Federal Court in California Holds Fluctuating Workweek Method of Calculating Back Pay is Inappropriate in FLSA Misclassification Cases

The proper method of calculating back pay in misclassification cases brought under the Fair Labor Standards Act has been a hotly debated topic in recent years.  Recently a federal district court in northern California weighed in, holding that the “fluctuating workweek” method of calculating back pay is inappropriate in such cases.  (Russell v. Wells Fargo & Co., 2009 WL 3861764 (USDC, N.D. Cal., November 17, 2009).  In so holding, the court rejected as unpersuasive a January 2009 opinion letter issued by the U.S. Department of Labor concluding that the fluctuating workweek method could be used to calculate overtime retroactively in a misclassification case.

Plaintiffs Monte Russell and Daniel Freedman were employed by Wells Fargo as “PC/LAN Engineers.”  During their employment, they were classified by Wells Fargo as exempt from overtime pay requirements, and therefore did not receive overtime pay.  After their employment ended, Wells Fargo reclassified the positions from exempt to non-exempt, and thereafter employees in those positions were entitled to receive overtime pay.

In 2007, Russell and Freedman sued Wells Fargo, alleging that they had been misclassified as exempt employees, and seeking liquidated damages under the FLSA for Wells Fargo’s alleged failure to pay them overtime.  The plaintiffs and Wells Fargo disagreed on the appropriate method of calculating back pay for misclassified employees.  To resolve the issue, the parties agreed to bring cross-motions for partial summary judgment.

In holding that the fluctuating workweek method of calculating back pay is inappropriate in misclassification cases, the court reviewed the evolution of the fluctuating workweek method.  The court noted that the FLSA, passed in 1938, generally provides that when an employee works more than 40 hours in a single workweek, the employer must pay the employee for the overtime hours at one and one-half times the employee’s regular rate of pay.  This general rule gave rise to the traditional “time-and-a-half” method of calculating overtime pay.

The court noted that in 1968, the U.S. Department of Labor promulgated 29 C.F.R. § 778.114, an interpretive rule designed to codify the Supreme Court’s decision in Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942).  The rule explains that where an employee’s work hours fluctuate from week to week, the employer may compensate the employee by paying a fixed amount to cover all hours worked, and that in the event the employee works more than 40 hours in one week, the employer can satisfy the FLSA by compensating the employee for the overtime hours by paying the employee an additional premium amount of only one-half the “regular rate of pay” determined by dividing the employee’s weekly salary by the total number of hours worked. 

However, the court interpreted the rule to contain two prerequisites that must be satisfied before the fluctuating workweek method may be used.  First, the court concluded that there must be a “clear mutual understanding” between the employer and the employee that the fixed salary is compensation (apart from overtime premiums) for all hours worked each workweek, whatever their number.  Second, the court held that the rule required that overtime pay must be provided contemporaneously with regular pay.  The court observed that the use of the fluctuating workweek method as opposed to the traditional time-and-a-half method can result in an employee being paid 71% less for overtime over a given year.

Turning to the issue at hand, the court reasoned that the prerequisites for applying the fluctuating workweek method could not be satisfied in a misclassification case because when an employee is treated as exempt there is no “clear mutual understanding” that overtime will be paid, nor is there contemporaneous payment of overtime.  The court therefore concluded that the fluctuating workweek method is inapplicable to misclassification cases, and that the traditional time-and-a-half method of calculating back overtime pay must be used.

Wells Fargo unsuccessfully cited a DOL opinion letter issued on January 14, 2009, which concluded that the fluctuating workweek method could be used to compute overtime pay retroactively in a misclassification case.  The court disagreed, finding the opinion letter unpersuasive.  While the court acknowledged that courts generally should defer to the expertise of agencies in interpreting statutes, the court held that opinion letters are not entitled to deference, but are only entitled to “respect,” and then only to the extent that they have the “power to persuade.”  The court determined that the opinion letter was inconsistent with the plain language of the DOL’s longstanding interpretation contained in 29 C.F.R. § 778.114.  The court further noted that an opinion letter cannot be used to make a substantive regulatory change.  The court concluded that the letter was therefore unpersuasive. 

The court noted that there is no binding Ninth Circuit precedent addressing the use of the fluctuating workweek method in misclassification cases, while noting that several other federal courts, including the First, Fourth, Fifth and Tenth Circuits, have allowed it to be used.  The court found those decisions unpersuasive in light of its analysis of 29 C.F.R. § 778.114.

The Russell v. Wells Fargo decision means that the appropriateness of using the fluctuating workweek method to calculate back overtime pay in misclassification cases remains an open issue, at least in the Ninth Circuit.

Fred M. Plevin and Aaron A. Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

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