Wage Hour Report


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EDITOR'S NOTE: Some state laws, including those in California and Pennsylvania, do not allow the use of the fluctuating workweek method at all. Please be sure to check your state wage and hour laws carefully.

Just in time for Halloween, a Texas law firm got some scary news in an overtime case brought by a former paralegal. The paralegal was misclassified as exempt from the overtime requirements of the Fair Labor Standards Act and was owed for 274 hours of overtime. A federal judge in the Northern District of Texas had awarded the paralegal 50 percent of her regular rate for the overtime hours, applying a fluctuating workweek concept. But on October 11, the U.S. Court of Appeals for the Fifth Circuit, which hears appeals from federal courts in the states of Louisiana, Mississippi, and Texas, said that she was actually owed 150 percent of her regular rate.

The Black decision serves as a warning that wage-hour policies and practices can come back to haunt employers. On the other hand, proper application of the fluctuating workweek can significantly reduce an employer's damages in the event of a misclassification.

The Fluctuating Workweek

The FLSA requires that non-exempt employees receive no less than one-and-a-half times their regular rate of pay for any hours worked in excess of 40 in a given workweek. This general rule applies to hourly employees and to salaried, non-exempt employees, such as clerical employees. Normally, if the employer misclassifies a non-exempt employee as "exempt" and does not pay overtime, the employer would owe the employee back pay at a rate of 150 percent (time and a half) of the employee's regular rate for the overtime hours.

The fluctuating workweek exception may apply to salaried, non-exempt employees. (It does not apply to hourly employees under any circumstances.) If the employee and employer agree that the employee will be paid a fixed salary each week that is intended to compensate the employee for all hours worked – no matter how many or how few – then the exception would apply. Thus, when when a "fluctuating workweek" employee works more than 40 hours, he or she has already been compensated at the "straight time" rate for all of the hours worked that week. (The straight time rate would be the employee's regular rate, which would be the weekly salary divided by the number of hours worked during the relevant workweek.) Because the employee has already been paid all of the straight time owed for the week, the employer who failed to pay overtime owes only the additional overtime premium (50 percent of the employee's regular rate, instead of 150 percent).

Want to explore the use of the fluctuating workweek for your employees? Download Constangy's free iPhone app here. From the home screen, go to Resources > Wage and Hour Calculators > Overtime Due on Salaries. Just fill in your numbers and see the significant impact the fluctuating workweek method has on reducing overtime payments.

The fluctuating workweek method can clearly be used by an employer prospectively to comply with the overtime requirements for salaried, non-exempt employees, provided that the employer follows the requirements in the regulation. But what if the employer did not contemplate a fluctuating workweek situation until after it found out that it had misclassified its salaried employee as exempt? Can the fluctuating workweek method apply retroactively? This issue has caused tension in the federal courts. The U.S. Courts of Appeal for the First Circuit (Maine, Massachusetts, New Hampshire, Rhode Island, and Puerto Rico) and Tenth Circuit (Colorado, Kansas, New Mexico, Oklahoma, Utah, Wyoming) have allowed the fluctuating workweek method to apply retroactively. However, more recent decisions have held that the regulation is inherently forward-looking and cannot be used to calculate damages in a misclassification case. Thus, those courts have focused on whether there is a way, independent of the regulation, to limit misclassification damages to half time.

The news appears to be good for employers. Relying on the Supreme Court's opinion in Overnight Motor Transp. Co. v. Missel, rather than the regulation, an increasing number of courts hold that a misclassified employee is entitled only to the overtime premium (50 percent of the regular rate, as opposed to 150 percent) when there is evidence that the weekly salary was intended to compensate the employee for all hours worked. As of the date of publication, the Fourth, Fifth, Seventh, and Eleventh circuits*, as well as district courts across the country, have adopted the Missel-based half-time method of calculating overtime damages in misclassification cases. This has also been the longstanding enforcement position of the U.S. Department of Labor. In summary, although the reasoning may vary, currently six U.S. Courts of Appeal and the DOL hold that half-time is the appropriate remedy in misclassification cases where there is evidence that the salary is intended to cover all hours worked.

*The U.S. Court of Appeals for the Fourth Circuit hears appeals from federal courts in Maryland, the Carolinas, Virginia, and West Virginia. The Seventh Circuit hears appeals from federal courts in Illinois, Indiana, and Wisconsin. The Eleventh Circuit hears appeals from federal courts in Alabama, Florida, and Georgia.

Policies and practices matter

Although the Fifth Circuit is one of the circuits that generally applies the half time method in calculating overtime in misclassification cases, it did not do so in the Black case, demonstrating that the employer's policies and practices matter. And, if not constructed carefully, those polices and practices can cost the employer in the event of an overtime lawsuit.

The half-time computation may be applied in a misclassification case only when there is evidence that the fixed weekly salary was paid as compensation for all hours worked each week, however few or many. In making this determination, the court will look at both the parties' initial understanding of the salary arrangement and their course of conduct over the course of the relationship. This, of course, means that when the employee may work less than the full weekly expected number of hours, the salary is not reduced or pro-rated to account for the lesser hours worked.

In Black, the Fifth Circuit found that the parties initially understood the salary to cover only 37.5 hours of work per week. The firm's Human Resources Director testified that she was unaware of any fluctuating workweek agreement with the paralegal. Both a firm partner and the firm's employee handbook defined "full time" as 37.5 hours per week. Likewise, the firm's payroll records indicated that the paralegal was paid for 37.5 hours each week. Not surprisingly, the Court found no evidence of an agreement that the employee's salary was intended as compensation for all hours worked. The parties' course of conduct led to the same conclusion. Although the evidence showed that the paralegal's hours did, in fact, fluctuate from week to week, it also revealed that the paralegal lodged both verbal and written complaints when she did not receive overtime compensation. The Court found that this strongly indicated that the paralegal did not understand her salary to compensate her for all hours worked each week.

Based on these findings, the Fifth Circuit held that the district court had no basis for applying the half-time methodology and awarding only an overtime premium (50 percent of the paralegal's regular rate for all overtime hours worked). The Court remanded the case to the district court with instructions to award damages based on a time-and-a-half rate instead (150 percent of the paralegal's regular rate for all overtime hours worked).

How to get the benefit of "fluctuating workweek" in the event of a misclassification

No employer wants to find itself on the losing end of a misclassification lawsuit. But if there has been a misclassification, it's a lot less painful to owe 50 percent of the employee's regular rate than 150 percent. Because misclassifications are not uncommon, employers should consider preventively adopting the fluctuating workweek method for compensating their salaried employees. Employers should learn from the mistakes of the law firm in Black and consider the following:

  • Exempt employees paid on a salary basis should be required to sign a document at the beginning of their employment acknowledging that their salary is intended to compensate them for "all hours worked." Alternatively, this information should be included in the employee's offer letter or other documentation disclosing the employee's salary.

  • Employee handbooks and other documents should not define "full-time employee" for wage and hour compliance purposes as an employee working a specific number of hours, such as 37.5. However, exempt employees paid on a salary basis may be told that they are expected to work a specified "minimum" number of hours, or that the company may expect their work hours to reach a specified "average" over the course of their employment.

  • If the company publishes work schedules or has policies regarding "normal" office hours for exempt employees, the employee handbook should have a policy stating that such schedules or hours are not controlling and that the employee may work more or fewer hours in a given week depending on the business necessities.

  • If possible, payroll software should not automatically record exempt employees as working a set number of hours per week. If this is unavoidable, exempt employees should be informed that the hours recorded in the payroll software are required by the software and do not reflect the actual number of hours for which they are being compensated.

  • Finally, management and human resources employees should understand the concept that salaries are intended to compensate employees for all hours worked, and be able to cogently explain that to employees and others.

These simple steps can significantly mitigate the overtime damages that an employer would owe in the event that an employee is found to have been misclassified -- damages that would surely haunt the employer for years to come.

Again, California and Pennsylvania, and possibly other states, do not allow the use of the fluctuating workweek method. Be sure to check applicable state wage and hour laws.

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About Constangy, Brooks & Smith, LLP
Constangy, Brooks & Smith, LLP has counseled employers on labor and employment law matters, exclusively, since 1946. A "Go To" Law Firm in Corporate Counsel and Fortune Magazine, it represents Fortune 500 corporations and small companies across the country. Its attorneys are consistently rated as top lawyers in their practice areas by sources such as Chambers USA, Martindale-Hubbell, and Top One Hundred Labor Attorneys in the United States, and the firm is top-ranked by the U.S. News & World Report/Best Lawyers Best Law Firms survey. More than 140 lawyers partner with clients to provide cost-effective legal services and sound preventive advice to enhance the employer-employee relationship. Offices are located in Alabama, California, Florida, Georgia, Illinois, Massachusetts, Missouri, New Jersey, North Carolina, South Carolina, Tennessee, Texas, Virginia and Wisconsin. For more information, visit www.constangy.com.

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