In a recent Wage and Hour development, the Fifth Circuit held that the “fluctuating workweek method,” which allows employers to decrease their liability for overtime payments in situations where they misclassify exempt employees, should not automatically be used where the employee works a different number of hours each week, based on a recurring, fixed schedule.

Calculating Hourly Rates: Fixed Method vs. Fluctuating Workweek Method

Since overtime pay is computed in terms of an hourly rate based on an employee’s regular rate of pay, to determine how much overtime pay a misclassified employee may be due, courts must first determine an employee’s regular rate of pay. Where the misclassified employee is paid on a salary basis, courts must convert the employee’s salary compensation to an hourly rate.

The “fixed” or “standard” method of calculating a salaried employee’s regular hourly rate of pay is to divide the employee’s salary by the number of hours that the salary is intended to compensate. However, for some salaried arrangements, the employee is not expected to work a fixed number of hours each week.  Many salaries are intended to compensate however many hours the job demands in a particular week, with the weekly salary staying the same whether many or few hours are actually worked.  When an employee agrees to such an arrangement, the hours worked in each workweek fluctuate, and the appropriate way to determine the regular hourly rate of pay is through what is called the “fluctuating workweek method.”  Using this method, the regular rate of pay is calculated by dividing the salary paid in a workweek by the total of number of hours worked.  As a result, the use of the “fluctuating workweek method” almost always results in a lower regular rate of pay than under the “fixed method.”

The Fifth Circuit Redefines Fluctuating Workweek

On August 4, the Fifth Circuit weighed in on the application of the “fluctuating workweek method.” In Hills v. Entergy Operations, Inc., a group of security supervisors claimed their employer, a nuclear power plant operator, misclassified them as exempt from overtime payment eligibility. [1]

While the misclassification has not been reached, the Fifth Circuit reversed the district court’s holding that the “fluctuating workweek method” of damage calculation would automatically apply. The district court’s decision was based on the plaintiffs’ admission that they agreed to a biweekly schedule that alternated the number of hours worked from week-to-week (a recurring schedule of 36 hours one week and 48 hours the next). Since this schedule had the employees working a different number of hours each week, the district court reasoned that the biweekly alternation was a “fluctuating” schedule.

The Fifth Circuit disagreed with the district court’s assessment that the biweekly alternation automatically constituted a “fluctuating” schedule. According to the Fifth Circuit, the “fluctuating workweek method” should only be applied when the employee “clearly understands” that his or her salary is intended to compensate any unlimited amount of hours he or she might be expected to work in any given week.  The Fifth Circuit reasoned that “[t]hough [the security supervisors’] schedule alternates from week to week, it is ‘fixed’ in the sense that the parties agreed to it at the outset of their employment relationship… This biweekly alternating, but fixed, schedule is not necessarily ‘fluctuating’ as that term of art is used in the fluctuating workweek method.”

While the eventual trier of fact will determine whether or not the workers in Hills worked a “fixed” or “fluctuating” schedule, the Fifth Circuit’s decision signals the potential for greater recoveries for misclassified employees.

As a step to limit liability, employers should include clear language in offer letters to salaried employees that their schedule may fluctuate from week-to-week, and the salary is intended to compensate any unlimited amount of hours they might need to work in a given week to fulfill the responsibilities of their position.

[1] See Hills v. Entergy Operations, Inc., 5th Cir., No. 16-30924, August 4, 2017.