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Paralegal had not agreed to fluctuating workweek method; error in computing FLSA damages against law firm

By Lisa Milam-Perez, J.D.

A trial court erroneously applied the fluctuating workweek method when computing damages after a jury found a paralegal was improperly classified as FLSA-exempt and thus wrongly denied overtime pay (Black v Settlepou, PC, October 11, 2013, Graves, J, Jr). The employee’s repeated objections to being reclassified as exempt from overtime supported a finding that there was no agreement between the parties that she would be paid a fixed salary for all of the hours she worked each week, the Fifth Circuit concluded, vacating the damages award and remanding for recalculation.

Reclassified as exempt. The employee began working for the law firm as a nonexempt legal secretary, and was promoted a year later to paralegal, still deemed a nonexempt position. The following year, she was told that she would now be supervising a legal secretary and therefore would be reclassified as exempt from overtime, much to her vocal displeasure. When she was terminated a few years later, she filed an FLSA suit alleging claims for unpaid overtime and retaliation. A jury found the law firm had willfully violated the Act by misclassifying her as exempt, and concluded she was entitled to 274 hours of overtime compensation. She did not prevail on her retaliation claim, though.

In computing the overtime pay award following the verdict, the district court applied the fluctuating workweek (FWW) method, multiplying her 274 overtime hours worked by one-half of her regular hourly pay rate of $28.891 per hour, for an actual damages award of $3,957.93. The court also awarded liquidated damages in the same amount, for a total damages award of $7,915.86. The employee moved to alter or amend the judgment, arguing that the court erred in awarding only half the regular hourly rate instead of one and one-half times the rate. After her motion was denied, the employee filed an appeal, contending that the FWW method was not warranted here. Agreeing, the Fifth Circuit reversed.

FWW method. Under the FWW method, as set forth in 29 CFR Sec. 778.114, an employee receives a fixed weekly pay for a fluctuating work schedule with a varying number of hours worked each week. After a finding of fact is made that an employee was misclassified and is entitled to overtime pay, the court determines as a matter of law whether to apply the standard method of calculating overtime pay due or whether instead to apply the FWW multiplier. The issue has divided the federal courts, the Fifth Circuit noted — particularly the question of whether the FWW formula is to be applied retroactively.

The Fifth Circuit, in Ransom v M Patel Enterprises, Inc, held that Sec. 778.114 does not allow for a retroactive damages award in misclassification cases. Looking to the Supreme Court’s endorsement of the FWW method in Overnight Motor Trans Co v Missel, which held that the FWW half-time multiplier may be used to calculate overtime when the employee had been working under a “contract [that] is for a weekly wage with variable or fluctuating hours,” the appeals court reasoned that the FWW method is appropriate only when employer and employee have agreed that the employee will be paid a fixed weekly wage to work fluctuating hours. Accordingly, the case here turned on the factual question of whether the employee had agreed to receive a fixed weekly wage for working fluctuating hours.

No agreement found. The district court made no specific finding of fact as to the terms of the paralegal’s employment agreement with the law firm; it implicitly determined that the parties agreed that her fixed weekly salary was intended to compensate her for all the hours she worked each week no matter how her hours fluctuated. But the lower court should have taken into account the parties’ initial understanding of the employment arrangement as well as their ongoing course of conduct.

Turning to this inquiry, the appeals court observed that the parties initially agreed that the employee would be given a fixed weekly salary and time and one-half of her regular hourly pay for any hours worked beyond 40. When the law firm reclassified her as exempt, that agreement changed — raising the question of whether the parties mutually agreed that she would receive a fixed salary to compensate her for fluctuating weekly hours under her new employment arrangement.

At trial, the employee testified that it was her understanding that she would be compensated with a fixed weekly wage to work a regular schedule of 37.5 hours per week, even though she was now classified as exempt. The HR director who had informed her that she was being reclassified as exempt testified that she too was unaware of any fluctuating workweek agreement in place. One firm partner testified that a full-time employee’s regular workweek was 37.5 hours per week. This testimony warranted a finding that the parties had agreed that the employee’s weekly salary was meant only to compensate her for a regularly set schedule of 37.5 hours per week. The law firm’s payroll records provided further support for this finding, as did the firm’s employee handbook, which sets forth a regular 37.5 hour workweek.

Course of conduct. The employee’s course of conduct also suggested there was no meeting of the minds on the FWW method. Her schedule did fluctuate above her standard workweek at least some of the weeks she was employed, yet she was only paid the same fixed weekly salary no matter how many hours she worked. The law firm argued that by accepting her fixed weekly pay, she indicated that she understood and agreed that her fixed weekly salary would cover all of her hours worked on her varying schedule. In its view, such conduct evidenced a FWW agreement.

However, the appeals court noted, the critical issue was not only whether the employee was paid a fixed salary for varying hours, “but whether the parties had agreed that a fixed salary would compensate her for all of the hours she worked each week.” The record evidence suggested otherwise: when she found herself working overtime without pay, she lodged both verbal and written complaints with her supervisor and HR about not being compensated for the extra work. Her continued protests showed that she did not agree that her fixed salary should compensate her for all of the hours she worked each week.

“By immediately and repeatedly voicing her disagreement with her lack of overtime pay after being reclassified as exempt,” the appeals court wrote, the employee “did much, short of quitting her job, to show that she did not agree that her fixed weekly salary was intended to compensate her for all of the hours she worked each week.” Accordingly, it was clear error for the district court to apply the FWW method in calculating her overtime premiums.

Remaining damages. In addition to vacating the amount of actual damages awarded, the appeals court remanded as to the liquidated damages and attorneys’ fee awarded. Because the jury found the law firm acted willfully in violating the Act, the employer could not show it acted in good faith. And, because the lower court erred in calculating actual damages, the liquidated damages award was to be recalculated accordingly.

As to the attorneys’ fee award, the district court determined the proper lodestar was $232,400, but in its discretion reduced the award to only $45,000 in attorney’s fees. The appeals court observed that plaintiff’s counsel had voluntarily reduced their billing hours by excluding any hours that were related strictly to the failed retaliation claim, and further reduced their hours by an additional 25 percent to compensate for their failure to recover on that claim. The district court ultimately concluded that a 25 percent voluntary reduction in hours was insufficient because, having lost the retaliation claim, the employee recovered only about $8,000 in damages instead of the $97,000 or so requested. However, the appeals court concluded that, while the district court must take into account the degree of success obtained, it was an abuse of discretion to reduce the fee award solely on the basis of the amount of damages obtained.