Employers found to be in violation of the Fair Labor Standards Act are subject to assessments of double the wages owed for up to three years, plus attorneys fees and costs. When those back wages involve a large class of former and current employees, the assessment can reach seven or even eight figures.

Last week, the Seventh Circuit Court of Appeals issued a decision that offers employers the ability to reduce the back wage assessment in some situations where they misclassified employees for purposes of FLSA overtime obligations. In Urnikis-Negro v. Am. Family Prop. Services, the plaintiff was a real estate appraiser who was misclassified as exempt from overtime requirements. She sued and prevailed on a claim for payment of back wages.

The plaintiff contended that the unpaid overtime should be paid at a rate of 1.5 times her weekly salary divided by 40. However, the Seventh Circuit agreed that the plaintiff's work allowed the employer to pay her under the Fluctuating Workweek method. This alternative pay plan allows employers to pay a half-time overtime premium that varies depending on the number of hours works each week. Fluctuating Workweek reduces overtime obligations by two-thirds or more, and resulted in a decrease in the back wage assessment in this case of 75 percent.

The plaintiff pointed to a provision in Department of Labor regulations that requires that there be a "clear mutual understanding" between the parties as to use of the Fluctuating Workweek method. The court stated that even if the DOL criteria for use of Fluctuating Workweek are not met by the employer, it is still entitled to calculation of overtime using the half-time method if the salary paid to the employee was intended to cover all hours worked, including overtime. The court relied on a 1942 U.S. Supreme Court decision that pre-dated the DOL regulation.

The Seventh Circuit noted that its reasoning in this case would benefit employees who regularly worked less than 40 hours in a given workweek, because the employer would still have agreed to pay the guaranteed salary. Also, the employee was still entitled to double damages and fees as a result of the misclassification. This case provides some hope to employers found to have misclassified employees in terms of their ability to limit even larger back wage calculations. On the front end, employers should consider clear and explicit use of the Fluctuating Workweek method for employees whose hours meet these requirements.