On August 17, 2017, in Williams v. General Nutrition Centers, Inc., the Connecticut Supreme Court invalidated the fluctuating workweek method of calculating overtime pay for retail employees who are paid in whole or in part by commission. The effect of this ruling is particularly significant to multi-state retail establishments with Connecticut employees, as the ruling exposes employers who use the fluctuating workweek rule to calculate overtime pay for commissioned retail employees to potential lawsuits and claims for overtime wages. Connecticut now joins the small list of states that forbid the use of the fluctuating workweek rule, at least as applied to commissioned retail workers. As such, Connecticut employers using the fluctuating workweek rule to calculate overtime pay for those employees should immediately cease the practice or face potential legal exposure.
The Fluctuating Workweek Method of Calculating Overtime
The fluctuating workweek method of calculating overtime pay is perhaps one of the least understood and most misapplied provisions under the state and federal wage-hour laws. State law and the Fair Labor Standards Act (“FLSA”) require employers to pay time and one half the regular rate of pay for all hours over 40 that a “non-exempt” employee works in a given week. (Overtime must be paid to an employee who works over eight hours in a day on a prevailing wage job – but that is another blog post.)
The fluctuating workweek method of calculating overtime is an alternative to the usual “time and one-half” method of calculating overtime pay for non-exempt employees who work more than 40 hours in a work week. The fluctuating workweek method is generally advantageous for employers when employees work varying (fluctuating) hours but tend to work more than 40 hours per week. The fluctuating workweek method may also be used when employees who work fluctuating hours are paid a salary plus a commission. It is not uncommon for an overtime-eligible employee to be paid partly on salary, and partly on commission, both of which must be taken into account in calculating the regular rate. Where an employee’s weekly earnings are comprised of both a fixed salary and a commission, the regular rate of pay will fluctuate even if their hours remain regular.
Under the fluctuating workweek approach, an employee’s “regular rate” is calculated each week by dividing his total weekly pay (salary plus any commission) by the number of hours he worked during the week. That calculation yields the regular rate of pay for that particular week which, in turn, is used to determine overtime pay. For example, if an employee has a weekly salary of $500, and earns $200 in commissions for a week in which he worked 50 hours, his regular rate is $14 per hour ($700/50), and his overtime rate is $21 per hour ($14 x 1.5). Under this scenario, because the employee has received only $14 per hour for each hour worked, the employee must be paid an additional $7 for each overtime hour to bring his pay to the required rate of $21 per hour for all hours in excess of forty.
The fluctuating workweek method of calculating overtime can be used provided these conditions are met:
- The employees’ hours must actually fluctuate from week to week.
- The employee must be paid a fixed salary that serves as compensation for all hours worked.
- The fixed salary must be large enough to compensate the employee for all hours worked at a rate not less than the minimum wage.
- There must be a “clear mutual understanding” between the employer and the employee that the fixed salary is compensation for all hours worked in a workweek, rather than for a fixed number of hours per week.
Employers have the potential to save money under the fluctuating workweek method because the employee’s regular rate and, therefore, his overtime pay rate, decreases as he works more overtime hours. For example, let’s take the scenario of an employee who is paid $700 per week and in the first week works fifty hours, then in the second week works sixty hours. In the first week, the employee’s regular rate is $14 per hour ($700/50); in the second week, it is $11.66 per hour ($700/60). Given that the employee is entitled to one and one-half times his regular rate of pay for overtime hours, the employee’s overtime rate for the first week is $21 ($14 x 1.5) per overtime hour, whereas his overtime rate in the second week is $17.49 ($11.66 x 1.5) per overtime hour. This example demonstrates that under the fluctuating workweek method, an employee’s overtime pay rate actually decreases as he works increased overtime hours — thus providing some cost savings to the employer. Conversely, employees may take issue with the fluctuating workweek because they feel they are being shortchanged for the overtime hours that they work. This was the crux of the dispute before the Connecticut Supreme Court.
The Connecticut Supreme Court’s Ruling
The issue before the Connecticut Supreme Court in Williams v. General Nutrition Centers, Inc., was whether an employer may use the fluctuating workweek method to calculate overtime pay for retail employees who are paid in whole or in part by commission. The Supreme Court concluded that the use of the fluctuating workweek method to calculate overtime pay for retail employees is prohibited and unlawful.
The Supreme Court hung its hat on a Wage Order promulgated in 1970 by the Connecticut Department of Labor requiring that mercantile employees be compensated at a rate of one and one-half times their regular rate of pay for all overtime hours worked. The key provision of the Wage Order provides in relevant part as follows: “When an employee is paid a commission in whole or in part for his earnings, the regular hourly rate for the purpose of computing overtime shall be determined by dividing the employee’s total earnings by the number of hours in the usual work week ….” (Emphasis added.)
The case turned on the Court’s interpretation of the Wage Order, and specifically the meaning of “number of hours in the usual work week.” The Supreme Court expressly rejected the fluctuating workweek methodology of calculating a “regular rate” by dividing an employee’s total weekly pay by the number of hours he actually worked during the week. Instead, the Court concluded that the Wage Order required “employers to divide the employee’s pay by the hours usually worked in a week to calculate an employee’s regular rate.” (Emphasis added.) While the Court did not specifically define the phrase “number of hours in the usual work week,” the Court made clear that using “actual hours” was improper, thus rejecting the fluctuating workweek methodology as applied to retail employees paid in whole or in part by commission.
In concluding that the Wage Order requires mercantile employers to determine an employee’s regular hourly rate for the purpose of calculating overtime by dividing the employee’s weekly pay by the hours the employee “usually works” in a week, the Supreme Court observed that in calculating the regular rate, the employer must still take into account the full amount paid to the employee for the week. The Court offered the following illustration:
Suppose an employee who usually works forty hours per week actually worked fifty hours in a week, and earned $400 base pay, plus an additional $100 in commissions, for a total weekly pay of $500. In this scenario, the employee’s regular hourly rate for the purpose of calculating overtime is $12.50 per hour ($500/40 usual hours). This differs from his actual rate of pay, which was $10 per hour ($500/50 actual hours). The employee must be compensated at least $18.75 for each overtime hour worked ($12.50 x 1.5). Because the employer has already paid the employee at a rate of $10 for each hour worked, including overtime hours, the employee needs an additional $8.75 for each overtime hour to bring him to $18.75 per hour for each overtime hour. His additional overtime pay is $87.50 ($8.75 x 10 hours of overtime).
This illustration is helpful because it demonstrates that an employee’s regular hourly rate for the purpose of calculating overtime is different from the employee’s actual rate of pay, and that the differential must be factored in when determining the additional amount of overtime pay that must be paid to the employee to ensure that he is receiving at least one and one-half times his regular hourly rate for each overtime hour worked.
What Does This Mean for Employers?
This ruling effectively puts mercantile employers on notice that if they use the fluctuating workweek method to calculate overtime, their employees paid in that fashion may have a colorable claim for unpaid overtime wages. While the decision certainly has an immediate impact on Connecticut retail workers who receive commissions and are paid via the fluctuating workweek method, it will be interesting to see if either the Department of Labor or the plaintiffs’ bar uses this decision as traction to try and restrict the use of the fluctuating workweek method for non-commissioned mercantile employees, or for other occupations. Of course, the Supreme Court’s decision was based on a Department of Labor Wage Order solely applicable in the retail setting, so its application in other settings is not guaranteed.
Employers should immediately stop using the fluctuating workweek method to calculate overtime pay for commissioned retail employees in Connecticut. Additionally, employers who use the fluctuating workweek method for other employees should evaluate whether the risk of legal exposure is worth the savings currently being enjoyed over the use of the standard overtime method. Multi-state employers should be particularly vigilant about complying with the overtime laws of every state in which they have employees. It may be advisable to involve legal counsel promptly in evaluating whether using the fluctuating workweek method is prudent in light of this decision.
The Court’s decision may be found here.