Wage and hour litigation has been on a meteoric rise and is unlikely to slow in 2014. Nationally, employers paid over $245 million in 2013 to resolve wage and hour cases. In Texas, Fair Labor Standards Act (FLSA) cases continue to be among the most commonly filed in federal courts. Many of these cases allege plaintiffs are due overtime after being misclassified as exempt employees.

Two recent rulings by the U.S. Court of Appeals for the Fifth Circuit define an employer’s ability to resolve these cases at a discount by applying the fluctuating work week (FWW) method of calculating damages. These savings can be significant — for example, with an employee who earns $45,000 annually and averages 45 hours per week, an employer can save $15,000 over the three year look-back permitted by the FLSA by applying this method — and multiply when considered in the common context of collective actions.

The FWW method is authorized by the FLSA. Where the employer and employee agree and the employee works a varying number of hours per week, the employee receives reduced overtime pay.  The employee is paid a weekly salary, which compensates the employee for all “regular” hours worked. For each hour of overtime, the employee receives the premium amount of “half-time” instead of the traditional time and a half. This method can save employers two-thirds of the potential damages in a misclassification suit. Although a circuit split exists, the Fifth Circuit routinely approves retroactive application of this method in misclassification cases.

The Fifth Circuit issued two recent opinions clarifying an employer’s ability to discount damages by retroactively applying the FWW method. This approach was approved in Ransome v. M. Patel Enterprises Inc., where the court ruled that the FWW calculation is properly applied where the employee understands his hours would vary each week and his salary was intended to compensate him for all hours worked. The court found the parties’ course of conduct and the employee’s initial understanding that a weekly salary would cover the full work week of varying hours was sufficient to trigger application of the FWW method. Importantly, the employer’s documentary evidence showed that the employees understood their weekly hours would vary.

Only three months later, the Fifth Circuit rejected use of the FWW calculation in Black v. SettlePou PC. In this case, the Fifth Circuit reversed a district court’s application of the FWW method of calculating damages. The distinguishing factor in SettlePou is that the plaintiff did not agree that her weekly wage would compensate her for all hours worked. Rather, she complained that she was not paid properly on several occasions. In addition, the evidence showed that she understood her salary would compensate her for her regular work week with no indication the hours would vary. Black complained in writing and verbally that she was misclassified and was due overtime pay. After a jury found she had been misclassified, the district court applied the FWW method in calculating damages. The Fifth Circuit reversed the district court’s ruling on damages. Citing Ransome, the court concluded that two factors must be considered: the parties’ initial understanding of the arrangement and their course of conduct. SettlePou failed to satisfy both prongs. First, Black understood her salary was intended to compensate her for a regular work week of 37.5 hours, not varying hours. Second, Black made complaints to her employer that she was not paid properly. The Fifth Circuit found both of these elements preclude a calculation of damages using the FWW method.

These cases are instructive for employers wishing to ensure that they can apply the FWW method of calculating damages in the event of an employee misclassification. First, discuss — and document — with the employee that he likely will be required to work a varying number of hours each week; he is not guaranteed a workweek limited to 40 hours. Second, respond to employee complaints promptly; evaluating the merit of the exemption at the first complaint may preserve the ability to apply this discounted damages calculation looking back. Litigation often turns not on the facts as we know them to be but on the facts we can demonstrate. Documenting the varying nature of the work week, whether in an application, offer letter or other writing, can be the determinative factor.

Jessica Glatzer Mason is a partner with Gardere Wynne Sewell in Houston. Her practice includes all areas of employment law, including FLSA, unfair competition and discrimination matters. Her email address is jmason@gardere.com.

Reprinted with permission from the April 7, 2014, edition of Texas Lawyer. ©2014 ALM Media Properties LLC. All rights reserved. Further duplication without permission is prohibited.