The U.S. Labor Department's unfounded April fluctuating-workweek commentary (earlier post here) continues to complicate many pre-existing pay plans and to cause employers to narrow their views of the available compensation alternatives.  This is the foreseeable (and apparently intended) result of what DOL said.  Unfortunately, some observers are compounding the impact of DOL's commentary by suggesting that its ramifications are more dire than ought to be the case.

We have previously noted that the federal Fair Labor Standards Act grants no regulatory authority to DOL to make such pronouncements.  Probably for this reason, the commentary purported to draw substance from sprinkled-in references to the seminal U.S. Supreme Court case of Overnight Transportation Co. v. Missel, 316 U.S. 572 (1942), which embraced the concept underlying the fluctuating-workweek calculation.  But DOL's effort is an illusion.

For example, Missel does not support DOL's assertion that paying bonuses, incentive payments, or other additional amounts is "incompatible" with figuring overtime on a fluctuating-workweek basis.  The Court did not address this proposition at all; it simply proceeded from the facts as they were presented (which involved a weekly wage for whatever hours the employee worked) and explained how FLSA overtime was to be computed on those facts.  The Court did not say, or so much as even imply, that the fluctuating-workweek calculation was inappropriate where other forms of pay are in the picture.

DOL also opined that fluctuating-workweek overtime might create an incentive to work employees long hours because it "results in a regular rate that diminishes as the workweek increases . . .."  On this premise, DOL found it inappropriate "to expand the use of this method of computing overtime pay beyond the scope of the current regulation."  Of course, the FLSA does not prescribe and in fact does not even address any maximum number of hours that adult employees can be required to work.  Moreover, DOL is not authorized to decide whether to "expand" or contract the use of the fluctuating-workweek method for computing overtime.  The Supreme Court's reading of the FLSA trumps DOL's musings in this area, and DOL must have overlooked this statement in Missel:

It is true that the longer the hours, the less the rate and the pay per hour.  This is not an argument, however, against this method of determining the regular rate of employment for the workweek in question.

316 U.S. at 580.

Having thrown sand in the gears, DOL has offered no specific elaboration upon what the actual effects of its commentary might be.  Others have filled this gap with suppositions that are not anchored in first principles.

As an illustration, assume that an employee receives a salary of $500 each workweek as straight-time pay for all hours worked and is also paid commissions on her sales made during all her hours worked each workweek.  Assume also that, in one workweek, she works 50 hours and is due $100 in commissions, for total gross pay of ($500 + $100) = $600.  Even if her commission pay is supposedly "incompatible" with fluctuating-workweek overtime, how much FLSA overtime pay is she due for that workweek?

Some have suggested that her overtime must be computed this way:

($600 ÷ 40 hrs.) = $15 Per Hr. "Regular Rate"
($15 × 1.5 × 10 OT hrs.) = $225,

for total FLSA pay of ($600 + $225) = $825.  In our view, dividing by 40 hours and paying an extra 1.5 times the resulting rate for overtime hours is not required under the FLSA, notwithstanding what DOL said.

Under Missel, the FLSA "regular rate" is determined by dividing the employee's total compensation for a workweek by the total number of hours for which that compensation was paid.  This is so whether the straight-time wages are paid for a fixed number of hours or for a varying number of hours, and it remains the bedrock principle underlying FLSA overtime pay.  See, e.g., 29 C.F.R. § 778.109.  Where the straight-time wages were paid for all of the employee's hours worked, the proper FLSA overtime premium is one-half of a regular hourly rate that declines as the hours worked increase.  See, e.g., 29 C.F.R. § 778.118.

And, more to the immediate point, this is all still true even when a fluctuating-workweek approach is "invalid or otherwise inapplicable."  See, e.g., Opinion Letter of Wage-Hour Administrator No. 1016, 69-73 CCH-WH ¶30,563 (June 24, 1969)(discussed in our earlier post).  In other words, 40 is not automatically the default divisor, and 1.5 is not the inevitable multiplier, even if a fluctuating-workweek approach has been undercut for some reason.  Whatever the basis for the employee's pay is, and even if that basis is somehow legally flawed in whole or in part, the FLSA regular rate and the overtime due still depend upon the number of hours for which the compensation was paid.  Cf. Section 32g07(b), Field Operations Handbook (U.S. Labor Department, February 28, 1986)(40 hours not used as the default divisor even for an invalid "Belo" plan).

Because our hypothetical facts show that the employee's straight-time wages were paid for all of her hours worked, the correct FLSA calculation is:

($600 ÷ 50 hrs.) = $12 Per Hr. "Regular Rate"
[($12 ÷ 2) × 10 OT hrs.) = $60 OT Premium Pay
($600 + $60) = $660,

or $165 less than the first computation.  The principles leading to this approach are independent of whatever DOL's policy preference is, and DOL has no power to curtail them.

That said, unless and until DOL withdraws or repudiates its April statements, or until a court consensus rejecting them emerges, employers should expect investigators and plaintiff's lawyers to press those statements to the hilt.  Even so, the underlying FLSA overtime principles remain unchanged, and employers who are willing to do so should be ready to assert them.

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The federal Fair Labor Standards Act's "tip credit" was among the many topics addressed by the U.S. Labor Department's recent Final Rule.  DOL's tip-related pronouncements are a mixed-bag for employers.
 
The General Principles
 
The FLSA's Section 3(m) allows an employer to credit a portion of a tipped employee's tips toward the FLSA-required minimum wage (currently $7.25 per hour).  Employers taking an FLSA tip credit must pay a cash wage of not less than $2.13 per hour, so at present they are limited to a tip credit of no more than ($7.25 − $2.13) = $5.12 per hour.  The FLSA defines "tipped employees" as those who are engaged in occupations in which they customarily and regularly receive more than $30 a month in tips.  For FLSA tip credit purposes, a "tip" is a payment the patron decides in his or her discretion whether to make, and as to which the patron can decide how much to give and for whom to leave it; not all "gratuities" are "tips".
 
Section 3(m) says that an employer may take a tip credit only if (i) the tipped employee has been "informed" by the employer of Section 3(m)'s provisions; and (ii) the employee has retained all of the tips he or she received, except for amounts pooled among employees who customarily and regularly receive tips.
 
What Does "Informed" Mean?
 
DOL's position is that an employer must tell the employee that it intends to take a tip credit and must also specifically notify the employee in advance:
 
♦   Of the amount of the direct cash wage the employer will pay to the employee;
 
♦   Of the amount the employer is taking as a credit against tips received, which cannot exceed the difference between the FLSA minimum wage and the actual cash wage the employer pays the employee;
 
♦   That the additional amount the employer claims as a tip credit may not exceed the value of the tips the employee actually receives;
 
♦   That the tip credit shall not apply with respect to any tipped employee unless the employee has been informed of Section 3(m)'s tip-credit provisions; and
 
♦   That all tips the employee receives must be retained by the employee, except for the pooling of tips among employees who customarily and regularly receive tips.
 
DOL says that the employer is not required to provide these notifications in writing, but it observes that doing so would provide evidence that the employer has in fact given them.
 
No Limit On Pool Contributions
 
In the past, DOL's enforcement position was that an otherwise-valid tip-pool arrangement could not require employees to contribute a greater percentage of their tips than was "customary and reasonable".  DOL said that it would not question pool contributions of 15% or less of the employee's tips.

DOL now acknowledges that the FLSA "does not impose a maximum contribution percentage on valid mandatory tip pools".  However, DOL takes the position that an employer "must notify its employees of any required tip pool contribution amount .  .  .."
 
Time For A Check-Up
 
As with other areas affected by the Final Rule, employers can expect DOL investigators and plaintiff's lawyers to be scrutinizing tipped-employee pay practices even more than they already were.  Management should take a fresh look at where tipped-employee compensation stands.  This review should include not only DOL's recent changes, but also other potential FLSA tipped-employee issues, as well as any state or local requirements and limitations.

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The federal Fair Labor Standards Act's Section 13(b)(10)(A) provides an overtime exemption for "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers."

This exemption was adopted in the mid-60s.  DOL initially said that the exemption included a service manager who was primarily engaged in diagnosing the mechanical condition of cars brought in for repair, assigning the work to employees, directing and checking their work, and being responsible for the work performed.  But soon thereafter, DOL reversed itself and began to say that dealership employees who primarily engaged in selling vehicle repairs and maintenance services and in related activities were not exempt.  DOL adopted an interpretative provision saying, "Employees variously described as service manager, service writer, service advisor, or service salesman who are not themselves primarily engaged in the work of a salesman, partsman, or mechanic as described above are not exempt under section 13(b)(10)."  29 C.F.R. § 779.372(c)(4).

Following a series of DOL court losses and other adverse rulings, DOL's Wage and Hour Division threw in the towel.  In 1987, the Division added this to its internal Field Operations Handbook:

Employees variously described as service writers, service advisors, service managers, or service salesmen whose primary duty is to record the condition of a vehicle and write up a report indicating the parts and mechanical work needed have been construed as within the exemption in Sec[tion] 13(b)(10)(A) by two appellate courts (Fifth and Sixth Circuits) and two district courts (in the Eighth and Tenth Circuits). Consequently, [the Wage and Hour Division] will no longer deny the [overtime] exemption for such employees. This policy (that these employees are within the exemption) represents a change from the position in [29 C.F.R. §] 779.372(c)(4), which will be revised as soon as is practicable.

FOH Section 24L04(k).  After almost 24 years, the current administration's DOL apparently found it "practicable" to say essentially, "Never mind."  In last week's Final Rule, DOL announced that it was not going to revise 29 C.F.R. § 779.372(c)(4).  For more details, read our partner John Donovan's Legal Alert on the topic.

At least one source has opined that dealership employers now have no choice but to start treating these workers as being subject to the FLSA's overtime requirements.  Paying them overtime is always one alternative, but there are others.

One might be for a retail dealership to implement a pay plan that meets the requirements for the FLSA's Section 7(i) overtime exception for commission-paid employees of a retail establishment.  We have summarized this provision in an earlier post.

And some dealership employers might be willing to fight if need be to convince a court that prior rulings (and DOL's interpretation before April 5) have it right.  Some might be particularly so inclined in federal appellate jurisdictions governed by decisions that have already rejected DOL's April 5 position.  For one thing, internal DOL policy statements indicate that it will not seek to enforce its views in a federal appellate jurisdiction that has rebuffed them (whether DOL will subvert these policies by assisting private complainants in those jurisdictions remains to be seen).  Moreover, current or former employees who sue in these jurisdictions will have to overcome those prior rulings.  Employers who consider taking this posture will want to give special consideration to implementing a back-up Section 7(i) plan.

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The U.S. Labor Department's April 5 Final Rule attempts to transform the principles of fluctuating-workweek pay plans in two ways.  Remarkably, DOL apparently plans to do so, not by facing up to these matters by actually proposing a straightforward revision of the relevant interpretative provision at 29 C.F.R. § 778.114, but instead via remarks in the preamble accompanying the Final Rule.

The Basic Concepts

A non-exempt employee's FLSA overtime pay must be based upon his or her regular hourly rate.  This is determined by dividing the employee's total compensation for a workweek by the total number of hours worked for which the compensation was paid.  See 29 C.F.R. § 778.109.

Under a fluctuating-workweek plan, the employee receives a salary that is paid as straight-time compensation for all of his or her hours worked in a workweek, however many or few, including hours worked over 40.  Thus, for overtime hours, the employee is due only an additional one-half of the rate obtained by dividing all of the workweek's hours into the salary (this rate can never be less than the minimum wage, of course).  The employee's regular hourly rate therefore fluctuates, that is, it decreases as his or her hours worked increase, and vice versa.  The employee is also due additional overtime premium for most other compensation he or she receives for an overtime workweek.

It is worth emphasizing from the outset that Congress has given no generalized regulatory authority to DOL where the FLSA's overtime requirements are concerned.  See, e.g., Reich v. Interstate Brands Corp., 57 F.3d 574, (7th Cir. 1995), cert. den., 516 U.S. 1042 (1996).  Thus, the fluctuating-workweek method is not some exception, exemption, or DOL-conferred dispensation.  See, e.g., Davis v. Friendly Express, Inc.,  2003 WL 21488682 (11th Cir. 2003); Samson v. Apollo Resources, Inc., 242 F.3d 629 (5th Cir. 2001); Dooley v. Liberty Mutual Insurance, 307 F.Supp.2d 234 (D. Mass. 2004).  Instead, Section 778.114 simply acknowledges the arithmetical realities of applying the basic regular-rate rule in one set of circumstances.  Notwithstanding the misinformed approaches of some courts in recent times, Section 778.114 does not (and may not) represent a set of prerequisites for using fluctuating-workweek plans.  "The fluctuating workweek doctrine is not a benefit to be withheld .  .  ., but rather is an interpretive tool to give effect to the understanding of the parties."  Dooley v. Liberty Mutual Insurance, supra.

Other Pay Besides The Salary

DOL's comments say that employers who rely upon fluctuating-workweek plans for non-exempt employees may not also pay these workers bonuses, premium payments, or other additional amounts.  This is supposedly "incompatible" with paying on a fluctuating-workweek basis.  This is a complete reversal of the views expressed in 2008, when the Bush administration's Wage and Hour Division proposed to make it clear that bonuses, premium pay, or other extra sums could be paid in conjunction with a fluctuating-workweek plan, as has been done for decades.

DOL recounts a variety of supposed horribles that it believes could result from making payments in addition to the salary, including the possibility that an employer might shift a large portion of an employee's pay away from a salary toward these other amounts.  This would, DOL says, potentially cause wide disparities in an employee's wages.  DOL provides no evidence that this has actually occurred in the 72 years since the law was passed, during which time innumerable employers have paid additional sums to employees otherwise compensated on a fluctuating-workweek basis.  More importantly, the FLSA has nothing whatsoever to do with whether there are disparities in an employee's pay from week to week.

As for what the FLSA actually does address – overtime compensation – even if extra payments purportedly undercut a fluctuating-workweek plan, general regular-rate principles lead to the same amount of overtime premium.  DOL recognized this long ago in Opinion Letter of Wage-Hour Administrator No. 1016, 69-73 CCH-WH ¶ 30,563 (June 24, 1969), in which the Wage and Hour Administrator said:

Where the salary for fluctuating hours of work method of compensation is invalid or otherwise inapplicable and an employee in a single workweek works at two or more different types of jobs .  .  . for which different nonovertime rates of pay are paid, the regular rate for that week is the weighted average of such rates.  That is, the total earnings from all rates are divided by the total number of hours worked in the workweek.  The employee would then be entitled to receive one-half of the resulting average hourly rate for the hours worked in excess of [40 in a workweek].

(Emphasis added).

DOL's other principal rationale apparently was that additional payments will somehow encourage the use of fluctuating-workweek plans, which the current administration disfavors.  DOL articulated no factual or evidentiary basis for this prediction, but in any case it is not up to DOL whether this concept is to be encouraged or discouraged – fluctuating-workweek calculations are simply an arithmetical fact.  And if this compensation method is so undesirable, why does DOL permit it at all?  The answer is that DOL has no authority to do otherwise.

An Alleged "Fluctuation" Requirement

DOL's comments also claim that the fluctuating-workweek method cannot be used unless the employee's hours of work actually fluctuate.  Nowhere does Section 778.114 say that the method is limited in this way, including that DOL still has not changed the provision to say so.  DOL's remarks refer without elaboration to Section 32b04b of its internal Field Operations Handbook, which prescribes a half-time calculation for a salaried employee "if" the worker's hours fluctuate from week to week.  But this discussion clearly uses "if" to mean "in this situation", rather than "on the condition that" (and the latter usage would not have legal force even so).

DOL is coy about what it means by "fluctuate".  The comments do not say how often or by what magnitude this supposedly must happen, for example.  DOL refers to Flood v. New Hanover County, 125 F.3d 249 (4th Cir. 1997)(upholding application of the fluctuating-workweek method), a case in which the employees' hours varied because they worked rotating schedules of different fixed lengths; so much for any meaningful use of the word "fluctuate".  If DOL instead has in mind that an employee's hours must vary irregularly and unpredictably, then its research apparently failed to disclose cases rejecting such an approach.  See, e.g., Griffin v. Wake County, 142 F.3d 712 (4th Cir. 1998); Mitchell v. Abercrombie & Fitch Co., 428 F.Supp.2d 725 (S.D. Ohio 2006).

In any event, once again the proper analysis leads to a half-time calculation for the hours covered by a salary whether or not there is any "fluctuation".  As an illustration, assume that a non-exempt employee is paid a weekly salary of $500 which is understood to be his or her straight-time pay for up to the individual's fixed, regularly-scheduled workweek of 50 hours.  Assume further that the employee's actual hours worked each workweek seldom vary above or below 50.  For workweek-after-workweek, the employee's total compensation required by the FLSA is:

($500 ÷ 50 hrs.) = $10.00 Regular Rate
($10.00 × ½ × 10 OT hrs.) = $50 OT Premium
($500 + $50) = $550 Total FLSA Pay Due.

If the employee works 45 hours in an isolated workweek, the pay due is:

($500 ÷ 45 hrs.) = $11.11 Regular Rate
($11.11 × ½ × 5 OT hrs.) = $27.78 OT Premium
($500 + $27.78) = $527.78 Total FLSA Pay Due.

See, e.g., 29 C.F.R. §§ 778.109, 778.325.

These half-time calculations are proper notwithstanding that the employee's hours worked are practically invariable.  They are unremarkable and appropriate applications of the regular-rate principle in Section 778.109.

What To Do Now?

Employers should anticipate that DOL investigators and plaintiff's lawyers will seize upon the Final Rule's commentary in order to attack the use of a fluctuating-workweek approach in many situations.  In fact, some believe that the commentary is indeed designed to influence courts to adopt DOL's views.  Only time will tell what the outcome of these disputes will be.

One option, then, is to stop using fluctuating-workweek plans altogether.  This appears to be DOL's preference.  Of course, some employers might find it possible to design alternative compensation methods that have exactly the same effect, such as commissions-only pay plans or piece-rate plans.

Or, an employer might decide to rely upon the fluctuating-workweek method only where the employee's hours "fluctuate" (whatever that means), and only for employees whose compensation is limited to a salary plus the additional overtime premium pay required in an overtime workweek.

Other employers might elect to continue with the fluctuating-workweek pay plans they have without regard to DOL's commentary, recognizing that they must be prepared to defend themselves someday in a possible DOL investigation or in court.

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Earlier this week, the U.S. Labor Department's Wage and Hour Division published a "Final Rule" entitled, "Updating Regulations Issued Under the Fair Labor Standards Act."  This document (which affects not only "regulations" but also interpretative provisions of lesser status), addresses a number of subjects.  These topics include (among others) fluctuating-workweek pay plans, the impact of previous changes in the minimum wage, the tip credit available for tipped employees, and the exemption status of certain employees in automobile dealerships.  The "Final Rule" is effective on May 5, 2011.

This action is ostensibly the continuation of an initiative begun in 2008.  At that time, the Wage and Hour Division proposed to clarify and correct certain FLSA principles and to take into account FLSA amendments that had occurred over a timeframe of more than three decades.  The current administration has now transformed this undertaking into a plaintiff's-lawyer "wish list" consisting mostly of background commentary rather than the procedurally-sound adoption of actual administrative interpretations or regulations.  Employers must now be prepared to explain to the courts why substantial portions of this publication should be rejected.

We are continuing to evaluate the details and will be posting additional comments and analysis.