Court Rejects Use of Fluctuating Workweek In Calculating Back Overtime for Misclassified Employees

On November, 17, 2009, the United States District Court for the Northern District of California in Russell v. Wells Fargo & Co., ruled that Wells Fargo, who allegedly misclassified computer technicians as exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”), was not entitled to calculate back overtime payments to employees under the fluctuating workweek ("FWW") overtime method of calculation.

Rejecting Wells Fargo's request for partial summary judgment on the claims of present and former computer technicians, the court found that the employer's proposed calculation, which would reduce back pay substantially, was not supported by the FLSA or Department of Labor ("DOL") regulations.

Granting partial summary judgment on the calculation issue to the plaintiffs, the court said it was not persuaded by a January 2009 DOL opinion letter concluding that the FWW could be used to calculate overtime retroactively in a misclassification case.

Under the DOL regulation on the FWW, the court observed, an employer must satisfy several requirements to use what the court called “the discounted overtime rate available through the FWW method.”

The prerequisites, the court said, include “(1) a clear mutual understanding that a fixed salary will be paid for fluctuating hours, apart from overtime premiums; and (2) the contemporaneous payment of overtime premiums.” In order to satisfy the regulation, it said, the employer and employee must have a clear understanding of the fixed salary that will be paid, but they also must have a mutual understanding that, contemporaneous with the salary payment, an overtime premium will be paid for any hours worked over 40 in a single workweek.

“When an employee is treated as exempt from being paid for overtime work, there is neither a clear mutual understanding that overtime will be paid nor a contemporaneous payment of overtime,” the court wrote.

Wells Fargo argued that its employees had agreed to accept a flat rate for fluctuating hours including those over 40 in a week, but the court said if the employees were misclassified as exempt workers, “Defendants essentially argue that misclassified employees have implicitly agreed not to receive their FLSA entitlement to overtime pay.” Such an agreement would be unlawful under the FLSA, it found.

Second, the court said, the Wells Fargo workers did not receive an overtime payment contemporaneously as required by the DOL regulations. “Employers cannot satisfy this requirement, after having been found to violate section 207, by claiming that they had intended to pay overtime,” the court said, adding that “such an after-the-fact provision of overtime compensation has been rejected by the Supreme Court.”

The court observed that if Wells Fargo's position on a back pay calculation were adopted, the employer would have the benefit of choosing to pay employees an overtime premium under an “employer-friendly” method that is less costly than a traditional method of calculation. “Given the remedial purpose of the FLSA, it would be incongruous to allow employees, who have been illegally deprived of overtime pay, to be shortchanged further by an employer who opts for the discount accommodation intended for a different situation,” the court wrote.

Denying Wells Fargo's motion for partial summary judgment, and granting partial summary judgment to the plaintiffs on the overtime calculation issue, the court said it “interprets § 778.114 to restrict application of the FWW method to calculate overtime pay to situations where (1) there is a clear mutual understanding between an employer and employee that the employee will be paid a fixed salary for fluctuating weekly hours but nonetheless receive overtime premiums and (2) overtime is compensated contemporaneously.”