New Proposed Regulations for Half-Time or the Fluctuating Work Week Method of Overtime

It is rather fantastic to realize that the laws of physics can describe how everything was created in a random quantum fluctuation out of nothing, and how over the course of 15 billion years, matter could organize in such complex ways that we have human beings sitting here, talking, doing things intentionally.

—Alan Guth

Under the Fair Labor Standards Act (“FLSA”), employers may be able to pay their salaried nonexempt employees using a so-called fluctuating work week (“FWW”) method. Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942). This method of compensation was provided for by the U.S. Supreme Court  and DOL has added as a regulation under 29 C.F.R. § 778.114 with guidance on its use. This method of overtime is available for employees who work a different number of hours every week and have agreed or understand that their salary is meant to compensate them for all hours worked. However, employers need to make sure that the salary paid does not fall below the minimum hourly wage, the average hourly wage will decrease as the work hours increase during a work period. In failed exemption cases, where an employee was presumed exempt but has become non-exempt or was never exempt under the FLSA, all Circuit Courts have agreed that the FWW method can be used to calculate the overtime due to the non-exempt employee.

The FWW method  allows the salary to cover the straight-time payments due under the FLSA. Hence, the employer only owes a half-time payment. The “regular rate” is the base, hourly rate of pay that the employee is designated. While overtime is generally one and one-half times the regular rate for all hours over the statutory maximum (generally forty hours in a week),  29 C.F.R. §778.415, for salaried workers  the salary covers the straight time portion if that is the agreement with the worker.  In failed exemption cases where the employer was using the fluctuating work week method, the employer and employee can calculate the regular rate by the salary or fixed rate that the employee was receiving, by the number of hours that the employee actually worked in that week. 29 C.F.R. §778.109. The employee then only gets one-half that regular rate for hours worked in excess of 40 in a week.

New Notice of Proposed Rulemaking

The  recent history of the FWW regulatory initiative is checkered. The George W. Bush Administration in its last days tried to issue new regulations. When that proved to be running up against the new inauguration deadlines, they also issued a new DOL opinion letter on half-time. But that whole initiative got bogged down in the Obama Administration , and eventually resulted in a 2011 Federal Register notice terminating the Bush Administrations rulemaking. This resulted in some litigation uncertainties, and certain US District Court rulings that were inconsistent with the prior weight of judicial authority.

The US Department of Labor (“DOL”), however, recently ventured back into the half-time thicket. A notice of proposed rulemaking was issued by DOL on November 5, 2019. The purpose of the rulemaking is to clarify the language already included in §778.114 and “affirm its current position that employers using the fluctuating work week method of to calculate overtime compensation may pay bonuses and premiums in addition to the minimum salary”. 84 FR 59591. Previously, due to the 2011 rulemaking, it was unclear if certain types of bonuses and premiums were allowed to be paid to the employees by the employer while maintaining FWW status. Now, the proposed rule allows “additional payment of any kind” to avoid confusion over whether a certain premium or bonus is allowed or not. However, all of these additional payments must be included in the regular rate computation unless they fall under an exemption in 29 U.S.C. § 207(e)(1)-(8). Finally, the proposed rule would include examples that are intended to make the rule a little more user friendly.

DOL hopes that the effects of this rule will be to avoid any sort of disincentive to employers to paying their employees any more money. As noted by DOL. a rule that restricts an employer for paying its employees more money is not exactly consistent with the original purpose of the FLSA. Furthermore, it hopes to alleviate any confusion it created from language in the 2011 revised rule preamble.

Comments were open until December 05, 2019 and more information as well as further justifications from the DOL can be found published in the Federal Register at https://www.federalregister.gov/documents/2019/11/05/2019-23860/fluctuating-workweek-method-of-computing-overtime.

In response to the proposed rulemaking, we posted the following comment on December 4, 2019:

Under the Fair Labor Standards Act (“FLSA”), employers may be able to pay their salaried, nonexempt employees using a so-called FWW method. Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942). This method of compensation was provided for by the U.S. Supreme Court  and DOL has added as a regulation under 29 C.F.R. § 778.114 with guidance on its use. This method of overtime is available for employees who work over 40 hours a week and have agreed or understand that their salary is meant to compensate them for all hours worked. However, employers need to take special care that the salary paid does not fall below the minimum hourly wage, since the average hourly wage will decrease as the work hours increase during a work period. In failed exemption cases, where an employee was presumed exempt but has become non-exempt or was never exempt under the FLSA, all Circuit Courts have agreed that the FWW method can be used to calculate the overtime due to the non-exempt employee.

The FWW method allows the salary to cover the straight-time payments due under the FLSA. Hence, the employer only owes a half-time payment. The “regular rate” is the base, hourly rate of pay that the employee is designated. While overtime is generally one and one-half times the regular rate for all hours over the statutory maximum (generally forty hours in a week),  29 C.F.R. §778.415, for salaried workers the salary covers the straight-time portion if that is the agreement with the worker.  In failed exemption cases where the employer was using the fluctuating work week method, the employer and employee can calculate the regular rate by the salary or fixed rate that the employee was receiving, by the number of hours that the employee actually worked in that week. 29 C.F.R. §778.109. The employee then only gets one-half that regular rate for hours worked in excess of 40 in a week.

The  recent history of the FWW regulatory initiative is checkered. The George W. Bush Administration in its last days tried to issue new regulations. When that proved to be running up against the new inauguration deadlines, they also issued a new DOL opinion letter on half-time. But that whole initiative got bogged down in the Obama Administration, and eventually resulted in a 2011 Federal Register notice terminating the Bush Administrations rulemaking. This resulted in some litigation uncertainties, and certain US District Court rulings that were inconsistent with the prior weight of judicial authority.

We are pleased that the US Department of Labor (“DOL”), however, has recently ventured back into the half-time thicket.  A notice of proposed rulemaking was issued by DOL on November 5, 2019. The purpose of the rulemaking is to clarify the language already included in §778.114 and “affirm its current position that employers using the fluctuating work week method of to calculate overtime compensation may pay bonuses and premiums in addition to the minimum salary." 84 FR 59591. Previously, due to the 2011 rulemaking, it was unclear if certain types of bonuses and premiums were allowed to be paid to the employees by the employer while maintaining FWW status. Now, the proposed rule allows “additional payment of any kind” to avoid confusion over whether a certain premium or bonus is allowed or not. However, all of these additional payments must be included in the regular rate computation unless they fall under an exemption in 29 U.S.C. § 207(e)(1)-(8). Finally, the proposed rule would include examples that are intended to make the rule a little more user friendly.

We write you now to support the above proposed rulemaking. We agree that the current state of the law provides perverse effects by giving employers a disincentive  to paying their employees any more money. As noted by DOL, a rule that restricts an employer for paying its employees more money is not exactly consistent with the original purpose of the FLSA. Furthermore, we think DOL does need to act to alleviate any confusion it created from language in the 2011 revised rule preamble.

We also urge DOL to take action to clarify the situation with the use of the FWW / half-time method to calculate back wages in failed exemption cases. This issue arises when employees are paid on a salary basis but are classified as exempt. Sometimes it turns out these salaried workers are found to have nonexempt duties. Damages for the salaried workers and back wages are then calculated by the FWW method. DOL investigators perform this action almost every day. Yet some U.S. District Courts have refused to apply the FWW/half-time method to failed exemption cases. This is the minority rule.

It is important to note that the majority rule, where “most courts” allow use of the FWW / half-time premium method, is compelled by regulation, statute and controlling Supreme Court precedent. The bottom line is that only a half-time premium is due in failed exemption cases where the workers were paid on a salary basis. Any ruling to the contrary is wrong, at least according to every currently followed Circuit Court ruling (covering the 1st, 4th, 5th, 6th, 7th, 9th 10th and 11th Circuits), and most district court rulings.  See, e.g. Black v. Settlepou, P.C., 732 F.3d 492, 497 (5th Cir. 2013); Lamonica v. Safe Hurricane Shutters, Inc., 711 F.3d 1299, 1311 (11th Cir.  2013) (adopting Missel-based half-time); Urnikis Negro v. Am. Family Prop. Servs., 616 F.3d 665, 679 (7th Cir. 2010) (also adopting Missel-based half-time), cert. denied, No. 10-745, 2011 WL 588987 (U.S. Feb. 22, 2011); Desmond v. PNGI Charles Town Gaming, LLC, 630 F.3d 351 (4th Cir. 2011) (vacating favorable district court half-time ruling on other grounds); Clements v. Serco, Inc., 530 F.3d 1224, 1230-1 (10th Cir. 2008); Valerio v. Putnam Assocs., 173 F.3d 35, 39-40 (1st Cir. 1999); Roy v. County of Lexington, SC, 141 F. 3rd 533, 547 (4th Cir. 1998); Fegley v. Higgins, 19 F.3d 1126, 1130 (6th Cir. 1994) (weekly pay to work 56 hours); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135, 1138-39 (5th Cir. 1988). See also, e.g., Ahle v. Veracity Research Co., 738 F. Supp.2d 896, 918-9 (D. Minn. 2010); Torres v. Bacardi Global Brands Promotions, Inc., 482 F.Supp.2d 1379, 1380-82 (S.D.Fla. 2007); Perez v. RadioShack Corp., No. 02 C 7884, 11 Wage & Hour Cas.2d (BNA) 163, 2005 WL 3750320, at *6-*8 (N.D.Ill. Dec.14, 2005); Saizan v. Delta Concrete Prods. Co., 209 F.Supp.2d 639, 640-41 (M.D.La. 2002); Donihoo v. Dallas Airmotive, Inc., No. Civ. A. 3:97-CV-0109P, 1998 WL 47632, at *6 (N.D.Tex. Feb.2, 1998). And most courts in the 9th Circuit, where the minority rule has had the most traction, still have approved the use of FWW/half-time premium, including in failed exemption cases. See Gen. Elec. v. Porter, 208 F.2d 805, 813 (9th Cir. 1953); Brennan v. Valley Towing Co., Inc., 515 F.2d 100, 110-111 (9th Cir. 1975); Baker v. Calif. Shipbuilding Corp., 73 F. Supp. 322, 325 (S.D. Cal. 1947). This also includes a more recent case in Western District of Washington State. Tumulty v. FedEx Ground Package Sys. Inc., 2005 WL 1979104, at *5 (W.D. Wash. Aug. 16, 2005).

CONCLUSION

We respectfully request that DOL step in and use the final regulations on the FWW to as an opportunity to clarify and affirm its traditional practice of using the FWWW for failed exemption cases, and to formally reject the minority rule.