The Fluctuating Workweek—A Working Option?
The general rule under the Fair Labor Standards Act (“FLSA”) is that non-exempt employees have to be paid for overtime at a rate of one and a half times their regular rate of pay. However, there is another option available to employers—the fluctuating workweek method, sometimes called the halftime method. If the fluctuating workweek model applies, an employee that is paid a fixed salary but has hours that fluctuate on a week to week basis is paid at an overtime premium rate of only half time, instead of time and a half. Sounds like a win for the employer, right? But employers must be careful—this model only applies in specific circumstances and if not carefully applied, an employer could end up owing big.
The fluctuating workweek model is covered by 29 C.F.R. § 778.114, which applies to an employee who works hours which fluctuate from week to week and has an understanding with his employer that he will receive a fixed amount as straight time pay for whatever hours he is required to work in a workweek. The regulation provides:
Where there is a clear understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period, such a salary arrangement is permitted by the [FLSA] if the amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours he works is greatest, and he receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half his regular rate of pay.
29 C.F.R. § 778.114. Basically, the idea is that the employee has already been compensated for the time over forty hours at the regular rate—and so doesn’t need to get paid time and a half for those extra hours, but half time. See id. (“Payment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate.”). The regular rate used to determine this half time premium rate to pay will then vary from week to week because it is determined by dividing the number of hours worked in a workweek into the amount of the salary. Id.
As an example: John works fluctuating hours for his employer—sometimes working 35 hours per week, sometimes as many as 50. John and his employer have a clear understanding that he is to be paid a fixed salary every week, whether he works 35 hours, or even less, or whether he works more. This salary is $800.00 per week. So, in a week in which John works 46 hours, he is entitled to his regular salary of $800.00, plus overtime at the half time rate for the additional eight hours. The half time rate is determined by dividing the 46 hours into the $800.00, which results in an hourly rate of $17.39 (which is still over the minimum wage and thus the employer is covered as far as that part of the regulation). Half of this hourly rate is $8.70, so in addition to his $800.00 for that week, John is also entitled to an additional $52.20 (8 hours times the half time rate of $8.70).
Seems like a good deal for an employer, right? However, employers need to be careful in implementing the fluctuating workweek method. First, an employer needs to make sure the hours worked by an employee truly do fluctuate—not that they are consistently working over 40 and the employer wants to avoid paying the time and a half. Secondly, the employer needs to make sure there is a clear understanding between it and the employee that the fixed salary is meant to compensate him or her for the hours worked each work, regardless of their number.
Significantly, courts have held that the question of whether there was such a clear understanding is an issue of fact. See Black v. SettlePou, P.C., 732 F.3d 492, 496 (5th Cir. 2013). Employers must be able to truly point to an express understanding as to the applicability of the model. In a case decided earlier this year, Thomas v. Doan Constr. Co., 2014 U.S. Dist. LEXIS 50093 (E.D. Mich. 2014), the employer claimed that the employee’s statement that “I was classified as salary and so my understanding was that I get paid a specific salary” was sufficient to show an agreement as to a fluctuating workweek. The court found that this statement did not show agreement between the parties as to a fluctuating workweek, pointing also to the fact that the employee had testified that she did not know she was entitled to overtime, which is contemplated under the fluctuating work week model, albeit at a different rate. Thomas at * 38.
As another court has explained,
Although the FWW method does not require employees to understand the exact calculations used to determine their overtime premiums, it does require employees to have a clear understanding that their fixed salary “is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period.”
Gallardo v. Scott Byron & Co., 2014 U.S. Dist. LEXIS 4634, * 47 (N.D. Ill. 2014). Because this is an issue of fact, it can make it a troublesome issue during litigation and prevent an employer from obtaining summary judgment.
Additionally, employers must be careful not to take inconsistent positions with regard to this issue. In Burke v. Alta Colleges, Inc., 2014 U.S. Dist. LEXIS 86353, *12 (D. Colo. 2014), the court found that the fact that the employer had taken the position that the employee was exempt under the FLSA “suggests a lack of a mutual understanding that overtime would be paid at a half-time rate.”
Another potential issue–if an employer repeatedly fails to make sure that the employee is still receiving minimum wage for each hour worked in the weeks that the hours fluctuate well over 40, it may not just mean that the employer has to rectify that mistake and make sure minimum wage was paid, but could result in a determination that the fluctuating workweek method was wholly misapplied and so cannot be used at all in determining damages owed. See Gomez v. Crescent Servs., LLC, 2014 U.S. Dist. LEXIS 79609, * 18-19 (S.D. Tex. 2014). This means that the employer would be liable for time and a half for all hours worked over forty in the relevant time period, which could be a significant amount.
Thus, although the fluctuating work week model remains a viable option for employers, employers must be sure it is implemented properly to avoid some of these potential pitfalls.