Employment Law Daily Payment of incentives disqualified employer from using fluctuating workweek method to calculate overtime
News
Tuesday, October 23, 2018

Payment of incentives disqualified employer from using fluctuating workweek method to calculate overtime

By Ronald Miller, J.D.

Because an employer paid additional incentives for off-day, offshore, and holiday hours worked each week, it was disqualified from using the fluctuating workweek (FWW) method to calculate overtime for some of its oil and gas inspectors, ruled the Fifth Circuit. The FWW method requires a fixed weekly salary that does not vary by the number of hours worked, and the employer’s incentive payments caused weekly variance in the FWW inspectors’ straight-time pay. Moreover, the appeals court affirmed the district court’s ruling that the employer had not acted willfully in violating the FLSA’s overtime requirements, where it twice sought the advice of counsel. However, the district court’s ruling that the employer was judicially estopped from challenging the methodology used to calculate overtime damages was reversed (Dacar v. Saybolt, LP, October 18, 2018, per curiam).

Fluctuating workweek method. The employer, a petroleum products company, used the FWW method to calculate overtime for some of its oil and gas inspectors who worked radically varying hours each week. These inspectors also received incentive payments for working less desirable hours during the workweek. A group of inspectors sued alleging that the incentive payments precluded use of the FWW method placed the employer in violation of the FLSA. They also claimed that the employer’s violation was willful.

Until February 2012, the employer used two different methods to pay overtime. It paid one group of inspectors using the FLSA’s standard time and one-half method. The second group of inspectors received overtime compensation under the FWW method. Federal regulations state that this method is appropriate when an employee works hours that fluctuate from week to week and the employee agrees that a fixed weekly salary will constitute straight-time pay for all hours worked in a week, however many or few. Accordingly, FWW inspectors received the same weekly base salary, regardless of the number of hours they worked.

In the FWW context, “the salary is intended to compensate” all hours an employee actually works. Because the hours actually worked each week fluctuate, the “regular rate” will fluctuate from week to week as well. As the hours worked increase, the “regular rate” will decrease. Another key difference under the FWW method is that the “overtime rate” is one-half, instead of one and one-half, times the “regular rate.”

Incentive payments. Under the employer’s payment scheme, FWW inspectors were purportedly paid overtime under the FWW method. But the company also paid incentive payments for working on a scheduled day off, working at sea, and working on a scheduled holiday. Non-FWW inspectors were ineligible for these incentives. When calculating the “regular rate” the employer added weekly incentive payments to the weekly base salary.

The employer communicated with outside counsel to assess whether the FWW method allowed for additional incentive payments. Counsel advised that combining incentive payments with the FWW method was a “potential issue.” Several district courts and the First Circuit had concluded that paying hours-based premiums in addition to a weekly salary precluded use of the FWW method. But he explained that the Fifth Circuit had not addressed the issue and DOL proposed regulation would allow payments of incentives under the FWW method. The opinion of another outside attorney that the employer consulted was that he considered the law on this issue unsettled.

Payment scheme. In January 2010, an employee filed a collective action on behalf of the FWW inspectors. He alleged that the employer did not comply with the requirements for using the FWW method and that the employer willfully violated the FLSA. Ultimately, the district court held the employer’s payment scheme violated the FLSA, but that the violation was not willful. The court adopted the employees’ model for calculating damages after concluding that the employer was judicially estopped from challenging this model. The district court also awarded liquidated damages.

Liability. The district court held that the employer did not meet the requirements for use of the FWW method because it failed to pay a “fixed salary” because it paid additional incentives for off-day, offshore, and holiday hours worked each week. The Fifth Circuit agreed that these incentive payments disqualified it from using the FWW method. The FWW method requires a fixed weekly salary that does not vary by the number of hours worked, and the employer’s incentive payment caused weekly variance in the FWW inspectors’ straight-time pay. Accordingly, its use of that method to calculate the FWW inspectors’ overtime premiums was erroneous.

Willfulness. The appeals court also agreed with the district court that there was no evidence that the employer violated the FLSA intentionally or recklessly. Evidence that an employer was merely negligent regarding the FLSA requirements was insufficient to show willfulness. In this instance, the employer twice sought the advice of legal counsel to ensure compliance with the FLSA; it knew from these communications that the relevant legal issue was unsettled and had not been addressed by the Fifth Circuit; and it knew that the DOL had issued proposed regulations that would vindicate its application of the FWW method.

After this lawsuit was filed in January 2011, more district courts held that incentive payments were incompatible with the FWW regulations. Moreover, in 2011, the DOL’s final rule affirmed that position. At that point, the employer transitioned away from paying inspectors under the challenged method. These facts did not suggest an intentional or reckless violation.

Judicial estoppel. The district court held that the employer was judicially estopped from challenging the methodology used to calculate overtime damages. The doctrine of judicial estoppel is appropriate when (1) a party has asserted a position that is plainly inconsistent with a previously asserted position, (2) the earlier position was accepted by the court, and (3) the party did not act inadvertently. Under this standard, the district court was mistaken about the nature of the employer’s arguments and erred in applying judicial estoppel.

Before the district court entered summary judgment, the employer suggested that damages, if any, should be based on what the employees would have earned under a non-FWW payment scheme. Moreover, it argued that any incentives the employees earned should offset the damages or, at least, should not be included in the “regular rate” used to calculate damages. The district court rejected the non-FWW comparator model by holding that incentive payments must be included in the “regular rate” calculation and could not offset damages. The court did not otherwise determine how damages would be calculated.

Here, the appeals court found that the employer’s initial position—that damages should be calculated using non-FWW inspectors as comparators—was not plainly inconsistent with its subsequent argument that damages should be calculated under the FWW method. In arguing for the comparator model, the employer never conceded that the FWW inspectors were paid based on a 40-hour workweek or were owed overtime at one and one-half times the “regular rate.” Thus, there was no inconsistency. Accordingly, the district court erred in holding that the employer was judicially estopped from challenging the employees’ damages model.

Interested in submitting an article?

Submit your information to us today!

Learn More
Employment Law Daily

Employment Law Daily: Breaking legal news at your fingertips

Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on employment legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.

Free Trial Learn More