In a decision that could lead to significant litigation cost savings for employers, the United States Court of Appeals for the Tenth Circuit recently endorsed the so-called “fluctuating workweek” method of calculating back pay awards for misclassified, salaried employees in lawsuits arising under the Fair Labor Standards Act (FLSA).

The FLSA provides that non-exempt employees are generally entitled to overtime pay at a rate of one and one-half times their regular rate of pay for all time worked in excess of 40 hours per week. 29 U.S.C. § 207(a)(1). When a non-exempt employee is paid a fixed salary and there is a “clear mutual understanding” that the salary is compensation for all hours worked each workweek (whether many or few), then: (a) the regular rate of the employee may be determined each workweek by dividing the salary by the number of hours worked in that week; and (b) payment for overtime hours at one-half that rate will satisfy the overtime pay requirement (because such hours have already been compensated at “straight time” via the salary itself). 29 C.F.R. § 778.114.

In misclassification litigation under the FLSA, plaintiffs often argue that the foregoing “fluctuating workweek” method of calculating overtime should not be permitted. These plaintiffs contend that the “clear mutual understanding” required by § 778.114 must include an understanding that overtime premiums will be calculated using the “half-time” method. Of course, in misclassification cases, overtime was not paid at all, so the parties necessarily did not have any understanding as to how overtime premiums would be calculated. If the plaintiffs prevail on this argument, therefore, the “fluctuating workweek” method could never be used in misclassification cases, and plaintiffs in misclassification cases would be awarded overtime damages using the “time and one-half” method (pursuant to which their weekly salary would be divided by 40 hours or some other fixed number of hours, and the resulting hourly rate would be multiplied by 1.5 and then paid for all overtime hours).

The method used for calculating overtime can have a significant impact on the potential exposure in litigation. For example, if an employee was paid a weekly salary of $1,000, overtime liability for a week in which the employee worked 50 hours would be: (a) $100 using the “fluctuating workweek” method ($1,000 ÷ 50 x 0.5 x 10); but (b) $375 using the “time and one-half” method ($1,000 ÷ 40 x 1.5 x 10).

In Clements v. Serco, Inc. the Tenth Circuit held that in order to take advantage of the “fluctuating workweek” method of calculating overtime in a misclassification case, the employer must prove only that the parties had a “clear and mutual understanding” that the employees would be paid a fixed salary for all hours worked.530 F.3d 1224 (10th Cir. 2008).

The Clements decision provides some welcome relief to employers faced with misclassification litigation. But it also provides a valuable lesson for all employers. In order to establish the existence of a “clear and mutual understanding” that the employees would be paid a fixed salary for all hours worked, offer letters and other documentation regarding an exempt employee’s weekly salary should not suggest that the salary is compensation for a fixed number of hours per week or for a fixed weekly schedule. Rather, the documentation should confirm that the salary is intended to compensate the employee for all hours worked each workweek, whether many or few.

For more comprehensive coverage of this issue, see our article on Littler.com.

Robert Pritchard authored this blog entry.