9/11/2013 By Eileen Christina Zorc
Overtime payments for employees who are misclassified as exempt under the Fair Labor Standards Act (FLSA) should be calculated using the fluctuating-workweek (FWW) method if the employees are paid a fixed weekly salary and are expected to work varying weekly hours, according to the 5th U.S. Circuit Court of Appeals.
Under the FWW method, set forth in 29 C.F.R., Section 778.114(a), an employee whose work hours vary from week to week may be paid a fixed salary “pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay” for all hours worked. Since the fixed salary “is intended to compensate the employee at straight time rates” for all hours worked, the employer generally owes only the additional 50 percent “overtime premium.” To calculate the regular rate, which may vary by week, one must divide the salary by the number of hours actually worked in a given week.
In 2010, 16 executive managers filed a collective action against their employer, M. Patel Enterprises Inc., claiming they were misclassified as exempt in violation of the FLSA. A jury found that the plaintiffs were misclassified, and the court awarded unpaid overtime and minimum wages, as well as liquidated damages and attorney fees.
Because the plaintiffs were paid a weekly salary, the trial court had to compute their regular rate to award overtime. The court found that the parties had a mutual understanding that the weekly salary was intended to compensate for 55 hours per week. The court also found that the employees were owed the overtime premium for workweeks of between 40 and 55 hours and one and one-half times the regular rate for any hours beyond 55 in a workweek. The court calculated the regular rate by dividing the weekly wage by 55. After the employer appealed, on the grounds that the overtime calculation was erroneous, the plaintiffs cross-appealed.
The 5th Circuit ruled that the lower court erroneously ignored evidence that the plaintiffs’ hours varied by week and that they knew that their hours would vary and their pay would be fixed. The lower court also incorrectly disregarded the FWW method.
The 5th Circuit emphasized that there is no authority requiring that the parties’ agreement be in writing. And it noted that, regardless, the plaintiffs’ job applications clearly stated that the job included flexible schedules and different hours each week.
In their cross-appeal, the plaintiffs argued that M. Patel Enterprises’ failure to ensure payment of the minimum wage barred the use of the FWW method. But the 5th Circuit held that this method still applies and that, for any weeks in which the method’s calculations result in payment of less than the minimum wage for straight time pay, the minimum wage becomes the regular rate.
Ransom v. M. Patel Enters., Inc., 5th Cir., No. 12-50534 (Aug. 16, 2013).
Professional Pointer: When hiring exempt employees where federal law applies, make sure there is a clear record on job applications and in other communications with the individuals that the pay is fixed and that hours will fluctuate week by week.
Eileen C. Zorc is an attorney at Marr Jones & Wang LLLP, the Worklaw® Network member firm in Honolulu.