Retroactive Overtime For Misclassified Salaried Employees: The DOL Supports The Fluctuating Workweek's Half-Time Methodology

The U.S. Department of Labor's (the "DOL") Wage

and Hour Division recently issued a Wage and Hour Opinion Letter,

FLSA 2009-3, addressing how a company can compute overtime payments

retroactively for salaried employees it had mistakenly classified

as exempt (not overtime-eligible) under the Fair Labor Standards

Act ("FLSA" or the "Act"). The DOL reiterated

its support for the half-time methodology in calculating back

overtime due, endorsing the so-called "fluctuating

workweek" model on a retroactive basis for remedying

the misclassification of salaried employees. This is a significant

development and, in so deciding, the DOL has "weighed in"

on an issue that remains a source of lively debate in the federal

courts.

Generally, the FLSA requires that overtime pay be calculated

weekly (notwithstanding that an employer's payroll period might

be semi-monthly or bi-weekly) and that employees receive one and

one-half times their regular hourly rate of pay for each hour

worked in excess of 40 hours in a workweek. Here, the employer paid

a guaranteed salary bi-weekly and expected the employees to work a

minimum of 50 hours per week. The employer's payroll software

even converted the bi-weekly salary to an hourly rate by dividing

the salary by 100, without regard to whether the employees worked

more or less than 100 hours in the payroll period. When the

employer concluded that it had mistakenly classified certain

salaried employees as exempt, it wished to pay them back overtime

retroactively, using a half-time methodology, reasoning that the

employees had already been compensated straight-time for each hour

over 40 worked in the workweek.

The DOL agreed. Since the fixed salary covered all the hours the

employees worked in a workweek, straight-time already was included

in the salary covering the hours worked over 40 and, as a result,

the employees needed only to be paid an additional one-half of

their actual regular rate for each overtime hour. Important to the

DOL's decision was the fact that the fixed salary was paid to

the employees even when they worked less than 100 hours in the

bi-weekly payroll period.

The Opinion Letter is particularly noteworthy for its generous

interpretation of the fluctuating workweek's "clear mutual

understanding" requirement which, heretofore, many had

understood meant that there had to be a "clear and mutual

understanding" at the outset of how salary and overtime would

be calculated and paid for hours worked. According to this Opinion

Letter, the "clear and mutual understanding" criterion

does not need to be set forth in writing and intent can be

inferred from the parties' conduct that the fixed salary was

compensation for all hours actually worked by the employee in a

given week, rather than for a fixed number of hours per week

– a stance that adopts the minority view among judicial

decisions that have considered the issue.

The Fluctuating Workweek Method

The Act provides that employees must be paid time and one-half

pay for all hours worked over 40 in a workweek. However, the

DOL's regulations interpreting and clarifying the Act provide

an...