You might want to grab a calculator, or at least some strong coffee, before reading this.

If an employee or group of employees have been found to have been misclassified as exempt, are they entitled to time-and-a-half for overtime hours, or only the half-time premium?  Years ago, the Supreme Court seemed to indicate that in such a case, the employer could rely upon a fluctuating work week (often called FWW) calculation and be liable only for the half time premium (actually a little less than that, as explained below).  Overnight Motor Transp. Co. v. Missel, 316 U.S. 572  (1942). Three years ago, in Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir. 2010), the Seventh Circuit applied Missel in an overtime case to hold that the FWW calculation, rather than time-and-a-half, was the correct method to determine damages in misclassification cases.  We blogged that case on August 10, 2010.

The decision as to which method to use is more than academic.  If a misclassified employee has worked 50 hours per week, they may be entitled to time and a half for 10 hours of work per week, with the hourly rate determined by the weekly salary divided by 40 hours.  But under the FWW method, they will be entitled to less than a third of that.  Under that method, the salary would be divided by the full 50 hours, and the employer would only be responsible for the half time premium based on that lower rate.  Let’s assume a weekly salary of $1,000.  At full overtime, the rate would be $25 ($1,000/40 hours), and the unpaid overtime would be $375 per week ($25 x 10 x 1.5).  Under the FWW method, the rate would be only $20 ($1,000/50 hours) and the unpaid overtime would be only $100 ($20 x10 hours x 0.5).  Multiply that times 50 weeks in a year, and the difference is $14,000 per employee.

A recent case from the Fifth Circuit again confirms that the FWW is the correct method, and that the number of hours to determine the rate is the total number of hours actually worked in the given week.  In Ransom v. M. Patel Enterprises, Inc., Case No. 12-50534 (5th Cir. 2013), a jury concluded that the employer had misclassified 16 of its party store managers as exempt.  To determine damages, the magistrate judge presiding over the case created his own formula, using a flat 55 hours to determine the rate, awarding half time for hours worked between 40 and 55, and a full time and a half for hours worked over 55.  Incidentally, even with 16 plaintiffs, the total overtime under this formula amounted only to $66,250.20, or about $4,000 per plaintiff.

The Fifth Circuit was sharply critical of the magistrate judge’s methodology.  After reviewing the lower court’s reasoning in detail, it followed Missel and Urnikis-Negro, reversed as to the damage calculation and held that the correct formula was to divide the weekly salary by the total number of hours worked, with only half time being paid for all hours in excess of 40.

The Bottom Line:  The fluctuating work week calculation for unpaid overtime should be used in misclassification cases.