Fluctuating Work Week Method of Computing Overtime

On March 11, 2013, a federal district court held that Radioshack’s bonus compensation method was unlawful under Department of Labor regulations.

The plaintiff employees alleged that Radioshack violated the federal Fair Labor Standards Act (FLSA) by failing to pay store managers time-and-a-half for overtime hours. Among other things, the FLSA requires a minimum of “time-and-a-half” for hours worked over 40 per workweek. But there are a number of exceptions to this requirement. For example, the “Fluctuating Work Week” method of compensation allows an employer to pay an employee who works a fluctuating, irregular workweek a fixed weekly salary – regardless of the hours worked. Significantly, that exception also permits an employer to pay an employee one-half (50%) her regular rate for overtime hours. To use this method of compensation, however, Department of Labor regulations impose several requirements:

• First, the employee’s hours must fluctuate from week to week.
• Second, the employee must receive a fixed salary that does not vary with the number of hours worked during the week.
• Third, the fixed salary must be sufficiently high so that an employee does not receive less than the federal minimum wage ($7.30) in any given workweek.
• Finally, the employee and employer must share a “clear mutual understanding” that the employer will pay that fixed salary regardless of the number of hours worked.

The plaintiffs argued that Radioshack’s payment of quarterly and year-end bonuses violated the requirement that employees receive a “fixed salary.” According to the plaintiffs, Radioshack’s bonus payments were therefore incompatible with the Fluctuating Work Week scheme. Radioshack argued, however, that its method of paying bonuses did not violate the Fluctuating Work Week method because the bonuses are tied to the performance of individual stores – not hours worked. The court concluded that Radioshack’s bonuses were incompatible with the Fluctuating Work Week method of computing overtime. In drawing this conclusion, the court accurately noted that the Department of Labor recently changed its position on the issue.

In interpreting the federal regulation governing the Fluctuating Work Week, the Department of Labor concluded that the payment of bonuses was incompatible with that scheme. To be sure, this position represented an about-face for the Department of Labor, as it previously sanctioned the use of bonuses in connection with the Fluctuating Work Week scheme. But the court recognized that this interpretation warranted significant deference given the Department of Labor’s authority in interpreting and administering the FLSA.

The decision represents a victory for labor. Because of the Department of Labor’s recent change in position, employers will be prohibited from utilizing the Fluctuating Work Week method and at the same time avoid paying employees overtime consistent with the regular time-and-a-half rate.

If you believe your employment rights have been violated, you should contact a St. Louis employment lawyer.

29 CFR 778.114: http://www.gpo.gov/fdsys/pkg/CFR-2010-title29-vol3/pdf/CFR-2010-title29-vol3-sec778-114.pdf

Copy of Opinion: http://www.gpo.gov/fdsys/pkg/USCOURTS-ohnd-1_12-cv-00958/pdf/USCOURTS-ohnd-1_12-cv-00958-0.pdf