In a scene reminiscent of a high school calculus class, the Fifth Circuit took out its red pen and reviewed the math a lower court used to determine back pay for employees found to have been improperly classified as exempt from overtime.  Unfortunately for the lower court, it flunked the exam:  the Fifth Circuit held that it improperly calculated the plaintiffs’ damages by failing to utilize the Fluctuating Workweek (“FWW”) method.

As we recently reported [here] and [here], the FWW method allows courts to calculate damages in misclassification cases by providing a “half time” premium, under which the employee receives an overtime payment of .5x, rather than a “time and a half” premium of 1.5x.

In Ransom v. M. Patel Enterprises, Inc. [here], former executive managers of Party City were found to be improperly classified as exempt.  In determining damages, the lower court calculated the employees’ “regular rate” of pay by dividing their weekly salary by the number of hours (55) it was intended to compensate them for.  According to the Fifth Circuit, the Magistrate Judge then “devised his own formula” and held that the employees were entitled to .5x the regular rate for each hour worked over 40 and up to 55, and then 1.5x the regular rate for all hours over 55.  This formula resulted in a damages award of $66,250.20 in unpaid overtime as well as an equal award as liquidated damages (plus $331,880.00 in attorneys’ fees).

On appeal, the Fifth Circuit held that the lower court should have first computed the regular rate by dividing the employee’s fixed salary by the actual hours worked in each workweek and then determined the hourly overtime rate by multiplying the regular rate times .5x.  The court not only vacated the overtime award but also the liquated damages and attorneys’ fees amounts, since “the new damages that will be awarded are relevant to the plaintiffs’ overall success in litigating this suit,” which is “the most critical factor in determining an attorneys’ fees award. 

This thorough decision is more good news for employers defending misclassification cases and reflects the continued acceptance of courts around the country of the FWW method of calculating overtime damages.