FLSA2009-3 — Retroactive payment of overtime and the fluctuating workweek method of payment

U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

FLSA2009-3

January 14, 2009

Dear Name*:

This is in response to your request for an opinion regarding whether the proposed method of
your client (the employer) for computing retroactive payment of overtime complies with the
Fair Labor Standards Act (FLSA). Based on a review of the information provided, it is our
opinion that the proposed method satisfies the FLSA.

The employer has for some time considered certain employees to qualify for exemption under
section 13(a)(1) of the FLSA.
∗
The employer expected the employees to work at least 50
hours per week and paid them a guaranteed salary bi-weekly. The employer’s payroll software
converts the bi-weekly salary to an hourly rate by dividing the salary by 100, the minimum
expected number of hours worked for a two-week payroll period. This is done without regard
to whether the employee has worked more or less than 100 hours in the pay period. For
example, if the employee’s salary is $1,825.50, the payroll software converts this to an hourly
rate of $18.25 ($1,825.50 divided by 100). The paycheck stub shows the $18.25 per hour rate
and the 100-hour divisor. In a follow-up correspondence, you stated that the employees’ hours
worked fluctuated above and below fifty hours per week notwithstanding the minimum fifty-
hour week expectation. Typically, however, the employees worked at least fifty hours per
week.

The employer recently realized that due to a reorganization, the nature of the work performed
by some of the employees ceased to meet the duties test of the section 13(a)(1) exemptions.
The employer now treats the affected employees as nonexempt and complies with the
recordkeeping, minimum wage, and overtime requirements of the FLSA for these employees.
The employer will pay back wages to the employees for overtime hours worked during the
period of misclassification. The employer is reconstructing the number of hours worked by the
employees over this period. Once this is completed, the employer will pay overtime
retroactively by (1) dividing the weekly equivalent of the employee’s bi-weekly salary by the
employee’s hours worked in that workweek; (2) multiplying the resulting regular rate by one
half; and (3) multiplying the half-time rate by the number of overtime hours worked in that
workweek. In the follow-up correspondence, you stated that the salaries involved are high
enough that the regular rate would in all cases exceed the applicable minimum wage.

You ask whether the proposed method of computing retroactive payment of overtime complies
with the FLSA.

∗
Unless otherwise noted, any statutes, regulations, opinion letters, or other interpretive material cited in this letter
can be found at www.wagehour.dol.gov.

Under the fluctuating workweek method of payment an employee may be paid a fixed salary
that serves as compensation for all hours worked if it is sufficient to compensate the employee
for all straight time hours worked at a rate not less than the minimum wage and the employee
is paid an additional one-half of the regular rate for all overtime hours.
See 29 C.F.R. §
778.114(a). The regular rate of pay will vary due to the fluctuating hours worked week to
week. See id. § 778.114(b). The full salary must be paid even when the full schedule of hours
is not worked. See id. § 778.114(c). Finally, there must be a “clear mutual understanding of
the parties that the fixed salary” is “compensation for however many hours the employee may
work in a particular week, rather than for a fixed number of hours per week.” Clements v.
Serco, Inc., 530 F.3d 1224, 1230 (10th Cir. 2008); see 29 C.F.R. § 778.114(a). As stated in
Wage and Hour Opinion Letter FLSA-772 (Feb. 26, 1973),

[a]n agreement or understanding need not be in writing in order to validate the
application of the fluctuating workweek method of paying overtime. Where an
employee continues to work and accept payment of a salary for all hours of work, her
acceptance of payment of the salary will validate the fluctuating workweek method of
compensation as to her employment.

Furthermore, the Department’s regulations do not require that the “clear and mutual
understanding” extend to the method used to calculate the overtime pay. See Valerio v.
Putnam Associates Inc., 173 F.3d 35, 40 (1st Cir. 1999) (“The parties must only have reached a
‘clear mutual understanding’ that while the employee’s hours may vary, his or her base salary
will not.”). Rather, 29 C.F.R. § 778.114 only requires that the employees have a “clear and
mutual understanding that they would be paid on a salary basis for all hours worked.”
Clements, 530 F.3d at 1230.

It is clear the employer paid the employees a fixed salary for variable hours worked and not on
an hourly basis. The payroll software’s conversion of the salary into an hourly rate and the
hourly rate notation on the paycheck stub do not negate this fact. Therefore, because the fixed
salary covered whatever hours the employees were called upon to work in a workweek; the
employees will be paid an additional one-half their actual regular rate for each overtime hour
worked, which at all times exceeds the minimum wage; and the employees received and
accepted the salary knowing that it covered whatever hours they worked, it is our opinion that
the employer’s method of computing retroactive payment of overtime complies with the FLSA.

This opinion is based exclusively on the facts and circumstances described in your request and
is given based on your representation, express or implied, that you have provided a full and fair
description of all the facts and circumstances that would be pertinent to our consideration of
the question presented. Existence of any other factual or historical background not contained
in your letter might require a conclusion different from the one expressed herein. You have
represented that this opinion is not sought by a party to pending private litigation concerning
the issues addressed herein. You have also represented that this opinion is not sought in
connection with an investigation or litigation between a client or firm and the Wage and Hour
Division or the Department of Labor. This opinion does not constitute supervision of payment
of back wages due to any employees under 29 U.S.C. § 216(c) of the FLSA.

We trust that this letter is responsive to your inquiry.

Sincerely,

Alexander J. Passantino
Acting Administrator

* Note: The actual name(s) was removed to preserve privacy in accordance with 5 U.S.C.
§ 552(b)(7).