In recent years, many employers have been entangled in collective action lawsuits alleging unpaid overtime under the Fair Labor Standards Act.  If employees have been misclassified as exempt from overtime, the resulting time and one-half back pay, interest, liquidated damages and attorneys fees can result in tens of thousands of dollars or more in damage awards per employee.

Last week, a district court in the Fourth Circuit (which includes North and South Carolina) gave employers some relief from these claims, holding that when calculating unpaid overtime, the employer was entitled to the benefit of the "fluctuating workweek" pay method.  The case, Desmond v. PNGI Charles Town Gaming, LLC , involved a West Virginia business that misclassified certain horse racing employees.  On remand from the Fourth Circuit, the lower court was tasked with calculating damages.  The plaintiffs sought to take the employees' salaries, divide by 40, and charge overtime at 1.5 times this rate.  The employer argued that it should be entitled to use the fluctuating workweek method, which only pays a half-time overtime premium, with the employees' regular rate determined by the salary divided by the total hours worked each week.  This method cuts the overtime payments by two-thirds or more.

The district court agreed with the employer, calculating the overtime damages using the less expensive method. Even though the employees were never actually placed on fluctuating workweek, the employer met all requirements for use of this method.  The employees' hours fluctuated from week to week, they were paid a guaranteed salary that was not subject to deductions for time missed during the week, and the employees had a clear understanding of these facts.

This case is important for employers in the Fourth Circuit due to the leverage it provides in settlement negotiations over unpaid overtime.  If an employer misclassifies workers, it can take the position that a court will only award the lower measure of damages if the plaintiffs successfully take the matter to trial.  This may present opportunities for cheaper settlement of these claims.

Of course, given liquidated damages, interest and fees, FLSA overtime cases are expensive for employers even using the lower measure of back pay calculation.  In order to avoid such claims in the first place, employers should review their employee classifications (under the direction of legal counsel to maintain privilege) to make certain they are defensible.  In situations where there are significant questions as to whether the employee meets the exemption test, fluctuating workweek may be a good alternative for complying with the FLSA while managing overtime expenses.