On August 16, 2013, the U.S. Court of Appeals for the Fifth Circuit reaffirmed the use of the “fluctuating workweek” method for calculating damages of workers owed overtime pay as a result of misclassification as “exempt” under the FLSA. In Ransom v. M. Patel Enterprises, Inc., the trial court found executive managers of Party City retail stores were misclassified as exempt from the overtime provisions of the Fair Labor Standards Act (FLSA) when the company paid them flat weekly salaries regardless of the hours they worked. On appeal to the Fifth Circuit, the company did not contest the workers’ status under the FLSA, but argued the lower court improperly calculated overtime damages.

The Fifth Circuit harshly criticized the lower court’s method of calculating damages. Specifically, the court found that the trial court erroneously found that the employees agreed upon a 55-hour workweek and, based upon this finding, divided the weekly salary by 55 to find the intended hourly rate. The lower court calculated the damages assuming that Party City’s pay scheme properly compensated the plaintiffs for hours worked up to 40, but failed to compensate the plaintiffs for overtime for the hours worked between 40 and 55, and further failed to compensate the plaintiffs for all hours worked over 55.

The Fifth Circuit rejected the trial court’s calculation scheme and, instead, applied the “fluctuating workweek” method, as established in federal regulations. The fluctuating workweek method applies when, as in Ransom, an employee is paid a fixed weekly salary and is expected to work fluctuating weekly hours. Under the fluctuating workweek method established by Party City, the company intended to compensate workers for all hours worked, not to cap compensation at 55 hours in a week. Critically, the court found that while there was no written agreement clearly defining the conditions of the workers’ employment, testimony from numerous Party City employees showed that the workers were expected to work a “flexible schedule” of “50 to 55” hours per week. Therefore, the lower court’s finding that the workers’ salary was intended to compensate workers for 55 hours was “clearly erroneous.” Accordingly, the plaintiffs’ award was limited to 50% of the intended hourly rate for all hours worked over 40 and would not include 150% of the intended hourly rate for all hours worked over 55.