PROSKAU ERROS E LLP ® as exempt, itwishedtopay thembackovertime it hadmistakenly classified certainsalaried employees the period.When theemployer concludedthat the employees worked more orlessthan100hoursin dividing thesalaryby 100, withoutregard to whether converted thebi-weekly to anhourly rate by hours perweek. Theemployer’s payroll software even expected theemployees 50 towork aminimum of employer paidaguaranteed salarybi-weekly and 40hoursin a workweek.in excess Here, of the paytheir regular hourly for rate each hourworked of and that times employees receive oneandone-half payroll periodmightbesemi-monthly orbi-weekly) calculated weekly (notwithstandingthat anemployer’s Generally, theFLSArequires that pay be lively debateremains asource inthefederal of courts. deciding, theDOLhas“weighed in” onanissuethat employees. Thisisasignificant development and,inso for remedying salaried themisclassification of “fluctuating workweek” modelona calculating backovertime due, endorsingtheso-called reiterated itssupport for thehalf-timemethodology in Standards Act(“FLSA” orthe“Act”). TheDOL exempt (notovertime-eligible) undertheFair Labor for salariedemployees ithadmistakenly classified as company cancomputeovertime payments retroactively Opinion Letter, FLSA2009-3,addressing how a and HourDivision recently issuedaWage andHour The U.S. Labor’s Departmentof (the“DOL”) Methodology Workweek’s Half-Time Supports theFluctuating Employees: TheDOL for MisclassifiedSalaried Retroactive Overtime Alert Client retroactive basis considered theissue. minority view amongjudicialdecisionsthat have hoursperweek –astancethat adoptsthe number of by theemployee inagiven week, rather thanfor afixed salary was compensation for allhoursactually worked be inferred from theparties’ conductthat thefixed does Letter, the“clearandmutual understanding” criterion paid for hoursworked. According tothisOpinion how salaryandovertime wouldof becalculated and to bea“clearandmutual understanding” at theoutset heretofore, many hadunderstoodmeantthat there had “clear mutual understanding” requirement which, thefluctuatinggenerous workweek’s interpretation of The OpinionLetterisparticularly noteworthy for its than 100hoursinthebi-weekly payroll period. was paidtotheemployees even when theyworked less to theDOL’s decisionwas thefactthat thefixed salary actual regular rate for eachovertime hour. Important their of needed only tobepaidanadditional one-half hours worked over 40and,asaresult, theemployees time already was includedinthesalarycovering the hours theemployees worked ina workweek, straight- The DOLagreed. Sincethefixed salarycovered allthe workweek. straight-time for eachhourover 40worked inthe that theemployees hadalready beencompensated retroactively, usingahalf-timemethodology, reasoning payment for overtime hoursis hours worked. Underthefluctuating workweek, week asstraight the number time, of irrespective of hours fluctuate from week toweek afixed amountper anemployermethod permits topay itsemployee whose “fluctuating workweek.” See29C.F.R. §778.114. This certain salariednon-exempt employees, calledthe alternative methodfor calculating thecompensation of interpreting andclarifyingtheActprovide an workweek. However, theDOL’s regulations pay for allhoursworkedand one-half over 40ina The Actprovides that employees must bepaidtime The FluctuatingWorkweek Method not need tobesetforth inwritingandintentcan one-half A reportforclientsand times the friends oftheFirm April 2009 regular rate, instead of one and one-half times the rate, Application of Fluctuating Workweek to because the straight-time rate is understood to compensate Misclassified Employees employees for all hours actually worked. Accordingly, the By its very nature, the fluctuating workweek overtime regular rate of hourly compensation will vary from week to methodology is designed to apply prospectively, yet here, the week depending on the number of actual hours worked in any DOL has permitted its retroactive application, as well. given workweek and the hours worked must be subject to Usually, the employer and employee (whom the employer some fluctuation for this overtime methodology to apply. The concedes is non-exempt) agree, in advance, as to how overtime regular rate is calculated by dividing the number of hours will be calculated and paid. The pertinent regulation at actually worked into the amount of the straight time salary 29 C.F.R. § 778.114 is silent as to whether the fluctuating for the workweek, rather than dividing the salary by 40 hours. workweek may be used retroactively to reimburse employees for back overtime damages in misclassification cases. When For instance, an employee who receives a weekly salary of an employer (or court) determines that a salaried exempt $1000 and who works 50 hours in a week would be paid $100 employee has been misclassified, by definition there is no in overtime under the fluctuating workweek method: first prior agreement as to how overtime will be paid because an divide the weekly salary ($1000) by the total number of hours exempt employee usually receives only a fixed salary, and no worked (50), which results in a regular rate of $20/hour, then overtime pay was ever contemplated by the parties. At the multiply that amount by one-half, resulting in an additional same time, the parties did agree that the employer would pay $10/hour for each hour of overtime, and then multiply the a fixed salary no matter how many, or few, hours the half-time rate ($10/hour) by the number of hours worked over employee actually worked in a workweek. 40 in the workweek (10 hours). The relatively few cases that have addressed whether the Contrast the fluctuating workweek paradigm with the time fluctuating workweek method may be used retroactively to and one-half model. At time and one-half (1.5), the compensate misclassified employees have arrived at opposite employee would receive $375 (more than three times as much) conclusions. While no case in the United States Court of for the same number of hours worked. Specifically, divide the Appeals for the Second Circuit (New York and Connecticut) employee’s $1000 weekly salary by 40, to arrive at a regular has squarely addressed the issue, the Tenth Circuit recently rate of $25 per hour, then multiply that amount by 1.5, held that merely because the parties initially agreed that no resulting in an overtime hourly rate of $37.50, and then overtime would be paid did not mean that “no agreement as multiply again by 10, the number of overtime hours worked to the overtime ever existed.” Clements v. Serco, Inc., 530 F.3d over 40. Significantly, the mathematics of the fluctuating 1224, 1230 (10th Cir. 2008). Citing an older First Circuit workweek method means that the more hours the employee decision, Valerio v. Putnam Associates Inc., 173 F.3d 35, 40 works at a fixed weekly salary, and the more overtime the (1st Cir. 1999) (also cited in the Opinion Letter), Clements employee logs, the less s/he is paid for each additional hour of reasoned that the fluctuating workweek regulation “calls for overtime . no such enlarged understanding”; rather, “the parties must only have reached ‘a clear mutual understanding’ that while Under the FLSA’s regulations, the fluctuating workweek the employee’s hours may vary, his or her base salary will method of calculating compensation can only be used if: not.” Clements, 530 F.3d at 1230. Several federal district (1) the employer and the employee clearly and mutually court cases have ruled, as well, that where employees have understand that the straight salary covers whatever hours the been misclassified, the overtime damages due them may be employee is required actually to work; (2) the straight salary calculated at half-time the hourly rate because the employee is paid irrespective of whether the workweek is one in which a already has been compensated by the fixed salary for all full of hours is worked (meaning, if an employee hours worked. works only 30 hours one workweek, s/he still gets paid the fixed salary without diminution); (3) the straight salary is In contrast, more recent cases have held that applying the sufficient to provide a pay rate not less than the applicable fluctuating workweek method retroactively “runs counter to rate for every hour worked in those the plain meaning of the [DOL’s] regulations,” Scott v. OTS, workweeks in which the number of hours worked is greatest; Inc., 2006 U.S. Dist. LEXIS 15014 (N.D. Ga. 2006), and and (4) in addition to straight-salary, the employee is paid for further that to do so would be “inappropriate.” Hunter v. all hours in excess of the 40-hour federal statutory maximum Sprint Corporation, 453 F. Supp. 2d 44 (D.D.C. 2006). at a rate not less than one-half the regular rate of pay. Indeed, one recent district court decision boldly announced

2 that it would refuse to follow established Fifth Circuit precedent permitting the retroactive use of the fluctuating BOCA RATON  BOSTON  CHICAGO  HONG KONG workweek method because it was “wholly inconsistent with LONDON  LOS ANGELES  NEW ORLEANS  NEW YORK the FLSA and cannot be reconciled with the purposes of the NEWARK  PARIS  SÃO PAULO  WASHINGTON, D.C. Act.” In re EZPawn FLSA Litigation, 2008 U.S. Dist. LEXIS 53636 (W.D. Tex. 2008). Client Alert The Proskauer Rose Law Counseling and What To Do Now Practice Group is a multidisciplinary practice group in the national and international offices of the Firm which advises and counsels The Opinion Letter is welcome news for employers who clients in all facets of the employment relationship including discover that they have misclassified employees as exempt. As compliance with federal, state and local labor and employment laws; the DOL strongly suggests that employers, from time to time, review and audit of employment practices, including wage-hour and independent contractor audits; advice on regulations; best practices conduct classification audits, this Opinion Letter may help to avoid workplace problems and improve employee satisfaction; persuade reluctant employers to proactively address management training; and litigation support to resolve reclassification issues because the half-time methodology for existing disputes. coming into compliance is far less onerous than the risks If you have any questions about the impact of this new law, please associated with a continuing liability and possible lawsuits. contact your Proskauer relationship lawyer or one of the lawyers listed below:

Given the explosion in wage and hour litigation, coupled with New York increased scrutiny by state regulatory agencies (many of Fredric C. Leffler which have assembled special misclassification or wage and 212.969.3570 – [email protected] hour task forces), it is prudent for employers to examine Marc A. Mandelman whether their employees have been correctly classified and 212.969.3113 – [email protected] paid (as exempt or as independent contractors) under both Katharine H. Parker the FLSA and state laws, and consider appropriate remedial 212.969.3009 – [email protected] action, if warranted. In light of the recent GAO report Boca Raton criticizing lax enforcement by the DOL of its minimum Allan H. Weitzman wage/overtime oversight responsibilities, and the recent 561.995.4760 – [email protected] nominations by the Obama Administration for Deputy Boston Secretary of Labor and Solicitor of Labor, we anticipate Mark W. Batten re-invigorated, aggressive enforcement of the wage and hour 617.526.9850 – [email protected] laws by the DOL. Los Angeles Harold M. Brody Employers should be aware, however, that not all states 310.284.5625 – [email protected] permit the use of the fluctuating workweek method (such as Arthur F. Silbergeld California). Therefore, before any classification audit is 310.284.5624 – [email protected] conducted, employers should consult with counsel to discuss Newark risks, consequences and remedies that will be followed should Lawrence R. Sandak the audit identify misclassified employees. 973.274.3256 – [email protected] Wanda L. Ellert If you have any questions concerning this Client Alert, or 973.274.3285 – [email protected] would like to discuss employee classification issues or any New Orleans other wage and hour issues, please contact any of the Charles F. Seemann attorneys listed below or your Proskauer relationship counsel. 504.310.4091 – [email protected] Washington, D.C. Lawrence Z. Lorber 202.416.6891 – [email protected] Leslie E. Silverman 202.416.5836 – [email protected] Special thanks to associate, Jeremy Mittman, for his contribution in drafting this Client Alert.

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