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Despite employee challenges, courts find fluctuating workweek method proper for calculating overtime pay

September 27th, 2012  |  Ron Miller

In the U.S. Supreme Court’s 1942 landmark decision in Overnight Motor Transp Co v Missel, the fluctuating work week method (SWW) for calculating overtime compensation was first recognized. Ultimately, the FWW method made its way into the federal regulations, 29 CFR Sec. 778.114. The FWW method is used primarily by employers whose employees may be called upon to work a fluctuating number of hours each week. Despite its lineage, the FWW has retained its vitality as demonstrated in two recent decisions involving employees who received commissions or bonuses under their employers’ compensation plans.

Under the FWW method, an employee receives a fixed salary as compensation for all hours worked, including overtime. The fixed salary must provide compensation at a regular rate that satisfies the minimum wage. Under applicable regulations, 29 CFR Sec. 778.114(a), the employee need receive only an additional 50 percent of his regular rate for each hour of overtime.

In Kornbau v Frito Lay, the snack food giants was granted its motion to dismiss a claim by route drivers that it was not entitled to use the FWW method to calculate overtime. In this instance, a federal district court in Ohio found an unambiguous regulation, 29 CFR Sec. 778.118, upon which Frito Lay was basing its overtime payments. The court found that the wage scheme under the collective bargaining agreement (CBA) between Frito Lay and a union complied with the plain language of Sec. 778.1 18 and did not violate the FLSA or case law interpreting the Act.

Pursuant to the CBA, Frito Lay paid its route sales representatives (RSRs) a guaranteed weekly salary plus commissions based on the amount of product delivered and “per carton” returns to the warehouse. RSRs routinely worked more than 40 hours a week. At issue in this case was the way in which overtime pay was calculated. Frito Lay used the variable rate overtime (VROT) method of calculating overtime payment, which is modeled after the FWW method. The employees alleged that use of the FWW method to calculate overtime pay for RSRs was unlawful because Frito Lay did not meet the requirements of 29 CFR Sec. 778.114. Specifically, they alleged that Frito Lay’s overtime payment system did not yield time and a half as required by the FLSA.

Half-time method. Frito Lay moved for dismissal of the employees’ complaint, arguing that its VROT system was allowed under Sec. 778.118 and complied with the FLSA. Using the VROT method, total wages earned in the week were divided by the actual hours worked to determine the “regular rate.” Half of this rate was then multiplied by the number of overtime hours worked, such that an employee received time and a half for the overtime hours. Frito Lay did not purport to meet the requirements of Sec. 778.114, but rather it argued that its VROT calculation was endorsed by Sec. 778.118. This section discussed the calculation of overtime payments based upon commissions. In support of its position, Frito Lay cited Kaiser v At The Beach, Inc, which relied in part on Tenth Circuit precedent to apply Sec. 778.118’s half-time calculation to weeks employees received commissions.

Here, the court found that a plain reading of Sec. 778.118 supported Frito Lay’s interpretation. Frito Lay was adding commissions to the employees’ other earnings for the workweek, and the total was divided by the total number of hours actually worked in the workweek to obtain the employee’s regular rate for that particular workweek. The RSRs were then paid extra compensation at one-half the regular rate for each hour worked in excess of 40 in the workweek. This was the half-time method of overtime payment. To read the applicable sections as the employees urged would violate the clear language of Sec. 778.113(a) and add extra analysis to what appeared to be simple and straightforward language in Sec. 778.118, stated the court.

Non-discretionary bonuses. In Switzer v Wachovia Corp, a federal district court in Texas concluded that Wachovia Bank’s payment of non-discretionary bonuses did not preclude it from paying nonexempt employees on the FWW basis. Because the employer’s non-discretionary bonuses were based on performance, not the number of hours worked, such additional compensation did not invalidate the employer’s use of the FWW method.

The plaintiffs worked as financial specialists for Wachovia, were classified as “nonexempt salaried with overtime.” According to the employees, Wachovia violated the FLSA because it failed to satisfy the requirements for the FWW payment method. Specifically, they alleged that the bank’s payment of non-discretionary bonuses precluded its use of the FWW method.

In this case, the employees argued that they were not paid on a fixed salary because the bank paid them non-discretionary bonuses. The bonuses were calculated based on: (1) sales and production growth; (2) portfolio growth; and (3) customer service. Here, the court found that the language of the FWW regulation did not support the employees’ position. It was undisputed that the employer paid a fixed amount “as straight time” for the hours each employee worked, as well as the non-discretionary bonuses. The regulation did not preclude such a bonus. Case law relied upon by the employees to invalidate the FWW involved additional pay that was based on the number of hours worked.

The court agreed that additional pay based on the number of hours the employee works would be inconsistent with the FWW method. However, it noted that Wachovia’s non-discretionary bonuses were based on performance, not on the number of hours worked. Moreover, the court observed that in 2008 and 2009, the years at issue in this case, the DOL construed the FWW regulation to permit bonus payments. As such, Wachovia was entitled to summary judgment that the payment of non-discretionary bonuses did not preclude use of the FWW method for paying its employees.

Although the DOL shifted course in 2011, and viewed bonuses to be inconsistent with the FWW payment method, the language of the regulation remained the same. The regulatory language does not preclude bonus payments that are not based on the number of hours the employee worked. The DOL’s 2011 pronouncement is contrary to its publicly-disseminated prior position and the 2011 interpretation was not issued until well after Wachovia was no longer using the FWW payment method for the employees.