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D.Ariz.: Where Construction Inspector Was Salaried Misclassified, Damages to Calculated Using Default Time and a Half Methodology, Not FWW
Blotzer v. L-3 Communications Corp.
This case was before the court on the parties’ cross motions for summary judgment. Both plaintiff and defendant contended that they were entitled to judgment as a matter of law regarding the exempt status of plaintiff, a construction inspector. The parties further disputed whether the fluctuating workweek methodology or the FLSA’s default time and a half methodology was applicable to calculate plaintiff’s damages, assuming he had been misclassified. After finding plaintiff to be non-exempt, the court held that plaintiff’s damages had to be calculated using the FLSA’s default methodology, because: (1) it is contrary to the rationale of the FLSA to apply the FWW method in misclassification cases; (2) application of the FWW in misclassification cases runs counter to the intent of the FLSA; and (3) even if the FWW method were applied, the defendant had failed to prove the elements of the FWW method were present in the case.
The court explained:
The FWW method set forth in 29 C.F.R. § 778.114 is not intended to apply retroactively in a misclassification case. See Urnikis–Negro, 616 F.3d at 666 (stating that 29 C.F.R. § 778.114 is not a remedial measure that specifies how damages are to be calculated when a court finds that an employer has breached its statutory obligations). It was drafted by the Department of Labor as “forward-looking” and only describes how employers and employees should structure an agreement for future compensation. Id. at 677. Moreover, because the regulation was adopted without formal rule-making, it is entitled to less deference. See Hasan v. GPM Investments, LLC, 2012 WL 3725693, *2 (D.Conn.2012) (citing Christensen v. Harris Co., 529 U.S. 576, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000)). The Court concludes that the FWW should not be applied in the present case because: (1) it is contrary to the rationale of the FLSA to apply the FWW method in misclassification cases; (2) application of the FWW in misclassification cases runs counter to the intent of the FLSA; and (3) even if the FWW method were applied, Defendant has failed to prove the elements of the FWW method are present in this case.
Application of the FWW method in a misclassification case is contrary to FLSA’s rationale. The FWW method requires proof of a “clear mutual understanding” that: (1) the fixed salary is compensation for the hours worked each work week, whatever their number; and (2) overtime pay will be provided contemporaneously such that it fluctuates depending on hours worked per week. See 29 C.F.R. §§ 778.114(a) & (c). In a misclassification case, at least one of the parties initiated employment with the belief that the employee was exempt from the FLSA, paid on a salary basis, and therefore not entitled to overtime. When an employee is erroneously classified as exempt and illegally being deprived of overtime pay, neither the fourth nor fifth legal prerequisites for use of the FWW method is satisfied. The parties do not have a “clear, mutual understanding” that a fixed salary will be paid for “fluctuating hours, apart from overtime premiums” because the parties have not contemplated overtime pay. In addition, because the employees were erroneously classified as exempt, overtime compensation was not provided contemporaneously. See Russell v. Wells Fargo and Co., 672 F.Supp.2d 1008 (N.D.Cal.2009); Hasan, 2012 WL 3725693 at * 4 (collecting cases which hold that, in a misclassification case, the parties never agreed to an essential term of a fluctuating work week arrangement, ie. that overtime would be paid at different rates depending on the number of hours worked per week). As the court stated in Ransom v. M. Patel Enters., Inc., 825 F.Supp.2d 799, 810 n. 11 (W.D.Tex.2011):
The significance of the employee’s lack of knowledge of nonexempt status cannot be overstated. The fundamental assumption underpinning the FWW is that it is fair to use it to calculate overtime pay because the employee consented to the payment scheme. But in the context of an FLSA misclassification suit when consent is inferred from the employee’s conduct, that conduct will always, by definition, have been based on the false assumption that he was not entitled to overtime compensation. The job will have been advertised as a salaried position. The employee, if he raised the issue, will have been told that the salary is all he will receive, regardless of how many hours he works. That is the very nature of a salaried, exempt position. When it turns out that the employer is wrong, and it is learned that the FLSA required the employer to pay the employee an overtime premium, the notion that the employees conduct before he knew this is evidence that the employee somehow consented to a calculation method for the overtime pay that no one even knew was due, is perverse. If the FWW requires consent in some fashion, the employee’s actions before he knew he was due overtime pay just cannot logically be the basis of that consent.
Furthermore, 29 C.F.R. § 778.114(c) provides that 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 non-overtime hours.” 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. Russell, 672 F.Supp.2d at 1014. Thus, attempting to retroactively apply the FWW method to a miscalculation case is akin to “the old ‘square peg in a round hole’ problem [because it requires] apply[ing] § 778.114 to a situation it was not intended to address.” EZPawn, 633 F.Supp.2d at 402.
“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.’ ” Russell, 672 F.Supp.2d at 1014 (citing Klem, 208 F.3d at 1089). Application of the FWW in a misclassification case gives rise to a “perverse incentive” for employers, because the employee’s hourly “regular rate” decreases with each additional hour worked. In fact, the difference between the FWW method and the traditional time-anda-half method can result in an employee being paid seventy-one percent less for overtime over a given year, and under the FWW method, the effective overtime hourly rate of an employee working sixty-one hours or more is less than the non-overtime hourly rate of an employee who worked no more than forty hours per week. See Russell, 672 F.Supp.2d at 1012;
see also Hasan, 2012 WL 3725693 at *2 (calculating the pay difference for a misclassified employer under both methods). This result is contrary to the FLSA’s purpose: encouraging employers to spread employment among more workers, rather than employing fewer workers who are then required to work longer hours. See Robertson v. Alaska Juneau Gold Min. Co. ., 157 F.2d 876, 879 (9th Cir.1946)
The court further explained that even if it had reached the opposite conclusion of law (i.e. that the FWW could be applicable in some misclassification cases), the facts of the case would still preclude its application here:
Finally, even if the Court concluded that the FWW method does apply in some miscalculation cases, it would not apply in the present case because Defendant has failed to demonstrate a “fluctuating” work week or a “clear mutual understanding” of straight pay and a contemporaneous overtime arrangement as required by the regulation. The FWW was intended to apply to “fluctuating” work schedules, ie. schedules in which an employee endures long hours some weeks but enjoys the benefit of short hours in other weeks, all at the same rate of pay. See Hasan, 2012 WL 3725693 at *4. In the present case, it is undisputed that Plaintiffs consistently worked more than 40 hours per week. Thus, Plaintiffs’ “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 Court in Missel.” Id. In addition, by its plain terms, the FWW method applies only when the employee clearly understands that he will receive straight-time pay for all hours worked and extra compensation of at least half his regular rate of pay, in addition to the fixed salary, for overtime hours during the weeks when he works overtime. Hunter v. Sprint Corp., 453 F.Supp.2d 44, 59 (D.D.C.2006); Russell, 672 F.Supp.2d at 1013–14. No such clear, mutual understanding is present in this case. Defendant contends that Plaintiffs agreed to work for a set salary regardless of whether they worked “35 hours or 55 hours.” (Doc. 74, pg.13.) Defendant misquotes Plaintiffs’ testimony regarding the number of hours they anticipated working. Although Defendant describes the Plaintiffs’ testimony regarding their salary as their “sole source of income regardless of whether they worked 35 or 55 hours,” neither Plaintiff testified to any expectation of ever working less than 40 hours. (Doc. 71, pg. 10; Doc. 71–1, pgs. 35 & 52.) The undisputed evidence is that Plaintiffs expected to work 50 hours a week. Furthermore, even if Defendant could prove that Plaintiffs and Defendant had a clear, mutual understanding that Plaintiffs would work 50 hours a week without overtime pay, such an arrangement amounts to an agreement “not to receive their FLSA entitlement to overtime pay. This would be illegal. Employees cannot agree to waive their right to overtime pay.” Russell, 672 F.Supp.2d at 1014. The parties’ lack of “mutual understanding” regarding Plaintiffs’ salary is further supported by the fact that Plaintiffs, upon realizing that they were being required to work far more than 50 hours per week, complained about their hours and were eventually paid some overtime.
In sum, the Court agrees with its sister district court in Northern California which held that “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.” Russell, 672 F.Supp.2d at 1014. Accordingly, the Court concludes that the FWW method to damages calculation is not applicable in the instant case.
Click Blotzer v. L-3 Communications Corp. to read the entire Order.
Hasan v. GPM Investments, LLC
Yet another court has weighed in on the FWW (“half-time”) versus time and a half issue in so-called “salary misclassification” cases, and this time it’s a victory for employees. This case was before the court on the plaintiffs’ motion in limine regarding the methodology for calculating damages, in the event the plaintiffs prevailed on their misclassification claims at trial. Addressing all of the arguments typically proffered by plaintiff-employees and defendant-employers, the court held that the fluctuating work week methodology was inapplicable because the defendant failed to meet several of the prerequisites for its use. Thus, the court held that any damages had to be calculated using the FLSA’s default time and a half methodology.
After a lengthy discussion of the Missel case, a history of the FWW and recent salary misclassification decisions, the court discussed why the FWW could not apply to a salary misclassification case. Framing the issue, the court explained:
Plaintiffs contend that the fluctuating work week method of compensation is never appropriate in a case where an employer has misclassified an employee as exempt from the FLSA’s protections. They argue that misclassification cases only present one issue—how to reconstruct what the rate of pay would have been absent a violation. Defendants counter that in a misclassification case “a fixed salary is always meant to compensate for all hours worked,” and under Missel, a fluctuating work week calculation “provides the precise remedy.” Def. Opp. at 12. In other words, a misclassification case does not require that the court recreate a rate, but, instead, that it convert a unusual payment method into an hourly rate. Plaintiffs have the better argument and one need look no further than the DOL’s guidance to understand why.
Initially, the court noted that where an employer has classified an employee as exempt, logically there is never a mutual understanding that overtime will be paid at varying rates, because the parties agreement is that there will be no overtime at all.
When an employer misclassifies an employee, the resultant employment contract will never fulfill any of the requirements of section 778.114. 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 arrangement—that overtime would be paid at different rates depending on the number of hours worked per week. See Perkins v. Southern New England Telephone Co., 2011 WL 4460248 at *3 (D.Conn. Sept. 27, 2011), Russell, 672 F.Supp.2d at 1013–14,Rainey v. Am. Forest & Paper Assoc., 26 F.2d 82, 100–02 (D.D.C.1998). To assume otherwise converts every salaried position into a position compensated at a fluctuating rate.
Next, the court noted the lack of contemporaneous overtime payment at the time the work in question was performed, pursuant to the parties agreement that there would be no overtime:
Second, misclassified employees will never have received any kind of bonus or premium for overtime. Indeed, parties will have explicitly agreed, as they did in this case, that employees will not earn extra money for long hours. See Def. Opp. Ex. A Job Description (listing the position as explicitly “exempt” from overtime compensation). At best, an employer could argue that the flat salary had an overtime bump embedded within it, that it was high enough so that employees remained well compensated for the hardship of working more than 40 hours per week. But this argument fails for two reasons: First, such an agreement would be illegal. An employee would have to waive her statutory right to extra compensation for overtime. Barrentine v. Arkansas–Best Freight Sys., 450 U.S. 728, 740 (1981) (noting that “FLSA rights cannot be abridged by contract” because this would “nullify the purposes of the statute”). Second, Missel explicitly rejected such an argument. The court reasoned that the contract at issue did not comply with the FLSA because “it [did not include a] provision for additional pay in the event the hours worked required minimum compensation greater than the fixed wage.” Missel, 316 U.S. at 581.
Further, here the court noted that while the plaintiffs’ hours fluctuated, the never worked fewer than 40 hours. Thus, the court concluded this was not a situation where short weeks were balanced against longer weeks and the plaintiffs were nonetheless receiving the type of steady income envisioned by the FWW as the supposed benefit for employees:
In this case, GPM also fails to meet a third criterion enunciated in the DOL’s guidance—that an employee’s hours actually fluctuate. After it lays out the requirements for a contract for a fluctuating rate, the rule warns that “typically, such salaries are paid to employees who do not customarily work a regular schedule of hours” and are “in amounts agreed on by the parties as adequate straight-time compensation for long work weeks as well as short ones .” 29 C.F.R. § 778.114(c). For a fluctuating work week arrangement to make sense to both parties, employees should offset their relative loss from a grueling work week far above forty hours with the benefit of full pay for weeks that clock-in at less than forty hours. Otherwise, employees have not bargained for anything but decreasing marginal pay as they work longer and longer hours at work. This is what the Court divined in Missel; a rate clerk would sometimes work long hours when shipments flooded in, and sometimes not at all when business dried up. Here, plaintiffs never had a short week; GPM’s job description stated that store managers were expected to work a minimum of 52 hours per week. See Def. Opp. Ex. A, Job Description. To the extent their hours fluctuated, it was because they sometimes worked almost 100 hours per week. See Plaintiff’s Motion in Limine, Ex. A, Timesheets. 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 Court in Missel.
In light of the defendant’s failure to meet any of the prerequisites for the use of the FWW, the court concluded that any damages due would be calculated using the FLSA’s default time and a half methodology. Thus, it granted the plaintiffs’ motion in limine.
Click Hasan v. GPM Investments, LLC to read the entire Ruling and Order on Motion in Limine to Preclude Use of the Fluctuating Work Week.
Perkins v. Southern New England Telephone Co.
This case, concerning allegations that the plaintiffs were “salaried misclassified” was before the court on the parties’ cross-motions in limine for a determination as to how damages should be calculated by the jury. While the defendants argued that they should be entitled to calculate any back wages due at “half-time” pursuant to the fluctuating workweek (“FWW”), the plaintiffs argued that the damages must be calculated using the FLSA’s default methodology of time and a half. Because the FWW would result in back wages of less than 1/3 of the amount of a time and a half calculation, the stakes were big. Because this case was not one of first impression, the court surveyed the previous cases from around the country, as well as DOL interpretive bulletins in reaching its decision. Significantly, the court declined to follow prior Circuit decisions, which it reasoned were not well-founded, instead opting to follow a series of district court decisions that discussed the issue in far more detailed and well-reasoned opinions.
Holding that plaintiffs’ damages were to be calculated at time and a half, the court reasoned:
“Although the Second Circuit has not addressed the use of the fluctuating workweek method in a misclassification case, other Courts of Appeal have applied section 778.114 to misclassification cases. See Clements v. Serco, Inc., 530 F.3d 1224, 1230–31 (10th Cir.2008); Valerio v. Putnam Assocs. Inc., 173 F.3d 35, 40 (1st Cir.1999); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135, 1138 (5th Cir.1988). None of these cases, however, provide any meaningful analysis regarding the merits of adapting the fluctuating workweek method to the misclassification context. Instead, the Tenth Circuit and the First Circuit base their finding on another case, Bailey v. County of Georgetown, wherein the Fourth Circuit held that section 778.114 does not require that the employee understand the manner in which overtime pay is calculated in order to apply the fluctuating workweek method. See Bailey v. Cnty. of Georgetown, 94 F.3d 152, 156 (4th Cir.1996). The plaintiffs in Bailey, however, were contesting the rate of overtime they were receiving, not whether they were entitled to overtime at all. See id. at 153–54 (describing the facts of the case). Consequently, Bailey is easily distinguishable from the case at hand. Also failing to address the applicability of the fluctuating workweek method to misclassification cases, Blackmon provides only a cursory explanation of computing overtime according to section 778.114. Blackmon, 835 F.2d at 1138–39.
In contrast, several district courts have held that applying the fluctuating workweek method to a misclassification violates the plain language of section 778.114. Generally, these courts hold that the language of section 778.114 requires both “(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.” See Russell v. Wells Fargo & Co., 672 F.Supp.2d 1008, 1013 (N.D.Cal.2009) (emphasis in original); Ayers v. SGS Control Servs., Inc., 2007 U.S. Dist. LEXIS 19634 at *40–42 (S.D.N.Y. Feb. 27, 2007); Rainey v. Am. Forest & Paper Assoc., Inc., 26 F.2d 82, 100–02 (D.D.C.1998) (finding that as a matter of law, the employer cannot prove a clear mutual understanding or contemporaneous payment of overtime premiums in a misclassification case); see also Urnikis–Negro, 616 F.3d at 678 (“Besides looking forward rather than backward, the interpretive rule plainly envisions the employee’s contemporaneous receipt of a premium apart from his fixed wage for any overtime work he has performed.”); 29 C.F.R. 778.114, supra at 4–5. Because the employer in a misclassification case has necessarily not made any contemporaneous payment of overtime premiums, these courts find that section 778.114 is inapplicable in a misclassification case. In addition, courts have found that assessing damages according to section 778.114 may actually frustrate the purpose of the FLSA. See, e.g., In re Texas EZPawn Fair Labor Standards Act Litig., 633 F.2d 395, 404–05 (W.D.Tex.2008) (using a hypothetical situation to demonstrate that the fluctuating workweek method may result in overtime compensation that is 375% lower than the traditional method, and asserting that using the fluctuating workweek method to calculate damages in misclassification cases allows employers to “escape the time and one-half requirement of the FLSA”).
This court agrees with other district courts that have analyzed this issue and concludes that section 778.114 does not support the use of the fluctuating workweek method in the circumstances presented in this misclassification case.”
As noted by the court, the Second Circuit has not weighed in on this issue as of yet. Therefore, it will be interesting to see if this case ends up there, giving another Circuit an opportunity to weigh in on this issue, which the Supreme Court recently declined to take up.
Click Perkins v. Southern New England Telephone Co. to read the entire Ruling on the cross-motions in limine.