Calculating Overtime – First Circuit Determines the Fluctuating Workweek Method Applies to Employees with Varying Weekly Pay
The First Circuit flexed its muscles last week, dismissing an overtime claim brought against General Nutrition Centers, Inc. (GNC) by one of its former store managers. In doing so, the First Circuit explained that an employer may use the fluctuating workweek method set forth in 29 C.F.R. § 778.114 to assess pay rates even if an employee who earns a fixed salary has varying weekly pay because the employee also earns weekly performance–based commissions.
The plaintiff, Joseph Lalli, was a store manager at a GNC store in Massachusetts. Lalli earned a guaranteed weekly salary regardless of the hours worked that week, as well as a non-discretionary sales commission that varied based upon the amount of products he sold for the week. Lalli’s work hours varied, often times working more than 40 hours in one week. Under the Fair Labor Standards Act (FLSA), all non-exempt employees are entitled payment of an overtime premium for hours worked over 40 hours in a given workweek. The overtime premium under the FLSA is one and one-half times the employee’s regular rate of pay. Although it sounds simple enough, calculating an employee’s regular rate of pay can vary depending on the particular circumstances.
29 C.F.R. § 778.114 offers guidance to employers calculating overtime rates for employees with fixed salaries and with fluctuating hours. The regulation explains that even though an employee earns a fixed salary, the employee’s regular rate of pay will vary from workweek to workweek due to his or her fluctuating hours. Therefore, the employee’s regular rate of pay should be calculated on a week-to-week basis using the “fluctuating workweek method” set forth in the regulation. The fluctuating workweek method of calculation appears straight-forward as the regulation explains, “the regular rate of the employee… is determined by dividing the number of hours worked in the workweek into the amount of salary to obtain the applicable hourly rate for the week.” GNC followed this method by (1) adding together both Lalli’s guaranteed salary for the week and the commissions earned for the week; and (2) dividing the total wages by the number of hours the employee logged for the week. After determining Lalli’s regular rate of pay using this formula, the health and wellness giant paid Lalli an additional 50% multiplied by the number of hours worked over 40 hours in one workweek.
Lalli and his attorneys disagreed with the applicability of the fluctuating workweek method, contending that § 778.114 only applied to employees with fixed salaries, rather than employees like Lalli who also had a performance-based commission element to their compensation. Unfortunately for Lalli, the First Circuit did not agree. The First Circuit described Lalli’s argument as the “two rights make a wrong” approach. For those of you shaking your head and exclaiming, “two rights can never make a wrong,” you’re absolutely right, as the First Circuit rejected Lalli’s argument, concluding “the payment of a performance-based commission does not foreclose the application of § 778.114 with respect to the salary portion of the pay structure at issue.”
Correctly calculating an employee’s regular rate of pay will vary depending on the circumstances. Employers should consult with local counsel to ensure proper application of the regulations governing overtime payment.