December 5, 2019
Submitted electronically via Federal eRulemaking Portal
Division of Regulations, Legislation, and Interpretation
Wage and Hour Division
U.S. Department of Labor
200 Constitution Avenue NW
Washington, D.C. 20210
RE: Comments Submitted on Behalf of the National Employment Lawyers Association on Notice of Proposed Rulemaking RIN 1235-AA31
Dear Ms. DeBisschop:
The National Employment Lawyers Association (NELA) submits these comments to the Notice of Proposed Rulemaking by the United States Department of Labor (“the Department”) regarding the Fair Labor Standards Act of 1938 (“FLSA”), issued for comment on November 5, 2019 at 84 Federal Register 214, et seq. (the “2019 NPRM”).
NELA is the largest professional membership organization in the country comprised of lawyers who represent employees in labor, employment, wage and hour, and civil rights disputes. Founded in 1985, NELA and its 69 circuit, state, and local affiliates have a membership of over 4,000 attorneys who are committed to working on behalf of those workers who have been treated illegally. NELA strives to protect the rights of its members’ clients, and regularly supports precedent-setting litigation affecting the rights of individuals in the workplace. NELA has a compelling interest in seeing that the goals of the FLSA are realized. To ensure that the rights of working people are protected, NELA has filed numerous amicus curiae briefs before the United States Supreme Court and other federal appellate courts regarding the proper interpretation of the FLSA and other federal civil rights laws, as well as undertaking other advocacy actions on behalf of workers throughout the United States.
NELA members represent thousands of individuals in this country who are subjected to employer violations of wage and hour laws. NELA members are committed to advocating for a narrow interpretation of the exemptions under the FLSA, so as to reduce the number of workers who are excluded from the protection of the overtime rules. These workers comprise a large and growing share of the workforce, and are harmed by the erosion of the right to overtime pay. In submitting these comments, NELA seeks to protect the rights of its members’ clients, by ensuring that the goals of the FLSA are fully realized.
These comments were drafted by NELA members who have been involved in wage and hour litigation for decades and are intimately familiar with the current regulations. These comments should be viewed not as the comments of a single committee or subset of NELA members, but as a distillation of the views of the 4,000 members of NELA who represent working people.
We appreciate the opportunity to comment on the proposed regulations. By commenting on various aspects of these regulations we are not suggesting that we agree with or tacitly approve the portions of the regulations upon which we are not commenting. We reserve our rights for further comment in that regard.
I. The Purpose of the FLSA
1. The FLSA Is a Broad Remedial Statute.
Congress enacted the FLSA to create a minimum standard for hourly wages and a maximum number of hours an employee could work without receiving overtime compensation. 29 U.S.C. §§ 206, 207. The FLSA was enacted to eliminate labor conditions that are detrimental to the health, efficiency, and general welfare of workers. 29 U.S.C. § 202. In his message to Congress urging passage of the Act, President Roosevelt explained that the Act is intended to ensure workers “a fair day’s pay for a fair day’s work” because “[a] self-supporting and self-respecting democracy can plead no . . . economic reason for chiseling workers’ wages or stretching workers’ hours.” H.R. Rep. No. 101-260, at 8-9 (Sept. 26, 1989) (reprinted in 1989 U.S.C.C.A.N. 696, 696-97).
2. Congress Intended the FLSA’s Overtime Provisions Both to Reduce Working Hours and to Spread Employment among the Work Force.
The FLSA established the general rule that employees must be compensated at one and one-half times their regular rate of pay for each hour worked in excess of 40 hours per week. 29 U.S.C. § 207(a)(1); Yourman v. Dinkins, 865 F. Supp. 154, 164-165 (S.D.N.Y. 1994) aff’d. 84 F.3d 655 (2d Cir. 1996), rev. on other grounds sub nom Guiliani v. Yourman, 519 U.S. 1145 (1997) (“FLSA’s default position . . . is to calculate hourly and overtime rates based on a regular workweek consisting of a fixed number of hours.”). Although the Act did not flatly prohibit overtime work, it intended to create a financial disincentive to its use. Overnight Motor Transp. Co. v. Missel, 316 U.S. 572, 578 (1942); Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 739 (1981).
The two primary purposes of the FLSA’s overtime provision are to protect workers from long hours of work and to spread employment. Citing to the Act’s legislative history, the Missel Court explained Congress’ intent:
The provision of section [207(a)] requiring this extra pay for overtime is clear and unambiguous. It calls for 150% of the regular, not the minimum, wage. By this requirement, although overtime was not flatly prohibited, financial pressure was applied to spread employment to avoid the extra wage and workers were assured additional pay to compensate them for the burden of a workweek beyond the hours fixed in the act. In a period of widespread unemployment and small profits, the economy inherent in avoiding extra pay was expected to have an appreciable effect in the distribution of available work. Reduction of hours was a part of the plan from the beginning. ‘A fair day’s pay for a fair day’s work’ was the objective stated in the Presidential message which initiated the legislation. That message referred to a ‘general maximum working week,’ ‘longer hours on the payment of time and a half for overtime’ and the evil of ‘overwork’ as well as ‘underpay.’ The message of November 15, 1937, calling for the enactment of this type of legislation referred again to protection from excessive hours. Senate Report No. 884 just cited, page 4, the companion House Report and the Conference report all spoke of maximum hours as a separately desirable object.
Missel, 316 U.S. at 578 (internal citations omitted). Courts have uniformly followed that seminal case in recognizing Congress’ intention to reduce work hours and spread employment. See e.g., Barrentine, 450 U.S. at 739; Monahan v. County of Chesterfield, Va., 95 F.3d 1263, 1267 (4th Cir. 1996); Hodgson v. Baker, 544 F.2d 429, 432-433 (9th Cir. 1976); Brennan v. Lauderdale Yacht Basin, Inc., 493 F.2d 188, 189 (5th Cir. 1974); White v. Witwer Grocer Co., 132 F.2d 108, 110 (8th Cir. 1942).
3. The Department’s Proposed Dilution of § 778.114’s Fixed Weekly Earnings Guarantee, to Allow Employers to Shift All Wages Beyond Minimum Wage to Non-Guaranteed Bonuses While Reaping the Benefit of Diminishing Half-time Premiums, Is Contrary to the FLSA’s Goals.
Congress intended the FLSA to accomplish two goals: protect individuals from long hours of work, and to incentivize employers to spread employment to avoid the high cost of paying time-and-a-half overtime premiums.
The Department’s proposal directly conflicts with both goals. It incentivizes employers to guarantee only enough base salary to pay minimum wages while making all other potential weekly earnings contingent on hours worked, all while still retaining the benefit of the diminishing half-time exception to time-and-a-half overtime premiums. There can be no dispute that as a matter of basic economics, the proposed interpretive change eliminates the financial disincentive to requiring more overtime work from an individual employee, which will necessarily eliminate the incentive to spread employment by spreading that work to other employees and/or reducing unemployment by hiring more workers. The Department’s 2019 NPRM does not attempt to dispute that, nor can it.
a. § 778.114 Already Tested the Furthest Bounds of Permissible Exceptions.
As NELA has informed the Department in prior commentary, the fluctuating workweek overtime pay methodology (“FWW”) undermines the FLSA’s goals of discouraging overtime work and encouraging the spread of employment because it creates an economic incentive for employers to do precisely the opposite. It allows an employer to pay less for each overtime hour the more hours the employee is required to work. In re Texas EZPawn Fair Labor Standards Act Litigation, 2008 WL 2513682, *7 (W.D. Tex. June 18, 2008) (“It is very difficult to see how using the [fluctuating] workweek method to compute damages is consistent with Congress’ declared policy [at 29 U.S.C. § 202(a) & (b)].”); see, Christopher L. Martin, et al., The Fair Labor Standards Act and the Fluctuating Workweek Scheme: Competitive Compensation Strategy or Worker Exploitation?, 44 Lab. L.J. 92 (1993); John T. Mullan, The Value of Overtime, CA Labor & Employment Bulletin 57 (February 2009). Not surprisingly, the result is typically long work hours for employees and fewer employees on the job.
By creating incentives to long work hours, the FWW pay plan often results in low pay and long work hours – exactly the conditions Congress sought to avoid through the FLSA. For example, after 60 hours, an employee’s hourly rate of pay under the fluctuating workweek is less than one-third the regular hourly rate of another employee working a 40-hour week. An employee working an additional 40 hours above the FLSA standard workweek is paid for the second 40 hours at one quarter of what he or she is paid for the standard 40-hour workweek. The potential for a 75% discount on wages provides a strong financial incentive to employers to require ever more overtime hours and to limit the number of employees. See, e.g., Martin, supra, 44 Lab. L.J. 92 (1993). And the more overtime hours a FWW-paid employee works, the more the overtime hourly rate decreases—resulting in diminishing half-time premiums that decrease with every overtime hour worked (“diminishing half-time”).
Courts have had no difficulty determining that the FWW diminishing half-time premium pay method makes overtime so cheap that it incentivizes companies to over-work non-exempt salaried employees:
[T]he difference between the FWW method and the traditional time-and-a-half method can result in an employee being paid seventy-one percent less for overtime over a given year, and under the FWW method, the effective overtime hourly rate of an employee working sixty-one hours or more is less than the non-overtime hourly rate of an employee who worked no more than forty hours per week. [Cit.] This result is contrary to the FLSA's purpose: encouraging employers to spread employment among more workers, rather than employing fewer workers who are then required to work longer hours. See Robertson v. Alaska Juneau Gold Min. Co., 157 F.2d 876, 879 (9th Cir. 1946).
Blotzer v. L-3 Communs. Corp., No. CV-11-274-TUC-JGZ, 2012 U.S. Dist. LEXIS 173126, at *38-40 (D. Ariz. Dec. 5, 2012); see also Hasan v. GPM Investments, LLC, 896 F. Supp. 2d 145, 147 (D. Conn. 2012) (observing that the FWW method “adds up to a perverse incentive” for companies to require non-exempt salaried employees to work long hours).
The effects of the fluctuating workweek’s perverse incentives “fall[ ] heavily on those at the lower rungs of the economic ladder,” those that the FLSA seeks to protect. Goodrow v. Lane Bryant, 732 N.E.2d 289, 298 (Mass. 2000). For example, a case where the fluctuating workweek is an industry-wide method of paying overtime revealed employees regularly working more than 80 hours in a week, and often more than 100 hours—workweeks so long that employers anticipated employees’ salaries falling below the minimum wage and instituted automatic bump-up to the minimum wage in their automated payroll calculations. Ayers v. SGS Control Services, 03 Civ. 9077, 2007 WL 646326, at *10 (S.D.N.Y. February 27, 2007).
Congress enacted the FLSA in order to improve “labor conditions detrimental to the maintenance of the minimum standard of living necessary for the health, efficiency, and general well-being of workers.” 29 U.S.C. § 202(a). But a fluctuating workweek diminishing half-time premium pay plan eliminates the employer’s disincentive to requiring individuals to work excessive hours, contrary to those goals. Excessive work hours correlate with an increased risk of workplace injuries and stress. See Ellen Galinsky, et al., Overwork in America: When the way we work becomes too much. (Families and Work Institute 2005). Studies show that excessive work hours also significantly result in increased risk of physical disease such as, for example, chronic heart disease, non-skin cancer, arthritis, and diabetes. See Allard E. Dembe & Xiaoxi Yao, Chronic Disease Risks From Exposure to Long-Hour Work Schedules Over a 32-Year Period, 58 Journal of Occupational and Environmental Medicine 861 (Sept. 2016); see also https://workfamily.sas.upenn.edu/category/legacytopics/overwork (listing various studies addressing health consequences of over-work). And as an individual’s weekly work hours increase to unreasonable levels, so too does the risk for hypertension and other stress-related ailments. See, e.g., Dong Hyun Yoo, et al., Effect of Long Working Hours on Self-reported Hypertension among Middle-aged and Older Wage Workers, 26 Annals of Occupational and Environmental Medicine 25 (2014), available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4387782/; See generally Joel Goh, et al., Workplace stressors & health outcomes: health policy for the workplace, 1 Behavioral Science & Policy 55 (2015). available at https://behavioralpolicy.org/articles/workplace-stressors-health-outcomes-health-policy-for-theworkplace/.
Courts have recognized that by financially encouraging employers to assign overtime work disproportionately to salaried employees, the FWW method undermines the “work-sharing” goals underlying overtime pay mandates. For example, in Zulewski v. The Hershey Co., 2013 U.S. Dist. LEXIS 23448 (N.D. Cal. Feb. 20, 2013), the court observed that the federal FWW method “goes against the FLSA’s intention of encouraging employers to spread employment among more workers, rather than employing fewer workers who must then work longer hours.” Id. at *15-16.
The FWW method is contrary to the FLSA’s public policy goals of encouraging employers to hire more workers by financially disincentivizing employers from piling more overtime hours on the same worker. Expanding the workforce by hiring more employees or giving part time employees more hours in lieu of requiring salaried employees to work excessive overtime remains an important public policy concern. As of 2015, 20.7% of part-time employees (7.2 million workers) work part-time because full-time work is unavailable, and involuntary part-time work is especially common in some low-wage sectors such as retail. See, e.g., Anne Morrison & Katherine Gallagher Robbins, Fact Sheet: Part-Time Workers Are Paid Less, Have Less Access to Benefits – and Two-Thirds Are Women (National Women’s Law Center Sept. 2015); Steven Greenhouse, A Push to Give Steadier Shifts to Part-Timers, New York Times (July 15, 2014), available at https://www.nytimes.com/2014/07/16/business/a-push-to-givesteadier-shifts-to-part-timers.html.
These dual concerns about spreading employment while curbing excessive work hours remain as relevant today as when the FLSA was enacted. And they remain as relevant today as when the Department determined a mere eight years ago that this very same proposed expansion of permissible fluctuating workweek pay plans would be contrary to the Act’s purpose, concluding: “the Department is cognizant that this method of pay results in a regular rate that diminishes as the workweek increases, which may create an incentive to require employees to work long hours. The Department does not believe that it would be appropriate to expand the use of this method of computing overtime pay beyond the scope of the current regulation.” 76 FR 18832, 18850.
The Department’s 2019 NPRM, however, does not address either goal. And it contains no findings evaluating whether the proposed interpretive rule will be consistent with those goals.
b. § 778.114 Thus Had Specific Prerequisites to Protect Workers.
The Department issued 29 C.F.R. § 778.114 as one of a number of interpretive regulations comprising a broader interpretive bulletin issued in 1968 that memorializes the Department of Labor's understanding of the meaning and application of the maximum hours and overtime pay requirements of the FLSA. 33 Fed. Reg. 986 (Jan. 23, 1968); see 29 U.S.C. § 778.1.
As a preliminary matter, the courts have recognized that the diminishing half-time premium exception of § 778.114 is a benefit to the employer; therefore, the employer can only avail itself of that benefit by paying a fixed amount of total weekly earnings that are guaranteed regardless of whether the employee works less than 40 hours in a week. Dacar v. Saybolt, L.P., 914 F.3d 917, 920 (5th Cir. 2018) (holding employer cannot claim benefit of § 778.14 while making bonus and incentive pay contingent on hours worked, recognizing § 778.114 “plainly provides that if an employer does not meet the conditions necessary to employ the FWW method, it may not reap the benefit afforded by it: namely, the deviation from the normal practice of using the one and one-half multiplier of the regular rate to calculate overtime.”).
Thus, because the FWW method can undercut the FLSA’s goals, “an employer may not simply elect to pay the lower overtime rate under § 778.114. The regulation requires that [its] conditions be satisfied before an employer may do so.” O’Brien v. Town of Agawam, 350 F.3d 279, 288 (1st Cir. 2003). Specifically, the regulation requires that the employer and employee must have a “clear mutual understanding . . . that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek,” and that the employee “receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half his regular rate of pay.” 29 C.F.R. § 778.114(a). This overtime pay must be made contemporaneously with the employee’s regular pay. 29 C.F.R. § 778.114(c). In fact, in Missel, the case on which the fluctuating workweek was originally founded, the Supreme Court struck down the employer’s overtime pay scheme because it lacked the very kind of employee protections set forth in 29 C.F.R. § 778.114. Missel, 316 U.S. at 581 (internal citations omitted).
The Supreme Court recognized the reason for requiring payment of a fixed weekly income for fluctuating hours in Walling v. A. H. Belo Corp., 316 U.S. 624, 635 (1942) (decided on the same day as Missel): “[m]any such employees value the security of a regular weekly income. They want to operate on a family budget, to make commitments for payments on homes and automobiles and insurance.” Without a requirement to pay overtime premiums sufficient to financially incentivize full employment by hiring additional workers, however, employers have an incentive to work employees long hours and not to spread employment. It is the protections provided in § 778.114 that protect the FLSA’s goals. Missel, 316 U.S. at 581 (“This contract differs from the one in [Belo], decided today, where the contract specified an hourly rate and not less than time and a half for overtime, with a guaranty of a fixed weekly sum, and required the employer to pay more than the weekly guaranty where the hours worked at the contract rate exceeded that sum.”).
The FWW regulation requires that the clear mutual understanding be “that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek. . . .” 29 C.F.R. § 778.114(a) (emphasis added). The current regulations indicate that a fixed salary is the exclusive form of acceptable compensation “apart from overtime premiums.” A fixed salary provides an essential value of predictability to workers who “want to operate on a family budget, to make commitments for payments on homes and automobiles and insurance.” Belo, 316 U.S. at 635. This predictability is especially important to workers paid under the FWW, who will see minimal benefit from working longer hours. The current regulations provide that an employee paid under the FWW can count on all her compensation (apart from overtime premiums) being fixed salary. The 2019 NPRM proposes to convert this interpretive regulation to the complete opposite (i.e., fixed weekly salary means only a base salary needs to be fixed; all other variable, unpredictable methods of compensation like bonuses and incentive pay are fair game).
Section 778.114’s mutual understanding requirement promotes the FLSA’s goals. Among other things, the mutual understanding requires an employer to “negotiate an overtime compensation arrangement with the employee at the outset” with a fully informed employee. Hunter v. Sprint Corp., 453 F. Supp. 2d 44, 61 (D.D.C. 2006).
c. The Proposed Change Eliminates the Worker’s Benefit of Guaranteed Fixed Weekly Earnings Regardless of Hours Worked That Was the Entire Trade-Off For the Employer’s Benefit of Diminishing Half-time Overtime Premiums.
Courts have consistently recognized the benefit to the worker underpinning the trade-off benefit to the employer of the diminishing half-time exception: in weeks where the employee works less than 40 hours, the employee must be paid the same total fixed weekly earnings as if they had worked 40 or more hours. See, e.g., Dacar, supra.
The Department’s 2019 NPRM breaks that pact by eviscerating the previously ensured benefit to the worker, but retaining the full benefit to the employer. Under the proposed change, an employer need only pay a base salary that is fixed, and could then condition all other earnings on hours worked. The worker no longer receives those earnings regardless of hours worked, and instead the employer would be permitted unfettered freedom to condition those earnings beyond base salary on working overtime hours, working 7 days a week, working hazardous or remote duty hours, or any other previously prohibited criteria.
A. Courts Have Consistently Found That Hours-Based Incentive Payments Are Incompatible with the FWW.
Contrary to the Department’s suggestion, courts addressing whether an employer may impose a half-time overtime rate on its employees when the employer pays incentive compensation in addition to fixed salary have not faced overwhelming confusion; in fact, courts have consistently rejected hours-based payments, while generally allowing production-based payments. The Department’s assertion that judicial confusion warrants this change is unfounded.
Both before and after the 2011 Final Rule, courts consistently permitted bonuses based entirely on performance-based metrics, untethered to the number or type of hours worked, as compatible with a fluctuating workweek pay plan under §778.114. Wills v. RadioShack Corp., 2013 U.S. Dist. LEXIS 159727 (S.D.N.Y. Nov. 7, 2013); Lance v. Scotts Co., 2005 U.S. Dist. LEXIS 14949 (N.D. Ill. Jul 21, 2005) (holding payment of performance-based commissions did not violate FWW’s fixed weekly salary requirement); Brantley v. Inspectorate Am. Corp., 821 F. Supp. 2d 879, 889-90 (S.D. Tex. 2011) (distinguishing premiums for disfavored hours (off-shore, holiday, and day-off premiums) from “sales-based or production based bonuses and commissions” which are permitted under § 778.114); Soderberg v. Naturescape, Inc., 2011 U.S. Dist. LEXIS 156235 (D. Minn. Nov. 3, 2011) (payment of performance-based bonuses was not incompatible with calculating overtime premiums by FWW half-time method); Switzer v. Wachovia Corp., 2012 U.S. Dist. LEXIS 120582 (S.D. Tex. Aug. 24, 2012) (paying performance-based bonuses held not incompatible with § 778.114).
That there was one lone outlier exception by one district court over the entire period since the 2011 Final Rule—Sisson v. Radioshack Corp., No. 1:12CV958, 2013 U.S. Dist. LEXIS 40135 (N.D. Ohio Mar. 11, 2013) – is not a sufficient basis for the sweeping changes the Department proposes here. Sisson was simply the first district court to interpret the Department’s preamble language to the 2011 Final Rule; and because it was “an issue of first impression, given the relative newness of the Final Rule,” the district court immediately stayed that case and certified its opinion for interlocutory appeal, and the Sixth Circuit granted review. See Order entered in Sisson v. Radioshack Corp., No. 1:12CV958 [ECF 63] (N.D. Ohio Aug. 9, 2013). Every district court and appellate court since Sisson has consistently allowed non-hours-based bonuses and incentive pay as compatible with § 778.114, and consistently prohibited bonuses and incentive pay contingent on hours worked as incompatible with § 778.114.
4. The Department’s Proposed Change Would Lead Employers to Decrease Fixed Salaries and Shift Compensation Away to Non-Guaranteed Bonuses While Paying Diminishing Half-time Overtime Premiums.
The Department implies that the proposed change will clarify for employers who pay under fluctuating workweek arrangements that they may augment those base salaries by adding incentive pay. The reality is that employers may also decrease the fixed portion of the salary, shifting compensation to the bonuses and incentive pay that are the antithesis of an unchanging, predetermined amount. Payment of a fixed salary is fundamental to the FWW, to make sure employees are guaranteed a minimum level of income that is dependable and predictable to meet their families’ monthly expenses, recognizing they will not receive the protections of the overtime provisions of the FLSA because overtime premiums will only be at a half-time rate.
The types of bonuses which the Department proposes to include would allow employers to incentivize their employees to work more steadily, rapidly, or efficiently; to remain with the employer; attendance bonuses; individual or group production bonuses; and bonuses for quality and accuracy of work. See 29 C.F.R. § 778.211(c). Each of these bonuses is based, in some measure, on the quantity or quality of work, and so are contrary the concept of a fixed salary that does not vary based on the quantity of work performed. Indeed, under the Department’s proposal, an employer could even institute a “dedication bonus” to workers who work 80 hours or more in a workweek, without losing the ability to pay overtime under the FWW’s diminishing half-time rate. Such changes are inconsistent with the FWW and should be rejected.
Most importantly, the harm of this change will fall on employees who either already work long hours or work for low wages. Where employers shift compensation away from the fixed amount and towards non-guaranteed variable pay contingent on the type or number of hours worked, employers can still require employees to work overtime hours without guaranteeing earnings.
The balance of power in employment relationships recognizes that most employees have little to no bargaining power when it comes to negotiating compensation structures. As but one of the many examples that the effect of this change will directly contradict the FLSA’s dual goals of reducing required overtime work hours and spreading employment, under the 2019 NPRM the employer would be free to require individuals to work overtime hours, while still setting hours-based earnings criteria sufficiently high that the employer may prohibit the worker from ever working the hours required to meet that criteria.
II. NELA’s Comments on Proposed Revision to the Department’s Interpretive Regulation Regarding the Payment of Diminishing Half-time Overtime Premiums by a “Fluctuating Workweek” Pay Plan.
NELA urges the Department to reconsider its proposed change. Neither judicial authority nor the Department’s prior positions support this change. The proposal would represent a stark change from the Department’s longstanding position, yet the NPRM fails to explain the about-face, and fails to show that courts have had difficulty dealing with this issue.
The Department’s 2019 NPRM cites unanimous Circuit Court authority finding that bonuses and premium pay tied to the hours worked, unlike solely performance-based compensation, are incompatible with the requirements of a permissible fluctuating workweek diminishing half-time premium pay plan. It cites one district court opinion that found all bonuses of any kind to be incompatible with a permissible fluctuating workweek plan. But it cites no court opinion, over the course of fifty years since the Department issued § 788.114, finding that the Department has ever taken the position that payment of non-guaranteed variable bonuses and premium pay is compatible with the fixed weekly amount prerequisite of § 778.114, and no opinion reaching the conclusion of the Department’s proposed new interpretation that any and all variable bonuses and premium pay are compatible with a valid fluctuating workweek overtime pay method. In short, because one district court held that all bonuses are impermissible, all other district and appellate courts held that hours-based bonuses are impermissible, and no court has held that the Department’s new interpretation would be permissible, the Department contradicts every court opinion and proposes an opposite and impermissible interpretation that all bonuses and premiums of any kind are permissible as long as a separately guaranteed “base salary” amount is fixed.
A. The Supreme Court in Missel Only Allowed Diminishing Half-time Overtime Premiums if Total Weekly Pay (Salary Plus Any Additional Compensation) Is Fixed and Not Variable.
The Court in Missel found that payment of a fixed weekly wage to an employee with fluctuating weekly hours did not satisfy the employer’s obligations under the Act where “there was no contractual limit upon the hours which [the employer] could have required [the employee] to work for the agreed wage, had he seen fit to do so, and no provision for additional pay in the event the hours worked required minimum compensation greater than the fixed wage.” 316 U.S. at 581. The Court rejected the employer’s argument that the fixed wage could “build in” overtime premiums since the amounts paid to Mr. Missel always exceeded what he would have earned at the applicable minimum wage, even including time-and-a-half overtime premiums. See id. at 574–75. The Court held that an employer may pay a diminishing half-time overtime premium only if the employee receives a fixed weekly wage amount that never varies based on work performed, provided that the pay plan also guarantees payment of legally required minimum wages. Nowhere in Missel did the Court consider, let alone authorize, the scenario of an employer paying a fixed salary but other variable hours-based compensation under a half-time pay scheme. Instead, the Court’s analysis and holding were limited to the facts of that case, which “involve[d] the application of the overtime section of the Fair Labor Standards Act of 1938 to an employee working irregular hours for a fixed weekly wage.” Id. at 573 (emphasis added).
As the Court explained, “[n]o problem is presented in . . . the computation of overtime for employees under contract for a fixed weekly wage for regular contract hours . . . .” 316 U.S. at 580. Likewise, “[w]here the employment contract is for a weekly wage with variable or fluctuating hours the same method of computation produces the regular rate for the week.” Id. (emphasis added). Dividing the fixed weekly wage by the hours worked each week determines the regular rate for the week “on an hourly basis, [which] is regular in the statutory sense inasmuch as the rate per hour does not vary for the entire week. . . .” Id. The Missel decision rested, in part, on the payment of a regular rate that is the same “for the entire week”—but the 2019 NPRM would allow hours-based bonus payments that apply to specific days, shifts, or hours within a week, thus undermining the one of the premises of Missel.
B. The Department of Labor Has Consistently Taken the Position by Agency Action that a Fixed Weekly Amount, Not Merely a Fixed Base Salary With Variable Bonuses and Incentives, Is a Prerequisite for Paying Diminishing Half-time Fluctuating Workweek Overtime Premiums.
1. Since 1950, the Department Has Consistently Required Payment of Fixed Weekly Earnings for Irregular Hours, and Precluded Non-Guaranteed Variable Compensation, Before Employers May Avoid Time-and-a-half Overtime Premiums.
Following Missel, the Administrator of Labor promulgated 29 C.F.R. § 778.3 in 1950. In § 778.3(5), the Administrator interpreted the Act to permit overtime compensation at diminishing half-time for salaried employees working irregular hours, but only if – contrary to the Department’s proposed interpretation in its 2019 NPRM allowing half-time as long as a base salary is fixed but allowing non-guaranteed variable bonuses and incentives resulting in varying total weekly earnings—the employee is paid fixed total earnings per week: “If an employee earns $46 per week…” (emphasis added).
The Administrator then proposed interpretive bulletins in 1965, codified at § 778 in 1968. In § 778.114(a), the Administrator included requirements that the employee receive a “fixed amount” and limited its application to employees who receive only (i) a fixed amount “(apart from overtime premiums)” which is paid as a guaranteed, non-variable “fixed amount” regardless of weekly work performed, and (ii) the overtime premiums, listed as the only item of compensation that is permitted to vary from week to week under § 778.114.
2. The Proposal Would Improperly Allow Reduction in Weekly Earnings Based on Hours Worked, Contrary to the Department’s Prior Positions.
Under the “salary basis test” that applies to the separate sections of the Act regarding bona fide exemptions, employers may avail themselves of those exemptions by paying a minimum guaranteed base salary (subject to certain permissible deductions) while shifting other compensation to non-guaranteed potential bonuses and other compensation that vary based on the work performed in the workweek.
The 2019 NPRM seeks to amend § 778.114 to eliminate its fixed weekly earnings requirement, so that employers will now merely need to satisfy the requirement of paying a guaranteed base weekly salary that need not even meet or exceed the “salary basis test” minimum threshold amount (since the employer is not attempting to satisfy an overtime exemption). Thus, an employer could retain the diminishing half-time benefit while decreasing current base salaries to effectively minimum wage by reducing weekly salary to $7.25 times 60 hours ($435/week, $22,620 annual salary), requiring employees to work overtime hours up to 60 hours but prohibiting them from working more than 60 hours (thus always paying minimum wage), and shift all other potential compensation to non-guaranteed variable bonus and incentive pay – even setting the earnings criteria for that non-guaranteed pay at over 60 hours in a work week.
For example, an employer currently paying a fixed salary of $400/week under the FWW could, under the Department’s proposal, decide to pay a base salary of $300/week, plus an attendance bonus of $20 for each weekday the employee works over 12 hours without losing the ability to pay overtime at the diminishing half-time rate. Such a change would effectively allow employers to take deductions from workers’ salaries based on attendance, contrary to the purpose of the FWW, which purports to allow a fixed salary whether the hours worked are few or many.
Unsurprisingly, the Department has consistently rejected attempts to expand § 778.114 by allowing diminishing half-time premiums as long as the employer merely pays a guaranteed base salary that is subject to deductions based on hours worked that would be permissible under the “salary basis” requirements of 29 C.F.R. Part 541, the separate regulations implementing the overtime and minimum wage exemption for certain executive, administrative, and professional employees:
Your argument is erroneous in that the salary basis requirement and the deductions from salary that are allowed as set forth in section 541.602 (copy enclosed) apply solely to the FLSA section 13(a)(1) overtime and minimum wage exemption. See Wage and Hour Opinion Letter August 20, 1991 (copy enclosed.)
The fluctuating workweek regulation does not authorize similar deductions. In contrast, the regulation requires the employer to pay the fixed salary "for the hours worked each workweek, whatever their number." 29 C.F.R. § 778.114(a). Thus, the fixed salary is the employee's straight time compensation, both "for long workweeks as well as short ones." 29 C.F.R. § 778.114(c). Therefore, it is the longstanding position of the Wage and Hour Division that an employer utilizing the fluctuating workweek method of payment may not make deductions from an employee's salary for absences occasioned by the employee. See Wage and Hour Opinion Letters August 20, 1991, November 30, 1983, December 29, 1978, and March 1, 1967 (copies enclosed).
Wage and Hour Opinion Letter, 2006 DOLWH LEXIS 19, *2-3 (May 12, 2006).
And in Wage and Hour Opinion Letter FLSA 2009-3, 2009 DOLWH LEXIS 3 (Jan. 14, 2009), the Administrator reiterated that in order to avail itself of the diminishing half-time fluctuating workweek overtime premium exception, the employer must have “paid the employees a fixed salary for variable hours worked and not on an hourly basis.”
3. The Department of Labor Withdrew FLSA 2009-24, By Agency Action Rejecting the Same Dilution of the Fixed Weekly Earnings Requirement Proposed in this NPRM.
The Department of Labor prepared, but did not distribute, Wage and Hour Opinion Letter FLSA 2009-24 FLSA (Jan. 16, 2009), which (if issued) would have announced the following interpretation: “Receipt of additional bonus payments does not negate the fact that an employee receives straight-time compensation through the fixed salary for all hours worked whether few or many, which is all that is required under § 778.114(a).” 2009 DOLWH LEXIS 28, at *5-6. The Department explicitly withdrew and rejected any reliance upon that unissued opinion letter on March 2, 2009:
[T]his withdrawal [is] issued as [an] official ruling of the Wage and Hour Division for purposes of the Portal-to-Portal Act, 29 U.S.C. § 259. See29 C.F.R. §§ 790.17(d), 790.19; Hultgren v. County of Lancaster, Nebraska, 913 F.2d 498, 507 (8th Cir. 1990). Wage and Hour Opinion Letter FLSA 2009-24 is withdrawn and may not be relied upon as a statement of agency policy.
2009 DOLWH LEXIS 28, *1-2
But the 2019 NPRM nonetheless incorrectly asserts (i) that the Wage and Hour Division “affirmed” a position allowing payment of non-guaranteed variable bonuses compatible with § 778.114, and (ii) that it “issued an opinion letter.” See 84 FR 59590, 59592 (“WHD reaffirmed this same position when it issued an opinion letter”). By citing the (withdrawn before distribution) January 16, 2009 Opinion Letter as a statement of agency policy affirming a position allowing payment of non-guaranteed variable bonuses compatible with § 778.114, the 2019 NPRM attempts to do that which the Department expressly forbade when the Department clearly and explicitly determined “Wage and Hour Opinion Letter FLSA 2009-24 is withdrawn and may not be relied upon as a statement of agency policy.” See, e.g., White v. Publix Super Mkts., Inc., No. 3:14-cv-1189, 2015 U.S. Dist. LEXIS 109670, at *48 (M.D. Tenn. Aug. 19, 2015) (determination in a withdrawn opinion letter does not constitute agency’s position). Nor was the January 16, 2009 opinion letter ever “issued” to the requester by the Department before it was withdrawn: “It does not appear that this response was placed in the mail for delivery to you after it was signed.” 2009 DOLWH LEXIS 28, *1.
4. The Department of Labor Explicitly Prohibited the 2019 NPRM’s Proposed Abandonment of the Fixed Weekly Earnings Requirement of § 778.114 by its Preamble to the 2011 Final Rule Interpreting Its Own Interpretive Regulations.
The Department clearly and explicitly prohibited the abandonment of the fixed weekly amount requirement of § 778.114 that this NPRM now seeks to accomplish, stating its final interpretation after notice and comment in the Preamble of the 2011 Final Rule: “we have concluded that unless such [bonus and other incentive] payments are overtime premiums, they are incompatible with the fluctuating workweek method of computing overtime under section 778.114.” 76 FR 18832, 18850.1
But the Department’s 2019 comment denies that its interpretation announced in the Preamble to the 2011 Final Rule after notice and comment on proposed rulemaking “explicitly forbid in rulemaking the payment of bonuses and premiums…under the fluctuating workweek method.” 84 FR 59590, 59591.
The Supreme Court has ruled to the contrary, holding agency positions announced in preambles to rulemaking constitute agency action. “[A]gencies ... can speak through a variety of means, including regulations, preambles, interpretative statements, and ... they will make their intentions clear if they intend for their regulations to be exclusive.” Hillsborough County v. Automated Med. Labs., 471 U.S. 707, 718 (1984).2
First, the Department’s 2011 Final Rule did not indicate any intention, much less “make [its] intentions clear,” that it intended its regulations to be the sole and exclusive statement of the Department’s interpretation on the matter to the exclusion of its Preamble. The Supreme Court has explicitly recognized that agency statements made in a preamble merit deference. United States v. United Healthcare Ins. Co., 848 F.3d 1161, 1177 n.9 (9th Cir. 2016) (citing Christopher v. SmithKline Beecham Corp., 567 U.S. 142 (2012); Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 158 n.13 (1982) (“[W]e look to the preamble . . . for the administrative construction of the regulation, to which ‘deference is . . . clearly in order.’” (third alteration in original) (quoting Udall v. Tallman, 380 U.S. 1, 16 (1965)))).
Second, the Department’s position that it did not announce an interpretive rule that bonus and incentive payments are incompatible with the fluctuating workweek method is contrary to Circuit Court authority recognizing that the Department “issued a final rule stating that incentive payments are ‘incompatible with the fluctuating workweek method’ and that it would not ‘be appropriate to expand the use of this method of computing overtime pay beyond the scope of the current regulation.’” See Dacar v. Saybolt, L.P., 914 F.3d 917, 920 (5th Cir. 2018).
Third, the Department’s statement in its Preamble to the 2011 Final Rule forbidding the payment of bonuses to employees paid by the fluctuating workweek method constituted the agency’s interpretation of its own ambiguous interpretive regulation (§ 778.114). The Department acknowledges in its 2019 NPRM that the 2008 NPRM “proposed clarifying language” regarding § 778.114—which can only mean that the proposed agency action involved clarification of its own regulation that the agency deemed sufficiently ambiguous to require clarification by agency interpretation. “When a regulation is ambiguous, [courts] consult the preamble of the final rule as evidence of context or intent of the agency promulgating the regulations.” City of Las Vegas v. FAA, 570 F.3d 1109, 1117 (9th Cir. 2009) (quoted in Tenn. Hosp. Ass’n v. Azar, 908 F.3d 1029, 1044 (6th Cir. 2018).
Fourth, the Department’s statement in its Preamble to the 2011 Final Rule is due the same interpretive deference as its regulations because it represents the agency's interpretation of its own regulation, in its considered judgment, after notice and comment, industry input and interagency consultation. See, e.g., United States v. United Healthcare Ins. Co., 832 F.3d 1084, 1099 n.9 (9th Cir. 2016) (deferring to agency statement in preamble after notice and comment, industry input, and interagency consultation).3 Based on the congressional command of the Administrative Practices Act, “it does not make sense to interpret the text of a regulation independently from its” preamble. Halo v. Yale Health Plan, 819 F.3d 42, 52 (2d Cir. 2016).
Finally, to the extent that the Department’s position, disclaiming any prior rule-making forbidding the expansion to the FWW it now seeks, indicates a belief that its decision to withdraw a proposed rule is somehow not an agency action worthy of the same—in fact, even more—deference than a decision to issue a rule, that position is directly contrary to the law. Under the deferential “arbitrary and capricious” standard of the APA, courts “give more deference to an agency’s decision to withdraw a proposed rule than [courts] give to its decision to promulgate a new rule or to rescind an existing one.” Int'l Union, United Mine Workers of Am. v. United States DOL, 360 U.S. App. D.C. 113, 116, 358 F.3d 40, 43 (2004) (citing Williams Natural Gas Co. v. FERC, 872 F.2d 438, 443–44 (D.C. Cir. 1989)).
5. The Department of Labor Indicated Intention to File Amicus Briefing Supporting the Department’s Longstanding Interpretation That Fluctuating Weekly Pay Amounts Preclude Use of a Diminishing Half-time “Fluctuating Workweek” Pay Plan Under 29 C.F.R. § 778.114.
We were disappointed by the Department’s failure to aggressively defend and support its longstanding interpretation that an employer may not avail itself of the diminishing half-time “fluctuating workweek” pay plan under 29 C.F.R. § 778.114 without satisfying the requirement that the worker’s guaranteed weekly earnings amount must be fixed and cannot be subject to reductions based on work performed. The Department filed a motion with the Second Circuit in Wills v. Radioshack requesting an extension of time “to file an amicus curiae brief in support of the Appellant [Wills],” stating:
The issue presented in this appeal—whether, under the Fair Labor Standards Act (“FLSA”), an employer is precluded from utilizing the fluctuating workweek method of calculating overtime compensation set out in 29 C.F.R. 778.114 when it pays its non-exempt employees a non-discretionary bonus—is very important to the Secretary. The Secretary administers and enforces the FLSA, see 29 U.S.C. 204, 211(a), 216(c), 217, and thus has a substantial interest in ensuring that the FLSA’s overtime compensation requirement, see 29 U.S.C. 207, and the fluctuating workweek method of calculating overtime compensation set out in 29 C.F.R. 778.114 are interpreted accurately and consistently with the broad remedial purpose of the FLSA.
Motion by Department of Labor in Wills v. Radioshack, No. 13-4661 [ECF 47-2] (2d Cir.).
Nonetheless, the Department cannot on the one hand rely on a 2009 Opinion Letter that was withdrawn before publication as an indication of the Department’s position, but deny the Department’s indicated position (supporting Appellant’s position in Wills) that was ultimately not filed.
C. The 2019 NPRM Contains No Reasoned Analysis to Contradict The Department’s Prior Finding, After Notice and Comment, that the Effect Will Be Employers Reducing the Fixed Salary and Shifting A Large Portion of Compensation into Bonus and Premium Payments, Resulting in Disparities in Weekly Earnings Depending on the Particular Hours Worked.
The Department, in the Preamble to its 2011 Final Rule, specifically determined that “[a]s several commenters noted, the proposed regulation [allowing bonuses and incentive pay compatible with FWW] could have had the unintended effect of permitting employers to pay a greatly reduced fixed salary and shift a large portion of employees’ compensation into bonus and premium payments, potentially resulting in wide disparities in employees' weekly pay depending on the particular hours worked. It is just this type of wide disparity in weekly pay that the fluctuating workweek method was intended to avoid by requiring the payment of a fixed amount as straight time pay for all hours in the workweek, whether few or many.” 76 FR 18832, 18850 (emphasis added).
In so doing, the Department recognized the distinction for bonuses and premiums “depending on the particular hours worked” that has been adopted with unanimity by the appellate courts and all but one district court both before and after the 2011 Final Rule. In Wills v. Radioshack, the court explained that part of the problem with paying premiums based on the number or type of hours worked was that “when an employer pays its employees additional money for hours worked during weekends, holidays, or nights, the employees who work such premium hours will earn more than those who work normal, non-premium hours.” Wills, 981 F. Supp. 2d at 256; see also Lalli v. Gen. Nutrition Ctrs., Inc., 814 F.3d 1 (1st Cir. 2016) (making the same distinction).
The Preamble to the 2011 Final Rule reflects the Department’s determination after notice and comment, summarizing the landscape of evidence, comments, and analysis that is the equivalent of legislative history. United States v. Frontier Airlines, Inc., 563 F.2d 1008, 1013 (10th Cir. 1977) (“The [agency preamble] is a summary of what, in the legislative process, would be gleaned from the hearings and statements of position which make up the legislative history.”).
Notably, the Preamble to the 2011 Final Rule specifically recognized comments favoring adoption of the 2008 NPRM by management representatives including Wage and Hour Consulting Services, SHRM, the Chamber of Commerce, and Fisher & Phillips LLP. 76 FR 18832, 18849. Not a single one of those commenters provided any assurances or any evidence that the effect of the proposed dilution of the fixed weekly earnings requirement would not be employers greatly reducing weekly salary amounts and shifting compensation to non-guaranteed bonuses and incentive payments that are both variable and contingent on the work performed during the workweek. See RIN 1215-AB13 comments by Wage and Hour Consulting Services (Sep. 26, 2008), SHRM (Sep. 26, 2008), Chamber of Commerce (Sep. 26, 2008), and Fisher & Phillips LLP (Sep. 24, 2008). The Department cited no such assurances or evidence in its Preamble to the 2011 Final Rule, and to the contrary made an agency determination (supported by the comments provided) that allowing the same dilution proposed by this 2019 NPRM would likely result in the unintended consequence of employers greatly reducing weekly salary amounts and shifting compensation to non-guaranteed bonuses and incentive payments that are both variable and contingent on the work performed during the workweek.
The 2019 NPRM cites no determination that any of the evidence submitted during the 2008 NPRM notice and comment period, upon which the Department based its determination of the likely effect of reducing salaries to shift compensation to non-guaranteed variable bonuses, is somehow no longer valid. It cites only one piece of evidence to support its reversal of position and its newly announced “belief”—Bureau of Labor Statistics indicating the ratio of salary to non-guaranteed variable bonus compensation during a period when employers could not pay varying hours-based bonuses while still availing themselves of the financial windfall of a diminishing half-time FWW overtime premium pay plan:
Upon reconsideration, the Department is no longer concerned that employers would shift large portions of pay into bonus and premium payments and is not aware of any evidence of problematic pay shifting. To the contrary, the Bureau of Labor Statistics finds that in situations where employers are permitted to pay bonuses and premiums, such supplemental pay constitutes a relatively small portion of employees' overall compensation—no more than 5% for any occupation. Accordingly, the Department finds no reason to believe that permitting employers using the fluctuating workweek method to pay bonuses would result in large-scale pay shifting. In fact, the Department now believes the proposal would encourage employers to pay these bonuses, premiums, and additional pay to salaried nonexempt employees who work fluctuating hours, and the Department does not believe that employers will shift large portions of salaries into such supplemental payments. Moreover, the Department's earlier concern that permitting employers who offer bonus and premium payments to use the fluctuating workweek would permit employers to pay a reduced fixed salary would be addressed by retaining the requirement that the fixed salary amount must be sufficient to provide compensation at a rate not less than the minimum wage.
84 FR 59590, 59593-59594.
The flaw in this analysis is obvious: the Bureau of Labor Statistics finding did not (and could not) determine what percentage of compensation employers would shift from salary to non-guaranteed bonuses (and how much they would reduce salaries accordingly) once they were permitted to do so without forfeiting the diminishing half-time savings of FWW overtime pay. The Bureau of Labor Statistics simply assessed the status quo as it exists prior to the proposed expansion of permissible § 778.114 pay plans. But the Department, after notice and comment, determined in 2011 that the effect of the proposed modification would likely be a huge change to the status quo (in a manner not benefitting employees and entirely antithetical to the dual public policy goals of the Act).
Yet the Department cites those statistics as disproving the likelihood that employers will shift compensation to contingent bonuses and incentive pay because supplemental pay currently “constitutes a relatively small portion of employees' overall compensation.” 84 FR 59590, 59594. The fact that the Bureau’s statistics show employers currently pay civilians non-production bonuses as 1.8% of compensation and shift differentials as 0.2%4 does not constitute evidence or indication of any kind that employers will not shift compensation to non-guaranteed bonuses and supplementary compensation if given the opportunity to do so while also reducing their overtime premium obligation from 1.5 to .5, their weekly guaranteed pay obligation from 100% fixed to only guaranteeing a base salary, and their total weekly earnings paid from 100% fixed to the likely lesser amount when compensation is shifted to bonuses set at targets that are often (if not always) unattained. The 2019 NPRM cites no evidence to the contrary, and no evidence disproving the Department’s prior contrary determination in 2011.
And the fact that the Bureau of Statistics was reporting the same (and even lower) average figures of supplemental pay as a percentage of total compensation when the 2008 NPRM issued, throughout the notice and comment period that followed, and when the Department issued its 2011 Final Rule,5 proves that the same Bureau statistics now purportedly relied upon by the Department in this 2019 NPRM are simply not evidence of the proposition they are cited to purportedly support: those figures were reported and available to commenters and the Department alike when it determined in 2011 that employers would likely reduce salaries and shift compensation to non-guaranteed bonus and other supplemental pay if given the opportunity to do so while only paying § 778.114’s diminishing half-time. Those figures haven’t changed (but will, as this Department has already indicated in its 2011 Final Rule Preamble, upon financially incentivizing employers to reduce salaries, shift compensation to contingent variable bonus amounts, while still availing themselves of the limited exception of § 778.114 allowing diminishing half-time overtime premiums).
In our experience, the Department’s newly adopted “belie[f]” that employers will not act in their own economic interests to reduce salaries, avoid overtime premiums, and shift compensation to non-guaranteed bonuses contingent on hours worked, is not only misguided and lacking in reasoned analysis—it is directly contradictory to the Department’s recognition of employer attempts to avoid overtime pay since 1968. Employers in all industries seek out ways to modify their compensation plans to minimize labor costs and shift risk onto their workers to prioritize their profits. The experience of NELA attorneys representing workers in wage and hour cases teaches us that employers will not hesitate to shift compensation away from salary if they sense an opportunity. The Department’s suggestion that incentive payments will continue to make up a small percentage of employees’ total compensation is similarly inconsistent with our observations, which is that employers routinely pay as much as 50% or more of an employee’s total compensation in non-guaranteed pay.
In addition, the Department’s analysis summarized in its 2019 NPRM is improperly limited to focus on employers who currently use FWW pay plans and the prospects for incorporating incentive pay into those plans; the Department failed to consider the likelihood that this change will lead more employers to adopt FWW plans, most or all of whom will then shift to non-guaranteed compensation to the maximum possible extent. As the NPRM observes, valid FWW plans are not particularly common—a good thing, because as courts recognize, they are an exception. The Department should not promote unnecessary changes to increase the likelihood that employers will undermine the goals of the FLSA by imposing FWW half-time overtime policies.
It certainly should not do so when throughout its history of interpreting and enforcing the FLSA, the Department has consistently recognized that employers will go to great lengths to reduce wages and avoid paying overtime premiums, including specifically by shifting compensation to alleged bonuses. That recognition is precisely what prompted the Department to issue the 1968 interpretative bulletins, containing an entire Subpart F addressing “Pay Plans Which Circumvent the Act,” “Devices to Evade the Overtime Requirements,” and “Pseudo-Bonuses.” See 29 C.F.R. § 778.500 (Artificial regular rates: “It may be helpful to describe a few schemes that have been attempted,” noting “[t]he scheme is no better if the employer agrees to pay straight time and overtime compensation on the arbitrary hourly rates and to make up the difference between this total sum and the piece-rate total in the form of a bonus to each employee.”); § 778.501 (The “split-day” plan: noting “[a]nother device designed to evade the overtime requirements of the Act”); § 778.502 (Artificially labeling part of the regular wages a “bonus”: addressing plans involving attempted use of bonuses to satisfy agreed fixed weekly wages, noting “[s]imilar schemes have been devised”); § 778.503 (Pseudo “percentage bonuses”: allowing percentage bonuses only if paid unconditionally, noting employer practices of expressing some bonuses as a percentage of both straight and overtime wages that “are in fact a sham”).
Finally, the Department purportedly bases its proposed revision on Bureau of Labor Statistics (“BLS”) data indicating that supplemental pay currently makes up only a small percentage of total employee compensation paid by U.S. employers, but contains no mechanism for adjustment if those statistics change. The Department could, for example, have provided that this revised interpretation shall only be applicable when the BLS data that purportedly supported this modified interpretation continue to do so; i.e., only when those percentages of supplemental pay to total compensation in the BLS statistics are equal or less than the current percentages, and only when current average or median total compensation is at or above present. It did not do so. The interpretation, if adopted, would therefore remain effective even when those percentages prove exactly that which the Department does not “believe” will happen: increased shifting of compensation to non-guaranteed supplemental pay, and reduction of overall wages paid.
D. The 2019 NPRM Ignores Prior Statements of Intention from Congressional Committees.
Recognizing that expanding the reach of the fluctuating workweek method is contrary to the FLSA’s goals, members of Congress, including the Chairs of the Congressional committees addressing labor issues and then-senator Barack Obama, reiterated that the fluctuating workweek should be narrowly construed in response to the prior 2008 NPRM. In a letter to the Department of Labor, the twelve members of Congress urged “instead of modifying Section 778.114 to expand the use of the fluctuating workweek method of calculating overtime pay, the Department should consider narrowing the scope of this section to prevent employers from abusing this method to lower workers’ pay.” Letter from George Miller, Edward M. Kennedy, Lynn Woolsey, Patty Murray, Christopher J. Dodd, Tom Harkin, Barbara A. Mikulski, Jack Reed, Hillary Rodham Clinton, Barack Obama, Bernard Sanders & Sherrod Brown to Hon. Richard M. Brennan, 4 (Sept. 26, 2008).
The Department’s 2019 NPRM does not address, nor attempt to explain, why it is attempting interpretive action that is inconsistent with specific requests from members of Congress.
E. The Proposed Expansion of § 778.114 is Contrary to Overnight Motor Transp. v. Missel.
The Department concluded in its Preamble to the 2011 Final Rule that this proposed dilution of “fixed weekly amount” to merely “fixed base salary only, with variable weekly earnings contingent on the number or type of hours worked” is inconsistent with Missel, 316 U.S. 572. See 84 FR 59590, 59591.
The 2019 NPRM offers no reasoned basis for departing from that longstanding interpretation of Missel. Instead, it posits that Missel—where the employee was paid fixed total earnings every week that never varied regardless of the number or type of hours worked—supports allowing payment of weekly total compensation that is contingent upon, and varies directly related to, the number or type of hours worked. In short, it relies on a case where the employee received fixed and guaranteed total earnings to eliminate the fixed and guaranteed total earnings requirement.
Nowhere in Missel did the Court contemplate, much less decide, whether an employer may condition weekly earnings on the number or type of hours worked as long as it pays a base salary and makes all other compensation contingent, variable, and non-guaranteed. Instead, the Court announced its holding as applicable to receipt of a fixed total weekly wage: “This case involves the application of the overtime section of the Fair Labor Standards Act of 1938 to an employee working irregular hours for a fixed weekly wage.” Missel, 316 U.S. at 573 (emphasis added). The Court held that an employer may pay a diminishing half-time overtime premium only if the employee receives a fixed weekly wage amount that never varies based on work performed, provided that the pay plan also guarantees payment of legally required minimum wages.
Indeed, Missel directly addressed a factual record where the employee was paid fixed supplemental wages in addition to salary. The plaintiff in Missel “received a salary of $23 a week plus $2.50 per week allowance for supper money, or a total of $25.50….[i]t is conceded that the supper money allowance is properly to be treated as part of plaintiff's wages in interpreting his rights under the Act.” Missel v. Overnight Motor Transp. Co., 40 F. Supp. 174, 176 (D. Md. 1941). Thus, Missel did not leave open the question of whether an employer can ever pay any amount other than base salary while still availing itself of a diminishing half-time calculation of overtime premiums for working fluctuating hours: it directly answered it in the affirmative, if (and only if) the additional compensation amounts—like the base salary—are fixed and do not vary based on the number or type of hours worked. Thus, regardless of whether the weekly wages are called bonuses, incentive pay, or “supper money,” provided the total of all such wages is fixed in advance and guaranteed each week regardless of hours worked, the half-time calculation method may apply.
The 2019 NPRM proposes the opposite conclusion, by allowing total weekly wages to vary based upon (and only earned contingent upon) the number and type of hours worked, as long as a base salary is also paid.
The 2019 NPRM also relies in error on Smith v. Frac Tech Servs., LLC, as an opinion that “declined to give any weight to the 2011 Preamble because it rested on an ‘unconvincing’ interpretation of Missel. But Smith merely held that “a bonus given wholly at the discretion of the employer” was permissible under Missel. Smith v. Frac Tech Servs., LLC, No. 4:09CV00679 JLH, 2011 U.S. Dist. LEXIS 64079, at *8 (E.D. Ark. June 15, 2011).
F. Federal Courts Have Had No Difficulty Applying the FWW’s Fixed Weekly Amount Requirement.
Federal appellate courts have had no trouble applying the FWW’s fixed weekly amount requirement and determining the appropriate test to be applied. See, e.g., Dacar v. Saybolt, L.P., 914 F.3d 917, 920 (5th Cir. 2018) (recognizing that its decision is consistent with the First Circuit’s decision in Lalli reaffirming O’brien in holding that the time-based bonuses addressed in O’brien are incompatible with fluctuating workweek diminishing half-time premium pay plans).
But the 2019 NPRM posits that the hours-based/productivity-based distinction that has been unanimously adopted by all appellate courts to decide the issue should be abandoned simply because “the Department has never drawn this distinction.” 84 FR 59590, 59593. Yet, the Department has never denied that distinction by final agency action in the 50 years since § 778.114.
There has been no widespread confusion or difficulty applying the FWW’s fixed weekly amount requirement. Both before and after the 2011 Final Rule, courts—with the lone exception of one outlier Sisson v. Radioshack—consistently permitted bonuses based entirely on performance-based metrics, untethered to the number or type of hours worked, as compatible with a fluctuating workweek pay plan under §778.114. Wills v. RadioShack Corp., 2013 U.S. Dist. LEXIS 159727 (S.D.N.Y. Nov. 7, 2013); Lance v. Scotts Co., 2005 U.S. Dist. LEXIS 14949 (N.D. Ill. Jul 21, 2005) (holding payment of performance-based commissions did not violate FWW’s fixed weekly salary requirement); Brantley v. Inspectorate Am. Corp., 821 F. Supp. 2d 879, 889-90 (S.D. Tex. 2011) (distinguishing premiums for disfavored hours (off-shore, holiday, and day-off premiums) from “sales-based or production based bonuses and commissions” which are permitted under § 778.114); Soderberg v. Naturescape, Inc., 2011 U.S. Dist. LEXIS 156235 (D. Minn. Nov. 3, 2011) (payment of performance-based bonuses was not incompatible with calculating overtime premiums by FWW half-time method); Switzer v. Wachovia Corp., 2012 U.S. Dist. LEXIS 120582 (S.D. Tex. Aug. 24, 2012) (paying performance-based bonuses held not incompatible with § 778.114).
The Department’s 2019 NPRM posits that because every appellate court to have considered the issue has consistently permitted performance-based bonuses but not hours-based bonuses as compatible with § 778.114, but not every appellate court has yet ruled on the issue, “[t]he Department is…concerned that the ‘productivity’ versus ‘hours’ based distinction fails to provide adequate guidance to employers because it has not been adopted by all jurisdictions.” 84 FR 59590, 59593. Its proposed solution, after determining that all appellate courts to have decided the question have consistently applied a “productivity” versus “hours” based distinction but not every appellate court has yet had the opportunity to join the unanimous line of authority, is to simply to contradict every such appellate court opinion by abandoning any distinction whatsoever.
To support its purported “confusion” exigency, the Department’s 2019 NPRM rests on the false premise that a district court opinion—much less, an outlier opinion contrary to the weight of authority—“remains good law” in that or any other district, and therefore the productivity/hours-based distinction “has not been adopted by all jurisdictions.” Specifically, the 2019 NPRM comments that one district court decision holding all bonuses incompatible with FWW (Sisson v. Radioshack), and dicta from another district court’s decision in the different context of retroactive application of FWW damages calculations when an employee is found to have been misclassified as exempt (West v. Verizon Servs. Corp.),6 “remain good law in some heavily populated jurisdictions, including the Federal judicial districts for the Northern District of Ohio and the Middle District of Florida.” 84 FR 59590, 59593.
While those cases have not been overturned, it is incorrect, of course, as a matter of law to imply that they are binding authority. “A decision of a federal District Court judge is not binding precedent in either a different judicial district, the same judicial district, or even upon the same judge in a different case.” Camreta v. Greene, 563 U.S. 692, 131 S. Ct. 2020, 2033 n.7, 179 L. Ed. 2d 1118 (2011) (citation omitted).
The 2019 NPRM’s purported “confusion” exigency based on court decisions commenting that the 2011 Final Rule constituted the Department “shifting course” from its 2008 NPRM (proposing an interpretation allowing bonuses compatible with § 778.114) and its 2009 Opinion Letter (withdrawn before publication) fares no better. The 2019 NPRM bases this “confusion” exigency on the fact that “for example, the Switzer court viewed the 2011 Preamble language as “shifting course” in a manner “contrary” to its prior position,” and therefore “it is worth making clear that the Preamble does not reflect a change from the Department's position that the 2008 NPRM sought to clarify.” 84 FR 59590, 59593. But the Switzer court7 did not view the Department’s 2011 Preamble as “shifting course” from the Department’s longstanding position as it existed prior to and as of the proposed changes by the 2008 NPRM. It simply acknowledged the obvious: the text of the interpretive bulletin remained the same throughout since 1968, but the Department proposed “shifting course” in its interpretation of that text by its 2008 NPRM and in an unissued 2009 Opinion Letter but adopted neither as a final agency action—thus, the only “shifting course” was considering, and then deciding not to adopt, a proposed change in interpretation.
We are troubled by the 2019 NPRM’s citation to “a 1999 Wage and Hour Division (WHD) opinion letter” as somehow supporting the proposed expansion of § 778.114. The 2019 NPRM states:
Early examples of Department guidance and court decisions exemplify interpretations of the FLSA that “afford the fullest scope possible” to fluctuating workweek arrangements. For example, a 1999 Wage and Hour Division (WHD) opinion letter explained that an employer using the fluctuating workweek method may pay bonuses for working holidays or vacations, broadly instructing that “[w]here all the legal prerequisites for the use of the fluctuating workweek method of overtime payment are present, the [*59592] FLSA, in requiring that `not less than' the prescribed premium of 50 percent for overtime hours worked be paid, does not prohibit paying more.”
84 FR 59590, 59591-59592.
That 1999 non-Administrator “opinion letter” by personnel in the Office of Enforcement Policy, Fair Labor Standards Team8 did not, as the 2019 NPRM indicated, determine that an employer “may pay bonuses for working holidays or vacations.” To the contrary, it specifically addressed whether an employer may pay additional amounts for a holiday occurring within a week or vacation pay for hours not worked in addition to salary without running afoul of § 778.114: “May a public employer who pays employees a fixed salary for fluctuating hours under 29 CFR § 778.114 make additional payments to employees for holidays, vacation days, etc. beyond their regular salary? For example, a foreman or assistant foreman has worked a week in which he works 32 hours, takes 8 hours of vacation pay and has one holiday of 8 hours, may the employer pay the employee his full weekly salary plus an additional 8 hours of pay (calculated by multiplying 8 x 1/40 of the employee's weekly salary)?” 1999 DOLWH LEXIS 52, *4-5. The guidance provided the unremarkable response that employers can pay additional fringe benefit amounts for vacation days and holidays occurring within a week, but cannot cause weekly earnings to vary based on additional hours worked. On this point, courts recognize that the 1999 letter merely “stated that an employer can make additional payments to an FWW employee for a holiday occurring in a given week.” Brumley v. Camin Cargo Control, Inc., Civil Action No. 08-1798 (JLL), 2010 U.S. Dist. LEXIS 144198, at *13 (D.N.J. Apr. 20, 2010) (emphasis added).
Moreover, unlike its responses to other questions posed by the requester, the 1999 letter did not provide a yes or no answer to the question posed, and instead merely responded to the question by providing the following generalized (non-conclusive) guidance, taken almost verbatim from § 778.114(c):
Where all the legal prerequisites for the use of the fluctuating workweek method of overtime payment are present, the FLSA, in requiring that "not less than" the prescribed premium of 50 percent for overtime hours worked be paid, does not prohibit paying more. On the other hand, where all the facts indicate that an employee is being paid for his overtime hours at a rate no greater than that which he receives for non-overtime hours, compliance with the FLSA cannot be rested on any application of the fluctuating workweek overtime formula.
1999 DOLWH LEXIS 52, *5
Courts have also had no difficulty parsing the obvious difference between an employer voluntarily paying additional overtime premiums above those required by law for holidays or other reasons (which is entirely consistent with § 778.114’s requirement that the weekly earnings “apart from overtime premiums” remain fixed and guaranteed and that overtime premiums be “not less than” the required 50 percent), and paying additional non-overtime wages based on the number or type of hours worked on holidays or for other reasons (which is contrary to the explicit text of § 778.114, because the employee’s weekly non-overtime earnings are not fixed). See Ramos v. Telgian Corp., No. 14-CV-3422 (PKC), 2017 U.S. Dist. LEXIS 9769, at *8 n.6 (E.D.N.Y. Jan. 24, 2017) (“there is no FWW violation when an employer pays additional overtime for holidays or for other reasons.”) (citing 29 C.F.R. § 778.114 (“Where all the legal prerequisites for use of the [FWW] method of overtime payment are present, the [FLSA], in requiring that ‘not less than’ the prescribed premium of 50 percent for overtime hours worked be paid, does not prohibit paying more”); see also DOL Opinion Letter, 2002 WL 32255314 (Oct. 31, 2002) (stating that an employer may pay employees more than the minimum calculated rate under the FWW method for overtime).
G. Procedural Deficiencies in the 2019 NPRM
1. The 2019 NPRM Fails to Acknowledge That § 778.114 is Interpretive, Not Legislative.
Where the Act or any amendment thereto contains a Congressional intention to delegate rule-making authority to the Department of Labor, Congress has specifically so stated. See, e.g., Act (Sept. 23, 1966), § 602, providing in part: “On and after the date of enactment of this Act, the Secretary is authorized to promulgate necessary rules, regulations, or orders with regard to the amendments made by this Act.” Thus, Congress conferred legislative rule-making authority on the Department only as to limited and specifically enumerated provisions of the Act (such as those 1966 and the 1974 amendments,9 Section 11(c) record-keeping, Section 13(a)(1) exemptions, etc.).
The Supreme Court has recognized that Congress did not, however, delegate rulemaking authority to the Department on Section 7(a)(1), the statutory provision addressing regular rate and overtime premiums at issue in § 778.114 and the Department’s 2019 NPRM:
The statute contains no definition of regular rate of pay and no rule for its determination. Contracts for pay take many forms. The rate of pay may be by the hour, by piecework, by the week, month or year, and with or without a guarantee that earnings for a period of time shall be at least a stated sum. The regular rate may vary from week to week. Overnight Motor Co. v. Missel, 316 U.S. 572, 580; Walling v. Belo Corp., 316 U.S. 624, 632. The employee's hours may be regular or irregular. From all such wages the regular hourly rate must be extracted. As no authority was given any agency to establish regulations, courts must apply the statute to this situation without the benefit of binding interpretations within the scope of the Act by an administrative agency.
Bay Ridge Operating Co. v. Aaron, 334 U.S. 446, 460-61 (1948) (emphasis added). In his Statements of General Policy Or Interpretation Not Directly Related to Regulations regarding § 778, the Wage and Hour Administrator expressly stated that the APA’s notice and comment rules are not applicable “because these [including § 778.114] are interpretative rules.” 33 Fed. Reg. 18 (Jan. 26, 1968).
Management representatives agree that Congress never delegated regulatory rule-making authority to the Department regarding the Act’s sections addressed by the § 778.114 interpretive bulletin. See, e.g., U.S. Chamber of Commerce, Amicus Curiae brief filed in Wills v. Radioshack Corp., No. 13-4661 [ECF 88-2] at p. 21 (“the FLSA did not authorize the Department of Labor to establish regulations pertaining to the overtime rate or the overtime calculation.”); Fisher & Phillips, https://www.fisherphillips.com/Wage-and-Hour-Laws/Fluctuating-Workweek-Legal-Prerequisites: “Congress has never delegated plenary regulatory power to USDOL with respect to the FLSA's overtime requirement.”).
Thus, § 778.114, as with the Department’s proposed 2019 NPRM amendments thereto, is merely a statement of the Department’s enforcement and adjudicatory “interpretation” rather than a legislative “regulation” made pursuant to Congressional grant of rule-making authority. See, e.g., Monahan v. Cty. of Chesterfield, 95 F.3d 1263, 1272 n.10 (4th Cir. 1996) (distinguishing Section 778 of Chapter 29 of the Code of Federal Regulations, which merely constitute the Department’s enforcement “interpretations,” from “regulations” constituting binding law); see also 29 C.F.R. § 778.1 (“It is the purpose of this bulletin to make available in one place the interpretations of these provisions which will guide the Secretary of Labor and the Administrator in the performance of their duties under the Act unless and until they are otherwise directed by authoritative decisions of the courts or conclude, upon reexamination of an interpretation, that it is incorrect.”).
An interpretive rule merely “reflects an agency’s construction of a statute that has been entrusted to the agency to administer” and a statement of policy “represents an agency position with respect to how it will treat—typically enforce—the governing legal norm. By issuing a policy statement, an agency simply lets the public know its current enforcement or adjudicatory approach.” Syncore Int'l Corp. v. Shalala, 127 F.3d 90, 94 (D.C. Cir. 1997). Courts need not give it any effect. See Batterton v. Francis, 432 U.S. 416, 425 n. 9, (1977) (“Legislative, or substantive, regulations ... have the force and effect of law.... By way of contrast, a court is not required to give effect to an interpretative regulation.”) (internal quotes and alterations omitted).
The Department’s 2019 NPRM, inconsistent with notice of proposed rulemaking involving merely interpretive rather than legislative regulations by other agencies, fails to inform the public that its proposed “clarification” to § 778.114 is merely an interpretive statement of the Department’s current enforcement or adjudicatory approach as opposed to a rule to given the force of law under the Act. See, e.g., 73 FR 15944, 15951 (agency statement in NPRM specifically informing the public that the NPRM involves an interpretive regulation, not legislative rulemaking). We recommend that the Final Rule should make this point clear.
H. The 2019 NPRM Makes Significant Changes Without Setting Forth A Reasoned Analysis For Those Changes.
The 2019 NPRM fails to acknowledge that it makes significant changes to its existing interpretation, and fails to set forth the required “reasoned analysis” for those changes.
The APA requires an agency to provide a reasoned analysis indicating that prior policies and standards are being changed deliberately, rather than ignored. The U.S. Court of Appeals for the D.C. Circuit has described this requirement:
Under the Administrative Procedure Act (APA), a court may set aside agency action found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). Our review under the APA is highly deferential, but agency action is arbitrary and capricious if it departs from agency precedent without explanation. Agencies are free to change course as their expertise and experience may suggest or require, but when they do so they must provide a “reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored.” Greater Boston Television Corp. v. FCC, 143 U.S. App. D.C. 383, 444 F.2d 841, 852 (D.C. Cir. 1970); see also Philadelphia Gas Works v. FERC, 300 U.S. App. D.C. 374, 989 F.2d 1246, 1250-51 (D.C. Cir. 1993). An agency’s failure to come to grips with conflicting precedent constitutes “an inexcusable departure from the essential requirement of reasoned decision making.” Columbia Broad. Sys. v. FCC, 147 U.S. App. D.C. 175, 454 F.2d 1018, 1027 (D.C. Cir. 1971).
Ramaprakash v. FAA, 346 F3d. 1121, 1124,1125 (D.C. Cir. 2003) (emphasis added).
The analysis provided in the NPRM does not meet this standard. Instead, the Department relies on conclusory and speculative factual assumptions about the likely impacts of the proposed changes—assumptions that NELA’s member attorneys strongly dispute. The Department acknowledges that it does not present sufficient information to determine whether the proposed changes will result in transfers to or from employers, or in what amounts. The Department makes no attempt to quantify how many employers will switch to payment of diminishing half-time overtime under a new FWW plan, or what impact that will have in a) lost overtime wages, b) additional overtime hours, or c) job loss, as employers spread work over fewer workers working longer hours. The failure to engage with the inevitable harms from the proposed changes belies any claim that the Department performed a “reasoned analysis” here.
Likewise, the Department assumes, without explanation, that employers who pay under FWW plans will not shift compensation away from guaranteed salary and towards contingent, unpredictable, or hours-based incentive pay. This is contrary to our experience, and contrary to the Department’s prior position. The dramatic reversal is not explained, and fails the required reasoned analysis. Moreover, the Department fails to address the impacts on workers paid under diminishing half-time overtime plans of reduced guaranteed salaries, or the prospect for hours-based bonuses encouraging overwork and diminished earnings.
NELA urges the Department to reconsider the proposed changes. They are unnecessary, because courts are handling the issue of supplemental pay on FWW plans without the sort of challenges the Department asserts; , they would be actively harmful to employees, encouraging employers to pay diminishing half-time overtime with minimal guaranteed salary; they are contrary to the Department’s own positions and procedurally flawed; and they contravene the purposes of the FLSA that Congress intended. The changes should therefore not be implemented.