A federal judge in New Jersey recently ruled that Office Depot’s overtime scheme, modeled after the federal “fluctuating work week” method of overtime pay, violates the federal Fair Labor Standards Act. I know, you are probably saying, “what does that mean?” Let me explain.
As most of you know, we have had a law in this country since 1938 that requires overtime pay at “one and a half times the regular rate” to be paid to workers who work more than 40 hours in a week. Usually, employers assign these “non-exempt” workers a regular hourly rate of pay (say $10 per hour) and then pay them time and a half ($15) for all hours worked beyond 40 in a week.
Few people realize that there is an alternative method of calculating overtime pay called the Fluctuating Work Week method. It derives from a 1942 U.S. Supreme Court case called Missel. Some people call it the “half time” overtime method. Still others call it “Chinese Overtime.” (although I have no idea why). Here is how it works.
First, the employees have to be paid a fixed weekly salary, say $800 per week. This salary must be paid even if the employee works less than 40 hours. So, if the employee works only 30, she still gets her $800.
Next, when the employee works more than 40, say 50, overtime is calculated by dividing $800 by 50 ($16), then paying hours 41-50 at one and a half times $16 or $24. Well, since this employee already got $16 for hours 41-50, she is only due another $8 for those hours or an $80 premium. She will get $880 instead of $1,100 (the amount she’d be paid if her hourly rate was $20).
There are obvious pitfalls to this method for employees. The most obvious is that if the employee never or rarely works less than 40, she will not receive the benefit of this scheme and only suffer its downside – half time overtime. Because of this, most employers who use this scheme neglect to tell their employees that they will get their full pay if they work fewer than 40 hours.
The fixed weekly salary component is not only violated if the weekly pay is too little, it is also violated if it is too much. If an employer pays $850 for our employees work during a holiday week, they’ve paid too much and the weekly salary won’t be “fixed” for FWW purposes.
Judges in Connecticut have been reluctant to allow employers to use this calculation when they mis-classify an employee as exempt. See Dan Schwartz blog post on this issue.
A federal judge in New Jersey ruled on February 22, 2013 that Office Depot’s overtime scheme, which it was using for its Assistant Managers, violates the Fluctuating Work Week. In that case, Office Depot’s pay scheme paid Holiday pay on national holidays. The case is called Gibbons v. Office Depot, Inc. and Gibbons is represented by Seth Lesser from New York.
The problem was that if the Assistant Manager worked 40, she got 8 hours of holiday pay for a total of 48. If she worked 35, she’d be paid 43 (with the 8 hours of Holiday Pay). If she worked 31, she still get 40 salary, but no holiday pay.
These fluctuations in salary defeated Office Depot’s claim that it paid a “fixed weekly salary.” The citation is 2013 U.S. Dist. LEXIS 25169.
Another component of the FWW is that the employer must show that its employees had a “clear mutual understanding” of the way overtime would be paid. The fact that it did not explain this holiday pay system in writing defeated this requirement.
The take away is that the FWW is a strictly construed exception to the normal “hourly” way of paying workers and that courts hold employers’ feet to the fire when employees challenge it. There is already a case pending in Connecticut for assistant managers at Save a Lot Food Stores challenging a similar practice. If you are an assistant manager paid on this FWW or “coefficient overtime” scheme, you could have a claim. If you are an attorney litigating this issue, this ruling can help you. Good luck.