If an employee is erroneously misclassified as exempt, she is entitled to recover any unpaid overtime at the rate of time-and-a-half for all hours over 40.  Right?

Wrong, according to a welcome decision (here) from Judge J. Paul Oetken of the Southern District of New York.   The decision confirms what employers in misclassification cases have advocated for years:  that the measure of damages is the “half-time” method, under which the employee receives an overtime premium of .5x rather than 1.5x for hours worked over 40.

This approach is often referred to as the “fluctuating work week,” or FWW, method.  Under Department of Labor regulations, several conditions must be met in order to use the method:  (1) the employee’s hours must fluctuate from week-to-week; (2) the employee must receive a salary that does not vary with the number of hours worked; (3) the hourly rate must equate to minimum wage or higher; (4) the employer and employee must share a “clear and mutual understanding” about payment of the fixed salary regardless of the number of hours worked; and (5) the employee must receive overtime at a rate of not less than one-half the regular hourly rate.

In Stein v. Guardsmark, LLC, the plaintiff was a secretary who was classified as exempt yet received a half-time overtime premium for any hours over 40 per week.  She sued, claiming she was improperly classified and that she did not receive the appropriate overtime amount.

In granting the defendant’s motion for summary judgment, Judge Oetken held that even if the plaintiff was misclassified, she nonetheless received all legally required overtime pursuant to the FWW method.  Although his analysis of each prong of the FWW test is worth a read, Judge Oetken’s analysis of the “salary basis” and “clear and mutual understanding” prongs are particularly important takeaways for employers given that these are the two criteria that plaintiffs most frequently argue have not been met.

Judge Oetken soundly rejected the plaintiff’s argument that because she received overtime for hours over 40, she was not paid on a salary basis.  He held that “the payment of overtime does not compromise a finding that an employee was paid on a salary basis.”  The court also disagreed with the argument that because the plaintiff’s pay was docked one day for leaving work early, the employer did not intend to pay her on a salary basis.  In rejecting this claim, Judge Oetken noted that courts “have looked skeptically on single incident docking of pay as proof that an employer did not intend to pay its employees on a salary basis.”

As previously discussed here, one of the most common tactics that employees use to fend off application of the FWW method is by arguing that the employer and employee did not share a “clear and mutual understanding” that the employer will pay the fixed salary regardless of the number of hours worked.  Judge Oetken, echoing the position taken by the DOL, held that “where an employee continues to work and accept payment of a salary for all hours of work, her acceptance of payment of the salary will validate the fluctuating workweek method of compensation as to her employment.”

It was irrelevant that the plaintiff was never specifically told that she would be paid pursuant to the FWW method or that she “did not have a full grasp of this method of calculating overtime until it was explained to her by her attorney.”  Given that the plaintiff received an offer letter stating her base salary, coupled with the fact that she never submitted any complaints about how her overtime was calculated, Judge Oetken held that there was “no room for doubt about the existence of a clear mutual understanding” about payment under the FWW method.

This thorough decision is good news for employers defending misclassification cases, since application of the half-time method reduces the measure of damages by a considerable amount.  If appealed, it may also present the Second Circuit with the opportunity to decide (as other Circuits have, but it hasn’t) whether the half-time method can be applied in these cases.