N.D.Cal.: Damages In A Salary Misclassification Case Must Be Calculated At Time And A Half; Fluctuating Workweek Not Applicable Without “Clear Mutual Understanding” And/Or Contemporaneous Payments Of Overtime

Russell v. Wells Fargo and Co.

This case was before the Court on the parties’ partial Cross Motions for Summary Judgment, regarding the methodology to be applied to determine damages where, as here, an employee is misclassified and paid solely their weekly salary, despite the fact they work overtime hours.  The Plaintiffs asserted that they were due the default time and a half (1.5x) under the FLSA, but the Defendant argued that Plaintiffs’ damages should be calculated under the exception to the default rule, referred to as the Fluctuating Workweek (FWW), whereby they would receive so-called half-time in lieu of time and a half.  In a detailed well-reasoned decision, the Court agreed with the Plaintiffs, and determined that Plaintiffs were due time and a half for all overtime hours worked, because Defendant could not meet several of the elements required for the application of the FWW.

The Court framed the following 3 issues for resolution on the Motions:

“1. Whether it is possible to have the required “clear mutual understanding” necessary to compute damages by the fluctuating workweek method (FWW method) in an exempt/non-exempt misclassification case;

2. Whether the concurrent payment of overtime pay is a required element to compute unpaid overtime by the FWW method, such that the FWW method of overtime calculation cannot be used in an exempt/non-exempt misclassification case; and

3. Whether damages (if any) on the FLSA overtime claim of an opt-in plaintiff who resides in California or Connecticut can be computed by the FWW method.”

Denying Defendant’s Motion seeking to apply the FWW, and granting Plaintiffs’ Motion to apply the time and a half default standard, for calculating Plaintiffs’ damages, the Court explained:

“Defendants argue that the FWW method can be used to calculate overtime pay retroactively for the purposes of determining damages in an exempt misclassification case. They assert that the FWW method is available when the employer and employee have a clear mutual understanding that a fixed salary will compensate the employee for all hours worked in a week, including those in excess of the FLSA’s forty-hour maximum, even if the “understanding” is based on the employer’s erroneous premise that the employee is exempt and thus not entitled to overtime pay. Defendants’ argument is untenable. The FWW method cannot be used to calculate overtime pay retroactively in a misclassification case.

As noted above, section 778.114 contains legal prerequisites, which employers must first satisfy to use the discounted overtime rate available through the FWW method. These prerequisites include (1) a clear mutual understanding that a fixed salary will be paid for fluctuating hours, apart from overtime premiums; and (2) the contemporaneous payment of overtime premiums.

When an employee is not exempt and is paid a fixed salary for fluctuating hours, the employer can satisfy these prerequisites. The employer and employee must have a clear mutual understanding of the fixed salary which, by law, must include an understanding that an overtime premium will be paid for any hours worked over the forty-hour-per-week maximum. Because both parties understand that overtime hours will be compensated, overtime pay would be provided contemporaneously.

When an employee is treated as exempt from being paid for overtime work, there is neither a clear mutual understanding that overtime will be paid nor a contemporaneous payment of overtime. Thus, when an employee is erroneously classified as exempt and illegally not being paid overtime, neither of these legal prerequisites for use of the FWW method is satisfied.

First, an effective clear mutual understanding is absent in misclassification cases. Defendants assert that an employer could have a clear mutual understanding with its employees that the employees would be paid a flat weekly rate for fluctuating hours, including those hours worked in excess of forty, and would not receive overtime pay. Defendants essentially argue that misclassified employees have implicitly agreed not to receive their FLSA entitlement to overtime pay. This would be illegal. Employees cannot agree to waive their right to overtime pay. See Barrentine v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 739-40 (1981).

Second, because the employees were erroneously classified as exempt, overtime compensation was not provided contemporaneously. Employers cannot satisfy this requirement, after having been found to violate section 207, by claiming that they had intended to pay overtime; such an after-the-fact provision of overtime compensation was rejected by the Supreme Court in Overnight Motor. See 316 U .S. at 581 (rejecting the employer’s attempt to use FWW method where there was “no provision for additional pay in the event the hours worked required minimum compensation greater than the fixed wage”). As stated above, 29 C.F.R. § 778.114(c) requires contemporaneous overtime pay: the FWW method cannot be used “where all the facts indicate that an employee is being paid for his overtime hours at a rate no greater than that which he receives for nonovertime hours.” 29 C.F.R. § 778.114(c). In a misclassification case, because employees have not been paid overtime premiums, they are compensated for those hours worked more than forty at a rate not greater than the regular rate.

If Defendants’ position were adopted, an employer, after being held liable for FLSA violations, would be able unilaterally to choose to pay employees their unpaid overtime premium under the more employer-friendly of the two calculation methods. Given the remedial purpose of the FLSA, it would be incongruous to allow employees, who have been illegally deprived of overtime pay, to be shortchanged further by an employer who opts for the discount accommodation intended for a different situation.

In making its decision here, the Court is “mindful of the directive that the [FLSA] is to be liberally construed to apply to the furthest reaches consistent with Congressional direction.” Klem v. County of Santa Clara, 208 F.3d 1085, 1089 (9th Cir.2000) (quoting Biggs v. Wilson, 1 F.3d 1537, 1539 (9th Cir.1993)) (quotation marks and alterations omitted).

The Ninth Circuit has not directly addressed the question of whether the FWW method may be used retroactively to compensate employees who have been misclassified as exempt.FN4 In Oliver v.. Mercy Medical Center, the court concluded that the FWW method could not be used to calculate liquidated damages pursuant to 29 U.S .C. § 216, in part because the plaintiff-employee and the defendant-employer did not agree to a fixed salary covering all hours worked in a week. See 695 F.2d 379, 381 (9th Cir.1982). Oliver confirms that an employer and employee must, at the least, agree to a fixed salary for fluctuating hours. But its holding does not address whether the FWW method can be applied retrospectively to calculate overtime pay in a misclassification case. To the extent the holding is silent on this point, there is no binding Ninth Circuit precedent.

In Bailey v. County of Georgetown, 94 F.3d 152 (4th Cir.1996), non-exempt employees challenged their employer’s use of the FWW method to calculate their overtime pay. Instead of compensating overtime at the time-and-a-half rate, the employer opted for the FWW method and paid a one-half time premium based on fluctuating hours. Id. at 153-54. The employees claimed that this was improper, arguing that the FWW method could only apply if it was shown that they “clearly understood the manner in which their overtime pay was being calculated under the plan.” Id. at 154. The court disagreed. The Fourth Circuit determined that neither the plain language of the FLSA nor section 778.114 required an understanding on how overtime would be calculated; according to the court, all that section 778.114 requires is a clear mutual understanding of a fixed salary for fluctuating hours. Id. at 156-57. The court provided no additional analysis. And because the case involved non-exempt employees who were paid overtime, the court had no occasion to address whether contemporaneous overtime pay was a requirement.

Thus, Bailey did not address remedial payment to misclassified employees. Nonetheless, the First and Tenth Circuits applied its rule to misclassification cases. See, e.g., Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir.2008); Valerio v. Putnam Associates, 173 F.3d 35 (1st Cir.1999). In Clements and Valerio, the courts held that the FWW method can be used to calculate overtime pay retroactively. But Clements and Valerio merely cite Bailey. Neither provides a substantive analysis or explains why Bailey should apply in the misclassification context. See Clements, 530 F.3d at 1230; Valerio, 173 F.3d at 40. The Fourth Circuit similarly applied Bailey’s interpretation of section 778.114 in the misclassification context without analysis. See Roy v. County of Lexington, South Carolina, 141 F.3d 533, 547 (4th Cir.1998). In Blackmon v. Brookshire Grocery Company, the Fifth Circuit applied the FWW method in a misclassification case. 835 F.2d 1135, 1138 (5th Cir.1988). Blackmon, like the other cases above, offers no explanation. See 835 F.2d at 1138-39.

District courts outside these circuits have held that the FWW method cannot be used in misclassification cases. In Rainey v. American Forest & Paper Association, the court analyzed section 778.114 and found that its requirements include a clear mutual understanding that the employee is entitled to overtime compensation and contemporaneous payment of overtime premiums. 26 F.Supp.2d 82, 99-102 (D.D.C.1998); see also Hunter v. Sprint Corp., 453 F.Supp.2d 44, 58-62 (D.D.C.2006) (discussing application of the FWW method in a misclassification case). Other courts have rejected the use of the FWW method in misclassification cases because there is no contemporaneous payment of overtime compensation in such cases. See, e.g., Cowan v. Treetop Enters., 163 F.Supp.2d 930, 941 (M.D.Tenn.2001) (citing Rainey ); Scott v. OTS Inc., 2006 WL 870369, *12 (N.D.Ga.) (citing Rainey ).

Defendants reject many of the other cases cited by Plaintiffs because “they are not in the exemption misclassification context.” Defs.’ Reply at 12. However, Bailey, the case relied upon by most of the cases cited by Defendants, was likewise not in the exemption misclassification context. Thus, Defendants’ argument undermines their reliance on Valerio, Clements and Roy. Accordingly, the Court does not follow Bailey and its progeny: Bailey is not on point, and the cases that rely on it are not persuasive.

The Court is similarly unpersuaded by the DOL’s January 14 letter. Generally, courts must defer to the expertise of an agency in interpreting statutes that Congress charged to administer. See Cent. Ariz. Water Conservation Dist. v. EPA, 990 F.2d 1531, 1539-40 (9th Cir.1993) (citing Chevron U.S.A., Inc. v. Nat’l Res. Def. Council, 467 U.S. 837 (1984)). However, opinion letters do not warrant such deference; under Skidmore v. Swift, 323 U.S. 134, 140 (1944), they are to be accorded respect, not deference. An opinion letter is entitled to respect to the extent that it has the “power to persuade.” See Christensen v. Harris County, 529 U.S. 576, 587 (2000).

The opinion letter does not explain why the FWW method should be applied retrospectively, despite the plain language of the DOL’s long-standing interpretation of the FLSA contained in § 778.114. The letter relies solely upon Clements and Valerio to explain the DOL’s new position, and it goes no further to detail why the DOL was departing from its forty-year-old interpretation. Given the DOL’s significant change in course, this explanation is insufficient. Further, the DOL’s prior abandoned effort to revise § 778.114(a) through notice-and-comment rulemaking, and the timing of the opinion letter’s release-less than one week before a change in the administration-detract from its persuasiveness. Deferring to the letter “would permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation.” Christensen, 529 U.S. at 588. The DOL cannot use the letter to make a substantive regulatory change that would have the force of law. See id. at 587. The letter lacks thoroughness in its explanation and consistency with the DOL’s earlier FLSA interpretation. The Court is not persuaded by it. See id. (citing Skidmore, 323 U.S. at 140).

Thus, the background and policy of the FLSA, the Supreme Court’s decision in Overnight Motor and the DOL’s 1968 interpretive rules demonstrate that the FWW method cannot be used to calculate overtime pay retroactively for the purposes of determining damages under the FLSA in a misclassification case. Section 778.114, which the DOL promulgated in light of Overnight Motor, provides legal prerequisites that cannot be satisfied in a misclassification case.

CONCLUSION

For the foregoing reasons, the Court interprets § 778.114 to restrict application of the FWW method to calculate overtime pay to situations where (1) there is a clear mutual understanding between an employer and employee that the employee will be paid a fixed salary for fluctuating weekly hours but nonetheless receive overtime premiums and (2) overtime is compensated contemporaneously. The Court therefore DENIES Defendants’ motion for partial summary judgment and GRANTS Plaintiffs’ cross-motion for partial summary judgment on the first and second stipulated legal issues. Based upon these holdings, the Court need not decide the third stipulated issue. Accordingly, the Court DENIES as moot Defendants’ and Plaintiffs’ motions for partial summary judgment on the third stipulated legal issue.”

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Filed under Damages, Exemptions, Fluctuating Workweek

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