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Employers May Use Fluctuating Workweek to Pay Overtime (Including When Hours Don’t Fluctuate Below 40 in a Week) – Just Follow the Rules!

Publisher: Day Pitney Employment and Labor Quarterly Update
October 30, 2020

This summer, the U.S. Court of Appeals for the Second Circuit approved the use of the "fluctuating work week" method to calculate overtime pay for non-exempt employees, but cautioned employers that they must comply with the method's strict requirements, else risk liability for unpaid overtime.

The Fluctuating Workweek

Since its inception in the late-1930s, the Fair Labor Standards Act (FLSA) has required employers to compensate non-exempt employees for overtime at "a rate not less than one and one-half times the [employee's] regular rate." The FLSA did not define what constitutes an employee's "regular rate," which led to the U.S. Supreme Court recognizing in 1942 the method now called the fluctuating workweek.

In 1968, the Department of Labor codified the fluctuating workweek into the FLSA's regulations. The fluctuating workweek permits employers to pay non-exempt employees a fixed weekly salary for all hours worked in a single workweek, regardless of how many, and pay the employee only a 50% premium (rather than 150%) for all hours worked over 40. There must be a "clear mutual understanding" that the fixed salary is compensation (separate from overtime) for all hours worked in the workweek, and the amount of the fixed salary must be high enough that, when divided by the number of hours worked in a given week, the hourly rate exceeds the applicable minimum wage. The regulation makes clear that, in addition to ensuring employees are paid the applicable minimum wage for all hours worked, employers cannot avail themselves of the fluctuating workweek "unless the employee clearly understands that the salary covers whatever hours the job may demand in a particular workweek and the employer pays the salary even though the workweek is one in which a full schedule of hours is not worked."

For example, an employer pays an employee $600 per week, regardless of the hours worked. In the first week, the employee works 37 hours and the employer pays her $600; in week two, she works 40 hours and gets paid $600; and in week three, she works 48 hours and gets paid $650 ($600/48 = $12.50 to compute the regular rate; $6.25 is the 50% premium for eight OT hours = $50).

Bed Bath & Beyond's Use of the Fluctuating Workweek Method

Until March 2015, Bed Bath & Beyond paid its department managers by the fluctuating workweek method. At the time of hire or promotion to department manager, each employee received, among other things, a "Department Manager Acknowledgment Form," which expressly explained that his/her compensation was based on a base weekly salary and an additional amount for all hours worked above 40 in a week, and that actual hours may fluctuate due to the needs of the store, and in which the employee acknowledged that the "base weekly salary is compensation for all hours … work[ed] in a week" and that Bed Bath & Beyond will pay that base salary whether or not the employee works 40 hours that week.

In Thomas v. Bed Bath & Beyond, Inc., 961 F.3d 598 (2d Cir. 2020), department managers sued Bed Bath & Beyond for violations of the FLSA relating to the company's use of the fluctuating workweek method. Specifically, they alleged that Bed Bath & Beyond violated the fluctuating workweek method because (i) they did not receive a guaranteed weekly wage, (ii) their schedules did not fluctuate above and below 40 hours per week, and (iii) Bed Bath & Beyond impermissibly allowed employees who worked on holidays or previously scheduled days off to shift their paid time off to a later date. The District Court granted summary judgment to Bed Bath & Beyond, and the Second Circuit affirmed.

The record reflected that, out of 1,500 weeks, there were only six weeks in which the department managers were paid less than their base salary. Three weeks were due to a payroll error that was fixed; the fourth week was because an employee's last day of employment fell in the middle of the week; the fifth week resulted from a negotiated agreement with an employee for an unpaid vacation; and the sixth week was due to an employee being on Family and Medical Leave Act (FMLA) leave the prior week, which extended to Monday the following week. The court noted that, while it must take seriously allegations that an employer did not adhere to the fixed salary, it was satisfied these six instances did not evidence that the employer failed to pay employees a fixed salary. First, it noted that Bed Bath & Beyond fixed the first three payroll errors and they were not "cause for alarm." Second, Bed Bath & Beyond had no obligation to pay the employee for the entire week when the employee's employment terminated midweek. Third, although the pre-negotiated vacation required "more attention," the court specifically noted, "Bed Bath & Beyond provided multiple written notices explaining the fluctuating work week method" and since the plaintiffs did not "identify any other instance of similar arrangements ... the record cannot support an inference of actual absence of a fixed weekly wage." Finally, even though the unpaid FMLA day was also troubling, the court noted it was also one instance and that the "totality of the facts" precludes an inference that Bed Bath & Beyond did not pay a fixed salary.

The court rejected the department managers' final two arguments that their hours actually had to fluctuate above or below the 40-hour mark, finding fluctuation is not required, and the fixed salary is "foundational" to the fluctuating workweek method. The court also held that the use of holidays or paid time off did not amount to hourly-based bonuses (which would erode the fixed salary) because permitting employees to use paid time off after working a holiday or previously scheduled day off did not result in additional compensation.

There are a number of takeaways for employers. First, the fluctuating workweek is a very useful tool that can reduce employers' overtime obligations. However, employers must adhere to critical requirements and limitations in order to take advantage of this method. What saved Bed Bath & Beyond in this case is the clear notice provided to employees, and adherence to the fixed weekly salary. Second, while New York (the location of the employer in this case) permits the use of the fluctuating workweek method of overtime calculation, not every jurisdiction does, and employers must be sure to comply with the laws where they operate. Given this, employers should consider reviewing with counsel their use of the fluctuating workweek method to prevent liability for unpaid overtime.

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