By Kara M. Maciel and Jordan Schwartz

As many employers are aware, the federal Fair Labor Standards Act (“FLSA”) mandates that employers pay non-exempt employees one and one-half times their regular rate of pay for all hours worked in excess of 40 in a workweek. However, as discussed by our colleague, Richard Tuschman, in his blog post “Reducing Your Company’s Exposure on FLSA Exemption Claims,” depending on the nature of an employee’s work schedule and salary arrangement, an employer can take advantage of the “fluctuating workweek” method. In so doing, an employer may compensate a non-exempt employee for overtime compensation at a rate of one-half his or her regular rate – as opposed to the usual rate of one-and-one half times the regular rate – because such hours have already been compensated at the straight time regular rate, under the salary arrangement.     

Earlier this month, in Urnikis-Negro v. American Family Property Services, 616 F.3d 665 (7th Cir. 2010), Ms. Urnikis-Negro, a former clerical employee at a real estate appraisal firm, sought relief from the U.S. Supreme Court and requested that it clarify the “fluctuating workweek” method that employers can use in calculating overtime. Before the trial court, Ms. Urnikis-Negro contended that although she routinely worked more than 40 hours a week, she never received any overtime pay. American Family Property Services argued that she was exempt for overtime as an administrative employee. While the trial court rejected the employer’s exemption classification, it concluded that it could pay her overtime based on the Department of Labor’s (“DOL”) “fluctuating workweek” method.             

In general, pursuant to DOL regulations, the “fluctuating workweek” method applies only when all the following factors are met: 

  •  The employee’s hours fluctuate from week to week;
  •  The employee receives a fixed salary that does not vary based on the number of hours worked each workweek;
  • There is a “clear mutual understanding” between the parties that the fixed salary is compensation for all hours worked each workweek;
  •  The fixed salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage for all hours worked each workweek; and
  • The employee receives additional compensation (in addition to the salary compensation) for all overtime hours worked at a rate of at least one-half the employee’s regular rate of pay. 

On appeal, the U.S. Court of Appeals for the Seventh Circuit noted that the propriety of relying on the DOL’s regulations regarding the “fluctuating workweek” method in cases where the employee has been misclassified by her employer as exempt from the FLSA’s overtime provision has divided federal courts. Nevertheless, the Seventh Circuit affirmed the trial court’s application of the “fluctuating workweek” method because the evidence demonstrated that the employee’s hours varied from week to week and she understood at the time of her hiring that her fixed salary was intended to cover all of the hours that she worked in a given workweek, even if they exceeded 40 hours per week. 

If the Court reviews the case, it will resolve the question of whether the “fluctuating workweek” method can use used to calculate the amount of overtime liability in cases where an employer has misclassified an employee as being exempt from the FLSA’s overtime provisions. And, as a practical matter, the Court’s decision to hear and subsequently rule on this case will have a significant impact on the extent of employer liability in misclassification cases in the future.