When faced with the legal obligation to pay overtime to highly compensated but non-exempt employees, many employers turn to the Fluctuating Workweek (FWW) method as an alternative way to manage overtime costs. In return for paying the employee a guaranteed salary, FWW allows the employer to pay a half-time overtime premium instead of the usual time and one-half overtime otherwise owed to the employee.
What happens when the employer misclassifies the employee as exempt, and pays them a guaranteed salary with no overtime premium? Should the employer retroactively enjoy the benefits of FWW for overtime calculations, even though the parties never intended that it be used for compensation purposes? Federal appellate courts across the U.S. have split on this issue. Earlier this month, the Fifth Circuit Court of Appeals concluded that FWW should not be used as the basis for backwage calculations in a misclassification case. In Black v. SettlePou PC, the plaintiff was a paralegal who was erroneously deemed to be salaried exempt. She successfully sued for unpaid overtime, but the district court calculated the damages according to FWW, reducing her award by more than two thirds.
The Fifth Circuit reversed this decision, ordering the lower court to recalculate damages based on time and one-half overtime. The court concluded that FWW should not be retroactively used in this case, because there was no agreement between the parties that this method would be the basis for her compensation. While FWW does not require written consent of the employee, in this case, the plaintiff had repeatedly objected to the lack of overtime pay.
Other federal circuits including the Fourth (which includes North Carolina and South Carolina) have taken the position that FWW should be used to measure damages in misclassification cases where the plaintiff was paid a guaranteed salary. These courts concluded that the plaintiff's acceptance of the salary over a period of time represented implied agreement to be paid on a salaried basis.
When the Department of Labor conducts wage and hour audits, the measure of damages sought can depend on the state in which the employer is located, and the position of the relevant appellate court on this issue. Absent U.S. Supreme Court review of this dichotomy, employers with operations in different parts of the country may face different methods for damages calculations for employees misclassified for overtime purposes.