How To Calculate Unpaid Overtime, The Sequel: Fifth Circuit Rejects FWW Method In Misclassification Cases

In Black v. SettlePou P.C., the Fifth Circuit Court of Appeals overturned a district court’s ruling concerning the proper methodology for calculating damages when an employee is misclassified as exempt. In so doing, the Fifth Circuit departed from what was considered to be settled precedent after its own opinion in Ransom v. Patel Enterprises, Incorporated, decided just 56 days before SettlePou.

Betty Black was a non-exempt paralegal at the Dallas law firm of SettlePou, P.C. In 2007, Black began supervising one of the firm’s legal secretaries and was reclassified as exempt. After Black’s employment was terminated in 2010, she filed a collective action suit alleging SettlePou misclassified her and other similarly situated paralegals as exempt employees and sought damages for unpaid overtime wages.

A jury rendered a verdict in favor of Black, finding SettlePou had willfully violated the Fair Labor Standards Act (FLSA) by misclassifying Black as exempt and that Black was owed overtime compensation for 274 hours of work. Consistent with the Fifth Circuit’s holding in Ransom, the district court applied a fluctuating workweek (FWW) method, calculating the amount of overtime compensation owed to Black by multiplying her 274 overtime hours by one-half of her hourly rate of $28.89 (as stipulated by the parties at trial) for an actual damages award of $3,957.93. Black appealed, arguing that the district court erred in its calculation of actual damages. The Fifth Circuit agreed.

Citing its opinions in Blackmon v. Brookshire Grocery Company and Ransom, as well as the Supreme Court’s ruling in Overnight Motor Transportation Company v. Missel, the Fifth Circuit reasoned that the FWW method for calculating overtime premiums in a misclassification case is only appropriate when the employer and employee have agreed that the employee will be paid a fixed salary to work fluctuating hours.

Unlike the district court, the Fifth Circuit found that the evidence weighed in favor of a finding that Black’s weekly salary was intended only to compensate her for a standard workweek of 37.5 hours. The court found the fact that Black “immediately and repeatedly” protested her lack of overtime pay to be particularly relevant. The case was reversed and remanded for recalculation consistent with the Fifth Circuit’s opinion.

Key Takeaways

While Ransom provided employers with clarity regarding the calculation of overtime premiums for misclassified employees, SettlePou introduces a new layer of complexity and trepidation to what was once thought to be well-settled precedent. For one, the opinion leaves employers with no clear guidance as to when and under what circumstances the parties’ conduct will suggest that a misclassified employee’s salary was meant to compensate for all hours worked. From a practical standpoint, one would assume that an exempt employee (whether misclassified or not) being paid a fixed salary is being compensated for all work performed regardless of the number of hours worked; however, SettlePou suggests otherwise.

Further, and in addition to this uncertainty, SettlePou leaves employers vulnerable to much larger damages awards. For example, assume an employee prevailing in a suit for misclassification under the FLSA earns a weekly salary of $3,600 per week and proves that he or she actually worked 60 hours per week. Under the FWW method, the multiplier of one-half of the regular pay rate will be multiplied by $60 per hour (which is the employee’s weekly salary divided by the actual hours worked), resulting in an additional $600 in unpaid overtime pay. Under SettlePou, assuming the court found that the weekly salary was intended to compensate for 40 hours per week, the overtime rate would be $45 per hour, resulting in $900 in unpaid overtime, and totaling $2,700 in actual damages (representing $900 in unpaid overtime and $1,800 in unpaid straight time). One can easily see that as the number of hours an employee works in excess of the “standard” workweek increases, the overtime rate increases exponentially. If an FLSA action involves hundreds of collective action claimants and two to three years of liability exposure, SettlePou dramatically magnifies an employer’s potential exposure to actual and liquidated damages.