Massachusetts Employment Law Letter

GNC manager gets healthy dose of reality when court dismisses wage claims

Faced with an increasing number court decisions holding that store managers and assistants do not meet the Executive Exemption from overtime, many employers have reclassified these employees as non-exempt and begun to pay them overtime. To keep the employees’ pay relatively comparable to what they were earning when classified as exempt, as well as to preserve the status associated with earning a salary rather than an hourly wage, employers have applied the fluctuating workweek method of calculating overtime. In a recent case, the United States Court of Appeals for the First Circuit, which covers the application of federal law in Massachusetts, provided guidance as to when use of the fluctuating workweek complies with state and federal wage laws.

No good compensation structure goes unpunished
Joseph Lalli was a Store Manager at GNC. As Store Manager, Lalli, who was classified as non-exempt, was paid a guaranteed salary each workweek, regardless of the hours he worked, plus a weekly sales commission in an amount that varied from week to week based on sales attributable to him. In addition, when Lalli worked more than 40 hours in a workweek, GNC paid him an overtime premium that was calculated according to the fluctuating workweek method of determining overtime compensation, which permits employers to pay a half-time rate for any time worked in excess of 40 hours in a workweek under certain circumstances. To calculate the half-time rate, GNC determined Lalli’s regular hourly rate by adding his salary and commissions earned for the week together and dividing that amount by the total number of hours he worked that week. GNC then paid Lalli 50% of that rate for all hours over 40.

Lalli claimed that GNC could not take advantage of the fluctuating workweek payment method. He filed suit in Federal District Court for the District of Massachusetts, alleging that GNC violated the Fair Labor Standards Act (“FLSA”) and the Massachusetts Minimum Fair Wage Law. Lalli contended that the compensation arrangement did not adequately compensate him for all overtime worked. The trial court dismissed his case. Lalli then appealed to the First Circuit, which upheld the trial court’s decision .

Fluctuating hours and fluctuating overtime rates

Generally, employers are required to pay a non-exempt employee one and one-half their hourly rate for all hours over 40 worked in a workweek; however, employers may pay employees only half-time for all hours over 40 under certain circumstances. When an employee’s hours fluctuate week-to-week, and there is an understanding that the employee will be paid a fixed amount as straight time pay for whatever hours the employee works in a workweek, payment for overtime hours at one-half of an employee’s regular rate satisfies the overtime pay requirement because all hours have already been compensated at the straight time rate. That method is referred to as the fluctuating workweek method of calculating overtime. Lalli argued, however, that GNCs could not use the fluctuating workweek method because his commissions varied from week to week and the fluctuating workweek method requires that the employee be paid a fixed amount each week. Lalli claimed that he should have been paid one and one-half his regular rate for all overtime hours.

The First Circuit disagreed with Lalli and affirmed the trial court’s dismissal of his lawsuit. The court held that the fluctuating workweek method requires employers to pay employees a fixed salary each week, regardless of hours worked. Citing the fluctuating workweek principles articulated in Department of Labor interpretive bulletins and related case law, the First Circuit concluded that the fact that Lalli received additional compensation above and beyond his fixed salary did not prohibit GNC from applying the fluctuating workweek method. The case is Lalli v. General Nutrition Centers, Inc., et al. (1st Cir. 2016).

Good news for employers

With the Department of Labor’s anticipated increase in the minimum salary required to claim exempt status, many employers will have to decide whether to bump the salaries of many employees who are currently classified as exempt or to reclassify them as non-exempt. The fluctuating workweek method may be a cost effective solution for employers who are forced to reclassify employees whose current salaries do not meet the new salary threshold. The fluctuating workweek method may also help to preserve the morale of employees who consider the fact that they are paid a salary to be a badge of honor and do not wish to be considered “hourly” employees. The First Circuit’s decision makes it clear that to be entitled to apply the fluctuating workweek, the employer’s obligation is to pay the employee a fixed amount each week: The fact that the employer may pay compensation above and beyond that fixed amount does not trigger the traditional time-and-one half rate for overtime.

The upcoming changes to the overtime regulations are likely to raise questions for many employers. We suggest you contact experienced labor and employment counsel to walk you through your possible options here.