On August 4, 2017, the United States Court of Appeals for the Fifth Circuit issued an opinion in Hills v. Entergy Operations, Inc., addressing what it called the “tricky” and often “perplexing” task of determining a salaried employee’s regular rate of pay for purposes of computing overtime backpay. In connection with overtime claims against Entergy Operations, Inc. (“EOI”), the district court had determined the “fluctuating workweek method” was the proper method for calculating two shift supervisors’ regular rate of pay and granted partial summary judgment in favor of EOI on that basis. The Fifth Circuit reversed.

Why is this important? If an employer misclassifies employees as exempt, the potential damages can be approximately 250% more if the employer also fails to establish the fluctuating work week method of calculating damages for its salaried (but non-exempt) employees. For example, a misclassified employee working at $500 per week for 50 hours would be owed $50 under the fluctuating work week method, as opposed to $125 under the “straight time and a half” method that would otherwise prevail. Multiplied over three years and with liquidated damages, the difference for such an employee could well be in the range of $20,000 per misclassified employee. If there are only ten affected employees, liability could be $200,000 greater.

Background

EOI’s security shift supervisors worked for the company as FLSA-exempt, salaried employees.  Believing they had been misclassified and were in fact non-exempt, multiple current and former security shift supervisors filed suit seeking overtime backpay.[1] There was no dispute between the parties that the plaintiffs had agreed to work “an alternating, biweekly schedule of 36 hours every other week and 48 hours every other week.” Likewise, it was undisputed that each plaintiff’s salary was intended to compensate their work under that schedule. At issue was whether the plaintiffs knew they would sometimes be required to work more than the scheduled number of hours without additional straight-time compensation.

The Decision

Writing for a three-judge panel, Judge Patrick E. Higginbotham rejected as “too literal” the district court’s conclusion that the fluctuating workweek method applied to the case. Looking to the “technical meaning” of the term “fluctuating” in the Fair Labor Standards Act, the Court explained that the fluctuating workweek method does not apply “to any and all deviation from week to week.”[2] As such, contrary to the district court’s holding, the fact that the plaintiffs had agreed to a weekly schedule that alternated between 36 hours and 48 hours was insufficient to demonstrate that they had agreed their salary covered whatever hours the job demanded in a particular workweek.

Rather, for the fluctuating workweek method to apply, there must be a clear mutual understanding between the parties that the fixed salary is compensation for the hours worked each workweek, whatever their number. Whether an employer and employee shared such a mutual understanding is a question of fact. And in Hill, the case presented conflicting evidence regarding “what the employees clearly understood” about the hours of work their salaries were intended to compensate.

Because of that factual dispute, the Fifth Circuit concluded that the district court’s pretrial ruling “was premature.” The trier of fact would need to determine whether to believe plaintiffs’ evidence that they agreed only to the fixed-but-alternating schedule of 36 hours every other week and 48 hours every other week, or whether to instead believe the employer’s testimony that the plaintiffs had agreed their salaries would compensate an unlimited number of hours per week (in which case the fluctuating workweek method could apply to determine the plaintiffs’ regular rate of pay).

Takeaway

The Hills v. Entergy Operations decision serves as a reminder that an employer seeking to rely on the fluctuating workweek method must be sure the employee has actually agreed to accept a fixed salary as compensation, regardless of the number of hours the job requires in any given week. While the employee bears the burden in the Fifth Circuit of demonstrating that the fluctuating workweek method is inapplicable, an employer should nevertheless document the employee’s understanding of the employment arrangement.

When hiring a non-exempt (or potentially non-exempt) individual who will be paid a fixed salary, employers should:

• clearly establish if the fixed salary is intended to compensate the employee for all hours worked in a week (not including overtime pay), whatever the number;
• obtain acknowledgement from the employee that he or she understands and agrees to the basis for his or her weekly compensation; and
• carefully record hours worked by fluctuating workweek employees.

Employers should also review provisions of their employee handbook to determine whether pay for salaried employees is addressed and, if so, whether the language supports the position that the pay for salaried employees covers all hours in the workweek.

Finally, employers should be careful in determining whether to “dock” salaried employees, as this may cause not only the loss of exempt status for otherwise exempt employees but also greater damages.

As the Fifth Circuit noted, these issues are indeed tricky, and especially so when the facts are conflicting and unclear. In the event of a wage dispute, having taken the above steps will go a long way towards reducing confusion regarding the parties’ intent and the employee’s proper rate-of-pay.

[1] For purposes of the appeal, the Fifth Circuit assumed without deciding that the plaintiffs were misclassified and thus entitled to overtime.

[2] Federal regulations provide that an employee employed on a salary basis may have hours of work which fluctuate from week to week. Such a salary arrangement is permitted by the Fair Labor Standards Act if the amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours worked is greatest, and if the employee receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half the regular rate of pay. See 29 CFR 778.114.