Fluctuate Away: When can an Employer Pay Half-time for Overtime?

According to the Fourth Circuit Court of Appeals and other federal circuits, the overtime calculation is significantly more employer friendly when paying salaried non-exempt employees. Keep in mind that just because an employee is salaried does not automatically mean that he or she is not entitled to overtime under the Fair Labor Standards Act (FLSA). The determination as to exempt or non-exempt is based on the actual duties performed – not whether the employee is paid a salary.

The Fourth Circuit, joining several other courts as well as the Department of Labor, has held that salaried employees may only be entitled to be paid half-time for overtime. See generally, Desmond v. PNGI, Charles Town Gaming, L.L.C., 630 F.3d 351 (4^th Cir. 2011), (the Fourth Circuit covers Maryland, Virginia, West Virginia, North Carolina and South Carolina). This is known as the “fluctuating workweek” method of compensation. It allows an employer to pay an employee, whose hours fluctuate from week to week, ½ time for overtime assuming the employee is paid a fixed salary regardless of the number of hours worked. To use this method of compensation, the employee must meet the following requirements:

• First, the employee’s hours must fluctuate from week to week.
• Second, the employee must receive a fixed salary that does not vary with the number of hours worked during the week.
• Third, the fixed salary must be sufficiently high so that an employee does not receive less than the federal minimum wage (currently $7.25) in any given workweek.
• Finally, the employee and employer must share a “clear and mutual understanding” that the employer will pay the fixed salary regardless of the number of hours worked. Finally, one last wrinkle about the fluctuating workweek – the method of calculating the rate of overtime actually goes further in favor of the employer because the more hours the employee works, the lower the rate of pay. This is because the employer divides the weekly salary by the number of hours worked in a given week and calculates the overtime based on that hourly rate. Thus, the more hours worked, the lower the hourly rate.
• It is unclear what exactly is meant by “mutual understanding.” Some courts have been far more liberal and have almost ignored the need for a “mutual understanding.” Other courts, as well as the Department of Labor, have indicated that the fluctuating workweek method cannot be used when bonuses violate the requirement that the employees receive a “fixed salary.” An employer should also be mindful of the different state laws that may restrict the use of the fluctuating workweek.

For questions regarding FLSA and compensation of your employees, contact Paul Klockenbrink or any member of Gentry Locke’s Employment & Labor group.