In recent years, the number of actions filed under the federal Fair Labor Standards Act (FLSA) by current and former employees seeking to recover alleged unpaid wages and overtime payments from their employers has increased rapidly. More than 7,000 FLSA actions were filed in federal courts in 2011 alone, a record number, and more than three times as many as were filed a mere 10 years before.

This is an astonishing increase, considering that the substantive rights under the FLSA have remained relatively unchanged since 1938. As FLSA litigation continues to surge, calculating damages has been litigated more frequently. One disputed method for calculating damages frequently arises in cases where salaried employees assert claims that they were misclassified as exempt from the FLSA, in so-called “misclassification actions.”

In Hasan v. GPM Investments LLC, No. 3:07-CV-1779 (SRU), 2012 U.S. Dist. LEXIS 121048 (D. Conn. Aug. 27, 2012), the court ruled that the fluctuating workweek method of calculating damages was not to be applied to the plaintiffs in this case, who had alleged that they had been misclassified as exempt employees. The Hasan decision, similar to Perkins v. Southern New England Telephone Co., 3:07-CV-967 (JCH), 2011 U.S. Dist. LEXIS 109882 (D. Conn. Sept. 27, 2011), is notable, not only because it serves to increase the potential damages in misclassification actions in favor of the plaintiff employees but also because it conflicts with the decisions of five circuit courts. See Valerio v. Putnam Assoc. Inc., 173 F.3d 35 (1st Cir. 1999); Desmond v. PNGI Charles Town Gaming LLC, 630 F.3d 351 (4th Cir. 2011); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135 (5th Cir. 1988).

Both Hasan and Perkins ruled that when an employer misclassifies an employee the resulting employment agreement never satisfies the requirements of the fluctuating workweek method of calculating damages. Conversely, the five circuit courts all determined that, for different reasons, the fluctuating workweek method applies to misclassified employees. Although the U.S. Court of Appeals for the Second Circuit has yet to address this issue, this clear conflict with the other circuit courts, and relative uncertainty of the law, presents a conundrum for the parties and their lawyers in litigating misclassification cases. The difference in overall damages when applying the fluctuating workweek method versus a premium overtime calculation can easily alter the total exposure to an employer by a factor of four or more.

Generally, nonexempt employees covered by the FLSA must be paid time-and-a-half for all hours worked in excess of 40 hours per week. For example, if a nonexempt employee is paid $10 an hour, then the employee must be paid $15 an hour for all hours worked over 40 per week. By contrast, employees exempt from the FLSA overtime provisions may be paid a salary for all hours worked without regard to the number of hours worked by that employee. These exempt employees are generally paid the same salary regardless of the number of hours worked in the workweek. Simple enough.

But a problem arises when an employee is paid a salary as an exempt employee under the FLSA and the employee is later determined to be misclassified, meaning that the employee should have received overtime payments. In those instances, employers commonly argue that the “fluctuating workweek” method of overtime calculation is the proper method for calculating damages in misclassification actions.

Differing Hours

The fluctuating workweek method is described by the U.S. Department of Labor regulations (29 C.F.R. § 778.114). If applied prospectively, this method calculates overtime payments when an employee is paid a set salary for differing hours per week, that is, when an employee’s workweek fluctuates weekly. The prospective fluctuating workweek regulation contains the following requirements: First, the employee must receive a fixed salary regardless of how many hours are worked in a week, meaning that the employee must receive the same salary even if working less than 40 hours in a week.

Second, the employee and the employer must have a clear mutual understanding that the fixed salary is meant as compensation for all hours worked. Third, the fixed salary must be significant enough so that the employee’s hourly rate of pay is not less than the minimum wage in the weeks when the hours worked are the greatest. Lastly, the employee’s hours must fluctuate from week to week. See 29 C.F.R. § 778.114. If all of these components are satisfied, the Department of Labor permits the fluctuating workweek method of overtime payment.

Applying this methodology, the overtime payment required results in payment of only the additional 50 percent of the regular rate (that is, the half time), as determined by dividing the set salary by the number of hours worked in that workweek. For example, if an employee is paid a salary of $500 per week, then in a week when working 40 hours, the hourly base rate is $12.50 ($500/40 hours) and, having worked no more than 40 hours that week, that employee is due no overtime pay.

If, however, that same employee works 50 hours in a week, the hourly base rate is $10 ($500/50 hours) and the overtime pay for the 10 hours of overtime is $5 per hour or half the base rate. Accordingly, the employee working 50 hours is due an additional $50 ($5 overtime rate times 10 hours of overtime worked) on top of the base salary.

In comparison, applying the time-and-a-half method, this same employee working a 50-hour week is due $150 in overtime payments. This threefold difference increases the more hours an employee works during the workweek. Mathematically speaking, under the fluctuating workweek method, the more hours employees work per week, the lower the base rate and the lower their half-time pay. Although this method of payment is permissible under the regulation when occurring contemporaneously, the problem in misclassification actions is that the regulation apparently has not contemplated retroactive application. As determined by the court in Hasan, to comply with the regulation, the employer must have understood the position to be nonexempt, which, by definition, never occurs in misclassification actions.

Windfall?

The fundamental issue when an employee is determined to be misclassified is how the parties, and the courts, determine an hourly wage from the salary paid to that employee. Clearly, the general assumption of the parties was that the fixed salary was meant as compensation for all hours worked. In this sense, to apply the time-and-a-half method of overtime calculation, sometimes described as a premium rate, which considers the salary as payment for 40 hours or the regular number of hours worked in the workweek and requires 150 percent for all hours in excess thereof, results in a windfall for the employee.

Conversely, to retroactively apply the fluctuating workweek method, which decreases the half-time pay the more the employee works in any given week, results in a significant benefit for the employer.

In Hasan, the court pointed out in a footnote at the conclusion of the decision that the fundamental issue is how to determine what the wages were meant to compensate and how to determine the proper base rate. Because the fluctuating workweek method, while simple in its application, has failed to find a resting place in Connecticut courts, it follows that there is no simple determination for damages in misclassification actions. Although the U.S. Supreme Court previously denied certiorari on this issue, adoption of the Hasan or Perkins rulings by the Second Circuit may result in a circuit split, requiring that the Supreme Court resolve the issue. As for now, Connecticut employers, and employment attorneys, must continue to pay attention as misclassification actions continue to progress through the courts. •