The Seventh Circuit recently held that the fluctuating workweek method can, at least in certain circumstances, be applied to calculate a successful plaintiff's damages in an overtime case brought under the Fair Labor Standards Act. Urnikis-Negro v. Am. Family Prop. Servs., 2010 U.S. App. LEXIS 16126 (7th Cir. 2010). This decision is an overall welcome sign for employers, particularly those facing FLSA collective actions alleging overtime misclassification.

The importance of the Unikis-Negro holding is best understood in the larger context of an employer's potential FLSA liability. Calculation of a successful plaintiff's damages under the FLSA is uniquely punitive from the perspective of an employer. Rather than the normal make-whole remedy, a successful FLSA plaintiff is often awarded twice his actual damages, plus attorneys' fees. Moreover, upon showing that the employer's alleged violation was willful, an additional year is added to the plaintiff's limitations period, stretching it from two years to three years. These multipliers and additions are particularly harsh in the collective action context, where they may be applied across hundreds and even thousands of opt-in plaintiffs to vastly increase total aggregate damages as well as, as a practical matter, the resulting attorneys' fee award. Thus, any reduction in a plaintiff's actual damages (the starting point for the calculation) can have a dramatic effect on the employer's total liability once the appropriate additions and multipliers have been applied.

The fluctuating workweek method, defined in 29 C.F.R. § 778.114, is one potential option for reducing a plaintiff's actual damages. In typical circumstances, the FLSA requires an employer to pay nonexempt employees one and one-half times their regular rate for all hours they work over 40 in a single week (i.e., "time and one-half"). An employee whose compensation is calculated under the fluctuating workweek method, however, is paid a theoretical set amount each week (i.e., the "flat amount"), regardless of how many or how few hours she works. This amount is deemed to provide straight time compensation to the employee for all hours worked in any given workweek. Her overtime premium, in turn, is calculated each week by dividing the flat amount by the number of hours she worked during that particular week, producing her regular rate for the week in question. Because the flat amount has already compensated her for her overtime hours on a straight-time basis (i.e., "time..."), this regular rate is cut in half to calculate the overtime premium (i.e., "...and one-half).

An example comparing the fluctuating workweek to a typical overtime calculation is helpful in clarifying the distinction. In the example below, Employee No. 1 is paid $10/hour using the regular workweek method, while Employee No. 2 is paid $400 per week regardless of the hours she actually works (the fluctuating workweek method). If both employees work 45 hours in Week No. 1, 43 hours in Week No. 2, and 37 hours in Week No. 3, their compensation for these weeks would be calculated as follows:  

Please click here to view table of calculations.

In Urnikis-Negro, the district court applied this fluctuating workweek method to reduce the plaintiff's damages by nearly 80%. The plaintiff in Urnikis-Negro typically worked 12 hours per day but received no overtime compensation because the employer treated her as administratively exempt. The district court held that her primary duties did not fall within the administrative exemption, and that she therefore was owed overtime by the employer. The district court further found, however, that the plaintiff's annual salary of $52,000 was intended to provide straight time wages for all hours she worked. As a result, the district court held that the plaintiff was only entitled to half-time pay for her claimed overtime hours under 29 C.F.R. § 778.114 (the fluctuating workweek method), rather than the full "time and one-half" award she sought. This holding reduced the plaintiff's damages from $111,787.50 to $24,466.

On appeal by the plaintiff, the Seventh Circuit rejected the district court's reasoning but affirmed the damages calculation. More specifically, the court held that 29 C.F.R. § 778.114 does not authorize the use of the fluctuating workweek method in calculating damages in a misclassification case. Instead, the court held that this calculation was permissible on the basis that an employer and employee are free under the FLSA to agree to a regular rate that varies from week to week based on the number of hours worked, so long as the regular rate always remains above the statutory minimum wage. In support of this holding, the Seventh Circuit cited the Supreme Court's decision in Overnight Motor Transp. Co. v. Missel, 316 U.S. 572 (1942).

In Missel, the plaintiff was paid a set amount each week that, when divided by the hours he worked, was always sufficient to satisfy the employer's FLSA wage and overtime obligations if the employee's regular rate was assumed to be the minimum wage. The employer and the employee, however, had no specific understanding in regard to the employee's regular rate. The Supreme Court held that, because the parties did not reach a specific understanding, the employee's predetermined weekly compensation could only be assumed to cover straight-time pay for the hours he worked. On this basis, the Court held that the plaintiff was entitled to an overtime premium for hours over 40, in addition to the straight-time compensation that he had already been paid for such hours. (Somewhat ironically, the Department of Labor relied on the Missel decision in adopting 29 C.F.R. § 778.114.)

Based on Missel, the Seventh Circuit held that the fluctuating workweek method can, at least in some instances, be used to calculate a successful plaintiff's damages in an FLSA overtime misclassification case. Notably, the court attempted to qualify its holding somewhat by suggesting that application of this method may require evidence sufficient to show that the employer and the employee understood that the employee's salary was intended to cover all hours worked. The court held that, if such an evidentiary requirement was proper, it would be satisfied in the Urnikis-Negro case because the plaintiff worked a significant number of overtime hours and was never compensated. On this basis, the court concluded that the parties must have had an understanding that her salary was intended to cover all hours she worked.

Overall, this decision is a positive development from the employer perspective, particularly in the collective action setting. For example, in a collective action with just 150 opt-in plaintiffs with damages equal to those of the Urnikis-Negro plaintiff, application of the fluctuating workweek method would reduce the aggregate damages by more than $13 million, from nearly $16.8 million to less than $3.7 million. While the Seventh Circuit did suggest that an evidentiary showing may be required, the quantum of evidence that the court found would be sufficient to satisfy this showing makes its suggestion much less troublesome. Moreover, the fact that the Seventh Circuit's decision is based on the FLSA itself rather than the Department of Labor's interpretative regulations means, as a practical matter, that the holding is less susceptible to changes in the political climate.

At the very least, the Seventh Circuit's opinion provides guidance for employers in relation to limiting FLSA exposure. Employers should confirm with each of their exempt employees (through offer letters, raise letters, and other employment records) that the employee's salary is intended to compensate them for all hours worked. Such evidence will provide a solid foundation for application of the fluctuating workweek method in the event that the employer is subsequently found to have violated the FLSA by treating employees as exempt.