Hunton Employment & Labor Perspectives

Employers who hold their breath and declare an employment position as “exempt” from the Fair Labor Standards Act’s overtime previsions − all the while knowing that the exempt v. non-exempt question is a close call − should take a simple step to save themselves substantial damages should a court later rule the position non-exempt.

When entering into an employment arrangement with the employee, the employer should obtain the employee’s acknowledgement in writing that the employee’s weekly hours may fluctuate, and that each weekly portion of the employee’s annual salary will constitute payment for all hours worked during that week.

According to a well-reasoned opinion issued in August 2010 by the United States Court of Appeals for the Seventh Circuit, such a declaration can make an astounding difference in the damages payout should the employer be liable on the exemption question.  The court in Urnikis-Negro v. American Family Property Servs. focused on this nagging question:  When determining how much overtime pay the employer owes the employee after losing a misclassification case, what is the regular hourly rate?

Courts have been split on this issue for years.  Assume that an employee earns a weekly salary of $1,000 and works 50 hours during some weeks.  Some courts have held that the regular hourly rate is $1,000 divided by 40 − the trigger point for overtime − which is $25.  Those courts then have held that damages for the week are calculated by multiplying 1½ by $25 for the 10 overtime hours.  That’s $375.

Other courts have held that the regular hourly rate is $1,000 divided by 50 − the actual number of hours worked − which is $20.  Next, because the employee already has been paid his regular hourly rate for each of the 50 hours he worked, the overtime owed is calculated by multiplying ½ (not 1½) by $20 for the 10 overtime hours.  That’s $100.

The difference is mammoth when defending a class action in which each plaintiff has worked a significant number of overtime hours.

The Urnikis-Negro court adopted the results of those courts that use the large divisor, which is favorable for employers.  But it rejected the reasoning of all courts that have tackled this issue.  Courts previously have made their decisions based on an interpretation of a Department of Labor regulation concerning the “fluctuating workweek” method for determining whether an employee has worked compensable overtime hours.  The Urnikis-Negro court ruled that the DOL regulation has no bearing on the analysis in misclassification cases.

The Urnikis-Negro court instead relied upon the simple logic of a 1942 Supreme Court case, which held that the regular rate is to be based on what the parties have agreed the employee will be paid for the hours he actually works.  In other words, the question becomes:  For what number of hours was the employee’s fixed weekly wage intended to compensate him?

To better position themselves, employers should commit this to writing early in the employment relationship, even through an offer letter.  Something along these lines will assist:  “Your hours in this position may fluctuate, and each weekly portion of your $52,000 salary will compensate you for all hours you work during that week.”  This will greatly undermine any argument by the employee that the salary was intended to compensate him for 40 hours weekly.

Given that Urnikis-Negro contains the most detailed analysis of this issue to emerge from a U.S. Court of Appeals, its guidance is recommended for consideration.