In Texas, an employer can satisfy its overtime obligation to nonexempt employees whose hours fluctuate from week-to-week and are paid on a salary basis, by using the fluctuating workweek (FWW) method of overtime compensation. Under the FWW, a nonexempt employee who has hours of work which fluctuate from week to week may be paid a fixed salary that is intended to compensate the employee for the straight time hours worked each workweek. On occasions where the employee works overtime, the employer is only required to pay one-half the employee’s regular rate of pay for the hours in excess of 40 in the workweek because the employee has already been paid the straight time regular rate under the salary arrangement. To use the FWW method, there must be a 1) clear and mutual understanding that the FWW will be used and that the employee’s fixed salary is intended to compensate for all straight time hours no matter how many or how few; 2) the salary must be sufficiently high that the employee’s regular rate of pay never drops below the minimum wage; and 3) the hours must fluctuate week to week rather than following a fixed scheduled.
A recent case from the Fifth Circuit Court of Appeals teaches that where an employer wants to use the FWW method to calculate and satisfy its overtime obligation to employees, it is wise to do so in a written document explaining what the salary is intended and having employees accept the terms of the arrangement. In Hills v. Entergy Operations, Inc., the Fifth Circuit reversed a trial court judgment in favor of the employer holding that the trial court’s determination that the FWW method was the proper method for determining the potential overtime liability for arguably misclassified employees was premature and further holding that genuine issues of material fact existed as to whether the employer and employee had agreed to use the fluctuating work week method. You can read the full opinion here.
The employer’s trial court win was reversed because there was disputed evidence in the record about whether the parties had a clear and mutual understanding that the fixed salary was intended to compensate the employees for all straight time hours and whether the employees’ alternating schedules of 36 and 48 hour shifts constituted fluctuating hours or a fixed schedule. This result might have been avoided had there been a written agreement between the parties clearly outlining the terms of the FWW arrangement or a notification the salary was intended to cover all of the employees’ straight time earnings in the original offer letter. Employers using the FWW method should review their practices to determine whether sufficient evidence exists to convince a court or jury that the parties have a clear and mutual understanding of what hours the fixed salary is intended to cover.