Federal Overtime Requirements – Who may take advantage of the Fluctuating Workweek Method of Calculating Overtime?

Robin Foret
September 3, 2008 — 4,877 views  
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Overtime pay requirements under the Fair Labor Standards Act (“FLSA” or the “Act”) remain difficult for employers to understand and to apply correctly.  Many employers are still under the mistaken belief that overtime applies to hourly employees only.  With some exceptions, both hourly and non-exempt salaried employees are entitled to overtime pay at a rate of one and one-half the regular rate of pay for all hours actually worked over 40 in any given workweek.  In some instances, the “fluctuating workweek” method of calculating overtime may be applied to reduce the employer’s overtime pay obligation to one-half the regular rate of pay for overtime hours worked in excess of 40.  Some jurisdictions even permit employers to use this alternative method as a defense to claims for unpaid overtime, which frequently arise when employees are misclassified as exempt from federal overtime requirements. 

 

In July, 2008, the United States Court of Appeals for the Tenth Circuit sanctioned an employer’s use of the “fluctuating workweek” method of calculating past due overtime pay for misclassified salaried employees.  In Clements v. Serco, Inc. 530 F.3d 1224 (10th Cir. 2008), the court of appeals affirmed the fluctuating workweek method to calculate a back pay award to employees who were not paid overtime due to being misclassified under the outside sales exception to the federal overtime requirements.  After it was determined that Serco had misclassified the employees, and that they were entitled to a back overtime award, the district court addressed the correct method of calculating the back wages owed.  The district court decided that the employer’s obligation could be calculated using the “fluctuating workweek” method, which had the effect of reducing the employer’s obligation substantially.  

 

On appeal, the Tenth Circuit affirmed the district court’s use of the “fluctuating workweek” method to calculate damages owed to the plaintiffs.  As a result, Serco’s back wage obligation to the plaintiffs was calculated at one-half the plaintiffs’ regular rate of pay, rather than one and one-half their regular rate of pay, for all unpaid overtime hours.  The Tenth Circuit determined that all requirements necessary for this alternative overtime calculation had been met, even though the employer had violated FLSA by not paying overtime during the employment relationship. 

 

Overtime Calculation – the general rule is that all employees not “exempt” from overtime under an exception to the federal overtime requirements, must be paid overtime for all hours actually worked in excess of 40 in any single workweek at a rate of one and one half times the regular rate of pay.  This rule applies to both salaried and hourly employees who do not meet any of the exceptions under the Act. 

 

Fluctuating Workweek Method – this alternative method of calculating overtime compensation for hours worked in excess of 40 may be applied to salaried employees who do not work a set schedule each week.  It is intended to compensate the employee at straight time rates for whatever hours are worked during the workweek (for example, an employee works 40 hours one week and 36 hours the next week, but is paid a set salary for a 40 hour workweek).  When it applies, the “fluctuating workweek” method allows the payment of overtime hours at the reduced rate of one-half the regular rate of pay for hours worked in excess of 40 in satisfaction of the overtime pay requirements under FLSA.  The rational is that this type of mutually agreed upon salary arrangement already compensates the employee for all straight time worked regardless of the fluctuations in the employee’s weekly schedule.  This provision is set forth in the Code of Federal Regulations at 29 C.F.R §778.114, and requires compliance with the following:  

 

1.  the “employee clearly understands” that the salary will encompass whatever hours the job may demand in a particular workweek, whether more or less hours are worked (different jurisdictions disagree on what is required for a clear understanding to exist); 

 

2.  the employer pays the salary even if the employee works less than a full schedule of hours and shall not make deductions in any particular workweek that the employee fails to work a certain number of hours (this arrangement is ordinarily not appropriate for employees who have mandatory fixed hours each week);

 

3.  the amount of salary is sufficient each week to provide compensation at a rate not less than the applicable minimum wage requirement for every week worked (the current federal minimum wage is $6.55 per hour; the hourly rate taking the salary and dividing it by the total hours actually worked each week must not go below minimum wage); and

 

4.  the employee receives compensation in addition to his or her salary for all hours worked in excess of 40 at a rate not less than one-half the regular rate of pay (overtime is still paid for all hours actually worked in excess of 40, but at this reduced rate). 

 

It is also important to be aware that certain states like California, which impose additional overtime laws on employers, do not permit use of the fluctuating workweek method.

 

Overtime Misclassification Claims – The Tenth Circuit in Clements not only endorsed the “fluctuating workweek” method for calculating overtime but sanctioned its use to calculate overtime for employees that had been misclassified as exempt.  The court concluded that the employees indeed had a clear understanding that their fixed salary arrangement would compensate them for all hours worked, and that the employer never made deductions for weeks in which they worked less than the full 40 hour schedule.  The Tenth Circuit rejected the employee’s contention that a clear mutual agreement had to include their understanding of how overtime pay would be calculated.  It is important to note that while other circuit courts (such as the Fourth Circuit) have likewise approved the use of the “fluctuating workweek” method to calculate unpaid overtime wage claims, other circuit courts have rejected this theory finding that the method may not be relied upon as a defense to such claims.  

 

Proceed with Caution – while beneficial to employers in terms of reducing the overtime pay obligation for salaried non-exempt workers, the “fluctuating workweek” method must be used with caution.  An employer seeking to implement the “fluctuating workweek” method must be careful to comply with the requirements of Section 778.114, which include calculating the regular rate on which overtime is paid on a weekly basis and making sure that the minimum wage requirement is not violated.  Various jurisdictions disagree on when and how this alternative method of calculating overtime compensation applies.  For example, courts disagree on exactly what is required to have a clear mutual understanding between the employer and employee.  Finally, many states do not permit employers to use the “fluctuating workweek” method as a defense to overtime wage claims, finding that such a result is inconsistent with the intent of Section 778.114.  Accordingly, employers who wish to use this method to calculate overtime should consult with their legal counsel to make sure the method is appropriate for their particular situation and that it is applied correctly.

 

 

The information contained in this article is not designed to address specific situations, and does not include rules and regulations that apply to all states.  If you have questions concerning this topic, you should consult with legal counsel of your choice to obtain advice on various fact specific matters. 

 

Robin Foret

The Foret Law Firm

Robin Foret practices in the areas of employment law, commercial litigation and specialty insurance defense claims. She handles a variety of employment matters such as theft of trade secrets, breach of employment agreements, non-competition agreements, wage and hour issues under the Fair Labor Standards Act (FLSA), discrimination and harassment issues under Title VII of the Civil Rights Act of 1964 (Title VII) and the Texas Commission on Human Rights Act (TCHRA), the Americans with Disabilities Act (ADA), Family Medical Leave Act (FMLA) issues, and the Sarbanes-Oxley Act (SOX). Robin has handled a wide variety of employment law matters for employers, as well as for executive-level employees, before agencies, and state and federal courts.