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The court found that the visa, travel, and recruitment expenses primarily benefited the employer and that, as per U.S. Department of Labor regulations, the employer must reimburse the workers for those costs if the workers would otherwise effectively receive sub-minimum wage compensation. See 29 C.F.R. §§ 531.3(d), 531.35.

The court relied heavily on the fact that a 2009 Department of Labor Field Assistance Bulletin declared that employers must reimburse H-2B visa workers for the costs of transportation, obtaining a visa, and third-party recruiters whose services the employer retains. The Field Assistance Bulletin reasoned that the costs of transporting H-2B workers and of obtaining an H-2B visa primarily benefit the employer because the H-2B visa program provides “greater-than-normal” benefits to the employer, since such workers are available to an employer only if it attests that no comparable domestic workers are available. In concluding that the recruitment costs primarily benefited the employer, the district court emphasized that the employer had retained the third-party recruiter’s services.

The courts have been divided on this issue. The Eleventh Circuit has similarly ruled that travel and visa expenses must be reimbursed when a worker’s effective wage received would otherwise be below minimum wage. See Morante-Navarro v. T&Y Pine Straw, Inc., 350 F.3d 1163, 1166 n.2 (11th Cir. 2003). The Fifth Circuit, however, has held to the contrary. See Castellanos-Contreras v. Decatur Hotels, 622 F.3d 393 (5th Cir. 2010) (en banc).

This entry was written by Bruce Millman and Nicholas Ortiz.

Photo credit: oddrose
 

Courts have disagreed, however, on the question of whether an employer who has misclassified an employee as salaried exempt may take advantage of the “fluctuating workweek” method of computing overtime when calculating the amount of overtime due. Plaintiffs have argued (and some courts agreed) that overtime damages should be determined by dividing the salary by some arbitrary fixed number of hours (typically, 40) to determine a fixed hourly rate, and then pay the employee time-and-one-half for all hours worked in excess of that fixed number. In a recent decision, however, the United States Court of Appeals for the Tenth Circuit held that as long as the salaried employees had a “clear mutual understanding” that their salary was intended to compensate them for all hours worked each week, the fluctuating workweek method should be used to calculate overtime owed following a decision that the employees were misclassified. See October 2008 blog entry: Tenth Circuit Endorses “Fluctuating Workweek” Method of Calculating Overtime for Misclassified Salaried Employees.

The Wage & Hour Division recently endorsed the Tenth Circuit’s position, albeit in a slightly different context. FLSA2009-3. The Wage & Hour Division issued its opinion letter in response to an inquiry from an employer that recognized some of its employees had been misclassified and wanted to retroactively pay them the overtime they were owed. For each workweek, the employer proposed a formula to calculate unpaid overtime: (1) determine each employee’s regular rate for each week by dividing his or her fixed weekly salary by the number of hours worked that week; and (2) pay the employee one-half that regular rate for each overtime hour worked in that particular week.

The Wage & Hour Division concluded that the proposed method of calculating overtime complies with the FLSA on the facts presented. The employer’s proposed calculation method would not cause any employee to be paid below the minimum wage. Additionally, the employer and employees had a clear mutual understanding that the fixed salary covered all work – not just the first forty hours of work each workweek. Citing Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir. 2008), the Wage & Hour Division explained that “clear mutual understanding” refers to the payment of a fixed salary for all hours worked, not the method of calculating overtime pay.

Coupled with the Tenth Circuit’s decision in Clements, the opinion letter should provide some comfort (and considerable cost savings) to employers when faced with litigation alleging misclassification of a group of salaried exempt employees. Of course, it is possible that courts in other jurisdictions will reject Clements and the opinion letter, and some states (e.g., California) do not permit use of the fluctuating workweek method as a matter of state law. Nonetheless, this development from the final days of the previous administration comes as good news to employers.

This entry was authored by Jeffrey Hammer.

In misclassification litigation under the FLSA, plaintiffs often argue that the foregoing “fluctuating workweek” method of calculating overtime should not be permitted. These plaintiffs contend that the “clear mutual understanding” required by § 778.114 must include an understanding that overtime premiums will be calculated using the “half-time” method. Of course, in misclassification cases, overtime was not paid at all, so the parties necessarily did not have any understanding as to how overtime premiums would be calculated. If the plaintiffs prevail on this argument, therefore, the “fluctuating workweek” method could never be used in misclassification cases, and plaintiffs in misclassification cases would be awarded overtime damages using the “time and one-half” method (pursuant to which their weekly salary would be divided by 40 hours or some other fixed number of hours, and the resulting hourly rate would be multiplied by 1.5 and then paid for all overtime hours).

The method used for calculating overtime can have a significant impact on the potential exposure in litigation. For example, if an employee was paid a weekly salary of $1,000, overtime liability for a week in which the employee worked 50 hours would be: (a) $100 using the “fluctuating workweek” method ($1,000 ÷ 50 x 0.5 x 10); but (b) $375 using the “time and one-half” method ($1,000 ÷ 40 x 1.5 x 10).

In Clements v. Serco, Inc. the Tenth Circuit held that in order to take advantage of the “fluctuating workweek” method of calculating overtime in a misclassification case, the employer must prove only that the parties had a “clear and mutual understanding” that the employees would be paid a fixed salary for all hours worked.530 F.3d 1224 (10th Cir. 2008).

The Clements decision provides some welcome relief to employers faced with misclassification litigation. But it also provides a valuable lesson for all employers. In order to establish the existence of a “clear and mutual understanding” that the employees would be paid a fixed salary for all hours worked, offer letters and other documentation regarding an exempt employee’s weekly salary should not suggest that the salary is compensation for a fixed number of hours per week or for a fixed weekly schedule. Rather, the documentation should confirm that the salary is intended to compensate the employee for all hours worked each workweek, whether many or few.

For more comprehensive coverage of this issue, see our article on Littler.com.

Robert Pritchard authored this blog entry.