Labor Department Guides Employers on Use of "Fluctuating Workweek" Method to Calculate Overtime Pay

The Wage & Hour Division of the U.S. Department of Labor recently issued an opinion letter that could produce substantial savings for employers who have misclassified employees as exempt from the overtime provisions of the FLSA and who need to retroactively compensate those employees for unpaid overtime.

An employer may pay its employees a fixed salary. But, when a non-exempt employee works more than forty hours in any workweek, the Fair Labor Standards Act (FLSA) requires his or her employer to pay overtime at one and one-half times the regular rate of pay. 29 U.S.C. section 207(a)(1).

If an employer and a non-exempt salaried employee have a “clear mutual understanding” that the employee’s salary is compensation for all hours worked each week (whether many hours or few), then the FLSA permits the employer to use the “fluctuating workweek” method to calculate overtime. Applying this method, the employee’s salary is deemed to constitute straight-time pay for each hour of work (including overtime hours), and the employer must pay the employee only the additional “half time” premium for each overtime hour. 29 C.F.R. § 778.114.

Courts have disagreed, however, on the question of whether an employer who has misclassified an employee as salaried exempt may take advantage of the “fluctuating workweek” method of computing overtime when calculating the amount of overtime due. Plaintiffs have argued (and some courts agreed) that overtime damages should be determined by dividing the salary by some arbitrary fixed number of hours (typically, 40) to determine a fixed hourly rate, and then pay the employee time-and-one-half for all hours worked in excess of that fixed number. In a recent decision, however, the United States Court of Appeals for the Tenth Circuit held that as long as the salaried employees had a “clear mutual understanding” that their salary was intended to compensate them for all hours worked each week, the fluctuating workweek method should be used to calculate overtime owed following a decision that the employees were misclassified. See October 2008 blog entry: Tenth Circuit Endorses “Fluctuating Workweek” Method of Calculating Overtime for Misclassified Salaried Employees.

The Wage & Hour Division recently endorsed the Tenth Circuit’s position, albeit in a slightly different context. FLSA2009-3. The Wage & Hour Division issued its opinion letter in response to an inquiry from an employer that recognized some of its employees had been misclassified and wanted to retroactively pay them the overtime they were owed. For each workweek, the employer proposed a formula to calculate unpaid overtime: (1) determine each employee’s regular rate for each week by dividing his or her fixed weekly salary by the number of hours worked that week; and (2) pay the employee one-half that regular rate for each overtime hour worked in that particular week.

The Wage & Hour Division concluded that the proposed method of calculating overtime complies with the FLSA on the facts presented. The employer’s proposed calculation method would not cause any employee to be paid below the minimum wage. Additionally, the employer and employees had a clear mutual understanding that the fixed salary covered all work – not just the first forty hours of work each workweek. Citing Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir. 2008), the Wage & Hour Division explained that “clear mutual understanding” refers to the payment of a fixed salary for all hours worked, not the method of calculating overtime pay.

Coupled with the Tenth Circuit’s decision in Clements, the opinion letter should provide some comfort (and considerable cost savings) to employers when faced with litigation alleging misclassification of a group of salaried exempt employees. Of course, it is possible that courts in other jurisdictions will reject Clements and the opinion letter, and some states (e.g., California) do not permit use of the fluctuating workweek method as a matter of state law. Nonetheless, this development from the final days of the previous administration comes as good news to employers.

This entry was authored by Jeffrey Hammer.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.