Court Rejects Employer’s After-The-Fact Reliance Upon “Fluctuating Work Week” Compensation Formula For Misclassified Workers Under The FLSA

The United States District Court for the District of Connecticut was recently asked to decide whether an employer accused of misclassifying workers as “exempt” from overtime protections under the Fair Labor Standards Act (“FLSA”) could utilize a “fluctuating work week” formula for calculating wages if the employees were to prevail at trial.  The answer, provided by Judge Stefan Underhill in response to a motion in limine filed by the employees in Hasan v. GPM Investments, LLC, was a resounding “no.”

Plaintiffs were hired as “managers” for convenience stores and gas stations owned by GPM Investments, LLC (“GPM”), and were paid a fixed salary with no extra compensation for time worked in excess of 40 hours per week.  Holding themselves out as “clerks,” plaintiffs filed suit claiming entitlement to overtime premium pay for all hours worked in excess of 40 per week.  GPM argued that the managers qualified for the FLSA’s executive exemption, and were paid for a fluctuating work week in which “plaintiffs’ hours varied from week to week, and rather than submit them to unpredictable paychecks based on hours worked, the company paid them a fixed salary no matter how much time they spent on the job.”

The Court found numerous flaws with GPM’s fluctuating workweek argument, noting the distinction “between imputing what an hourly rate should have been and converting salaries into hourly rates is enormous.”  The Court illustrated this point as follows:

“[S]uppose an employee makes a weekly salary of 1200 dollars.  A court is faced with the task of putting her in the position she might have been in absent a violation.  If [the] court divides her salary by the legal limit of 40 hours, it gets a regular rate of 30 dollars per hour.  In a week when the employee worked 60 hours, she would receive time and a half, or 45 dollars per hour, for that additional 20 hours of overtime.  Thus, her total compensation should have totaled 2100 dollars (1200 dollars in base salary plus 900 dollars in overtime).

But what if a court is faced with a fluctuating work week, not a standard overtime violation?  In that same 60-hour work week, the worker’s 1200 salary only compensated her at a rate of 20 dollars an hour, not 30.  And, for the additional 20 hours she only wins an overtime supplement of 10 dollars – she has already gotten the base rate of 20 dollars for every hour she worked, including the extra hours, and was only deprived of the slight bump of an unpaid half-time premium.  For that week, then, she would only receive two-thirds of the standard calculation or 1400 dollars (1200 dollars in base salary plus 200 dollars in an unpaid overtime premium).  This math adds up to a perverse incentive – the longer the hours the less the rate of pay per hour.”

The Court agreed with plaintiffs that the fluctuating work week compensation method is inappropriate where employers have misclassified employees as exempt from the FLSA’s overtime requirements: “When an employer misclassifies an employee, the resulting employment contract will never fulfill any of the requirements” of the fluctuating work week set forth by Department of Labor Guidelines, 29 C.F.R. § 778.114, promulgated “to codify” the United States Supreme Court’s decision in Overnight Motor Transp. Co. v. Missel, 316 U.S. 572, 578, 62 S. Ct. 1216 (1942).  These Guidelines contain two requirements: (1) a “clear mutual understanding” between employer and employee that the “fixed salary is compensation (apart from overtime premiums) for the hours worked each work week;” and (2) the employee “receive payment of a contemporaneous premium for overtime hours.”

Not only were these elements absent from the instant case, but they would be absent from any misclassification case in which the employer attempted to utilize a fluctuating work week after-the-fact.  As noted by the Court: “First, parties who believe that an employee merits no overtime payment cannot simultaneously believe that any overtime will be paid at varying rates.  Put another way, in a misclassification case, the parties never agreed to an essential term of a fluctuating work week agreement – that overtime would be paid at different rates depending on the number of hours worked per week…To assume otherwise converts every salaried position into a position compensated at a fluctuating rate.  Second, misclassified employees will never have received any kind of bonus or premium for overtime.”  The Court further noted that in this case in particular, GPM failed to meet a third component of the DOL’s Guidelines as well, namely “that [the] employee’s hours actually fluctuate.”  It was undisputed that plaintiffs were expected to work a minimum of 52 hours per week.  To the extent their hours fluctuated, it was because they sometimes worked almost 100 hours per week.  “This variance, between weeks with a moderate amount of overtime hours, and weeks where a majority of hours worked exceeded the 40 hour threshold, is not the same as the up and down fluctuation contemplated by the DOL and by the [United States Supreme] Court in Missel.”

According to this district court, then, fluctuating workweek arrangements cannot be created after-the-fact to explain an employer’s failure to comply with the FLSA’s overtime requirements.  Employers looking to utilize a fluctuating workweek must intend to set up such an arrangement and comply with the DOL’s Guidelines from the outset.

By Lawrence Peikes and Joshua Walls, Wiggin and Dana LLP

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