Seyfarth Synopsis: In its first published ruling on such issues, the U.S. Court of Appeals for the Second Circuit disagreed with some earlier court rulings and, in keeping with the U.S. Department of Labor’s new interpretive rule (taking effect on August 7, 2020), held that the fluctuating workweek (FWW) method for paying overtime pay does not require an employee’s actual hours worked or scheduled work hours to fluctuate both below and above 40 hours. It also held that permitting employees to take PTO in another week if they had to work on a holiday or scheduled day off does not invalidate the FWW pay method. Further, the Second Circuit found that a few instances of employees receiving less than their full guaranteed salary were insufficient to show that the base weekly salary was not truly fixed or guaranteed.
As we wrote about previously here, one method of calculating overtime pay owed to non-exempt employees under the FLSA is the FWW method, which the DOL has described in its interpretive rule at 29 C.F.R. § 778.114. Under the FWW method, with the clear mutual understanding of the employer and employee, an employer can pay a non-exempt employee whose work hours fluctuate a fixed, guaranteed salary that is intended to compensate the employee for all worktime in each week, regardless of how few or many hours are worked. In other words, the salary provides the “time” of “time and one-half” pay even for overtime hours worked.
In weeks in which the employee works 40 hours or fewer, the employee is owed the fixed, weekly salary but nothing more. In weeks in which the employee works more than 40 hours, the overtime pay (i.e., the additional “one-half” on “time and one-half” pay) is calculated by dividing the weekly salary (and other compensation earned by the employee in that workweek, except for excludable payments) by the hours worked in that workweek, dividing the resulting hourly rate in half, and multiplying the half-time rate by the overtime hours worked.
Because the FWW method of pay disincentivizes inefficient overtime work by compensating employees who work overtime at a decreasing rate of pay for each additional overtime hour worked, it can be both confusing to and unpopular with employees. Adding to these issues, some courts have read even greater rigidity into the requirements for use of the FWW method than was initially intended by the DOL. For these reasons, lawsuits challenging use of the FWW method of pay are popular among the plaintiffs’ bar.
The Second Circuit’s decision in Thomas, et al. v. Bed Bath & Beyond Inc., however, reinforces the propriety of the FWW method and rejects efforts to read more into the FWW’s requirements than was intended by the DOL’s rule and by U.S. Supreme Court’s decisions that gave rise to the DOL’s rule on the FWW method of pay. The Second Circuit’s decision includes three key findings.
First, contrary to efforts of some other courts to read more into the FWW method’s requirements, the Second Circuit found that the fluctuating hours factor of the FWW method necessitates only that the actual hours worked fluctuate to some degree from one week to the next. Nothing in the Supreme Court’s rulings or the DOL’s FWW rule requires that that fluctuation in work time be both below and above the 40-hours-per-week mark. In addition, there is no requirement that employees paid on a FWW basis have an irregular work schedule. As the Second Circuit noted, even the text of the DOL’s FWW rule does not list among the FWW’s requirements a need for the employee to have weeks with less than 40 scheduled hours. Instead, the regulation merely provides that “typically,” the payment of a fixed salary and use of the FWW method occurs with “employees who do not customarily work a regular schedule of hours.” In other words, even when the scheduled hours lack fluctuation, the FWW’s fluctuation requirement is met where the employee’s actual hours worked fluctuate some from week to week.
Second, the Second Circuit rejected the employees’ argument that the FWW method was invalidated by the employer’s policy of permitting employees who had to work on a holiday or previously-scheduled day off to take PTO in a later week. As the DOL has long recognized, employers have broad discretion in how and when to permit employees to use PTO as long as they do not compensate FWW-paid employees less than their full fixed salary (or “dock” that salary) in weeks with time off or fewer than 40 work hours.
Third and finally, the Second Circuit made some allowance for isolated incidents in which an employee was paid less than their full fixed salary. The plaintiffs had identified a total of six instances out of 1500 weeks’ worth of pay records in which this occurred for one of several reasons. In three cases, a payroll error resulted in an underpayment that had since been corrected, and the Second Circuit found that the correction negated any argument that the fixed salary requirement had not been met in these weeks. In another week, the employer prorated an employee’s salary in their final week of employment because the employee worked only a partial week. The Second Circuit noted that this was “of no concern” because the employer “had no obligation to pay appellants their wages for days after their employment ended.” In the other two weeks of an underpayment, the facts suggested a possible lack of full compliance with the fixed salary requirement. The Second Circuit found that when these incidents were viewed in the totality of the evidence, there was no proof of an effort by the employer to undercut the fixed weekly wage requirement, and thus no basis for finding the FWW method to be an invalid means of paying the employees. The court noted that the instances of underpayment were exceedingly rare, and the employer had many times distributed documents to the employees that clearly explained the FWW method and the intent to pay a fixed salary to employees each week.
For employers that currently use or are interested in adopting a FWW method of pay for non-exempt employees, the best practices that can be extracted from the Second Circuit’s decision and prior cases and guidance are as follows:
(1) explain to FWW-paid employees in writing, at the time of hire and regularly throughout their employment, that they are receiving a fixed salary that is intended to compensate them for all hours worked in any week and that their overtime premium rate will be at half the effective hourly rate of their salary that week based on their actual hours worked;
(2) have a policy for FWW-paid employees to report payroll errors and have a procedure in place for investigating such pay complaints and addressing them in a timely manner;
(3) make clear to FWW-paid employees that even if their scheduled hours do not change much from week to week, their actual work hours will fluctuate based on the needs of the business; and
(4) keep in mind that in a few states, including Alaska, California, New Mexico, and Pennsylvania, the FWW method of pay is not permitted under state laws. For example, California law requires that a non-exempt salaried employee’s salary can cover no more than 40 hours – the salary cannot “build in” the base portion of any overtime hours. Accordingly, salaried non-exempt employees must be paid a full time and one half rate for all overtime hours (and double time rate for all double time hours).