DLSE does not recognize the fluctuating workweek method of overtime pay

STATE OF CALIFORNIA PETE WILSON, Governor
DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
LEGAL SECTION
45 Fremont Street, Suite 3220
San Francisco, CA 94105
(415) 975-2060

H. THOMAS CADELL, JR., Chief Counsel

December 3, 1997

Robert J. Nobile, Esq.
Winston & Strawn
200 Park Avenue
New York, NY 10166

Re: Fluctuating Workweek In California

Dear Mr. Nobile:

This is intended to reply to your letter of November 27, 1997,
regarding the use of the fluctuating workweek method of payment in
California.

As you note, effective January 1, 1998, some - but not all -
of the California Industrial Welfare Commission Orders will no
longer require overtime after eight hours in a workday. Orders 1,
4, 5, 7 and 9 have been amended so that they no longer require the
payment of a premium rate for work in excess of eight hours in a
workday. All of the other Orders, however, continue to require the
payment of a premium for daily 1 overtime.

This change in the overtime requirements does not, however,
affect the enforcement policy of the Division of Labor Standards
Enforcement which does not allow the use of the fluctuating
workweek method. The Division's policy in this regard was tested
in the case of Skyline Homes v. Department of Industrial Relations
(1985) 165 Cal.App.3d 239; 211 Cal.Rptr. 792; 166 Cal.App.3d 232(c)
(hrg. den. 5/29/85)

The Skyline court discussed the role of the eight-hour day in
the analysis of the law and reached the conclusion that the
inclusion of the eight-hour day was inconsistent with the federal

1 Order 14 covering the agricultural occupations requires premium after 10
hours in a workday.

Robert J. Nobile, Esq.
December 3, 1997
Page 2

fluctuating workweek concept; however, the court also reached the
conclusion that the fluctuating workweek was inconsistent with the
California law because, unlike the federal Fair Labor Standards Act
which requires a premium for overtime work in order to compensate
employees for the "strain of working long hours", the California
law "relies on the imposition of a premium or penalty pay for
overtime work to regulate maximum hours consistent with the health
and welfare of employees..." (Skyline, 165 Cal.App.3d at 249,
emphasis added) This remains a fact.

The Skyline court chided the plaintiffs in the decision,
stating that they "fail to recognize one of the primary functions
under state law of the requirement of overtime pay." The Skyline
court noted that "Premium pay for overtime is the primary device
for enforcing limitations on the maximum hours of work" (citing
Calif. Mfrs. Assn. v. IWC (1980) 109 Cal.App.3d 95, 111) and citing
from the California Supreme Court in IWC v. Superior Court, supra,
the court pointed out that remedial legislation such as the Orders
"should be liberally construed to promote the general object sought
to be accomplished." Id., at 250.

A fluctuating workweek formula would provide that an employee
who was to receive $400.00 per week would receive an overtime
premium calculated by dividing the total number of hours worked
into the $400.00 wage to determine the "regular rate of pay", and
dividing that dividend by two to determine the half-time rate to be
paid for all hours over the limitation established by the Orders
after which overtime "premium" must be paid. The longer the
employee works, the less the "premium" pay per hour he or she is
due. Far from being a "penalty" to the employer, it is nothing
less than an incentive to the employer to work individuals overtime
since the longer the employee works, the less of a premium is owed
for the overtime work. An example makes the point clearer. Assume
that an employee is to receive $400.00 per week on a fluctuating
workweek plan for answering the phone:

(a) If the employee works 50 hours in a week his
regular rate of pay is $8.00 per hour ($400 ÷ 50);
he is entitled to one-half of that hourly rate for
all hours in excess of 40 ($4.00); and, thus is
entitled to a total of $440.00 for the week's work.

(b) If the employee works 60 hours in a week his
regular rate of pay is $6.67 per hour ($400 ÷ 60);
he is entitled to one-half of that hourly rate for
all hours in excess of 40 ($3.33); and, thus is
entitled to a total of $466.67 for the week's work.

Robert J. Nobile, Esq.
December 3, 1997
Page 3

(c) If the employee works 70 hours in a week his
regular rate of pay is $5.71 per hour ($400 ÷ 70);
he is entitled to one-half of that hourly rate for
all hours in excess of 40 ($2.86); and, thus is
entitled to a total of $485.71 for the week's work.

In other words, the employee would receive $40.00 for working
the first ten hours ($4.00 for each overtime hour); but only $66.67
for working twenty hours ($3.33 for each overtime hour), and even
less - $85.71 ($2.86 for each overtime hour) - for working thirty
hours. The employee answering the telephone is not given the
opportunity to increase his base wage (as is the case with
commissioned or piece rate workers) but is simply paid a lesser
rate per hour by the addition of each hour worked because the
employer has chosen to calculate his overtime premium on the
fluctuating workweek basis.

Given the intent of the IWC as announced by the California
courts, coupled with the fact that a fluctuating workweek formula
provides an ever-decreasing regular rate of pay, it is clear that
California courts would continue to recognize that the fluctuating
workweek formula does not comport with the intent of the IWC. The
IWC intended to adopt the 40-hour workweek "consistent with the
FLSA" (Statement of Basis, Orders 1, 4, 5, 7 and 9). Obviously,
the Commission's use of this term was to emphasize that the FLSA
only provides overtime after forty hours in a week. The statement
does not address calculation of the overtime. Had the IWC intended
to make the overtime calculation consistent with the FLSA they
certainly would not have left intact the many definitions contained
in the Orders which make such calculation consistencies impossible.

More important, had the IWC intended that the DLSE was to
adopt the fluctuating workweek method of calculation, it certainly
would have told the DLSE. As the Commission states in its
Statement of Basis, the Commission consulted with the Division of
Labor Standards Enforcement in an effort to eliminate
contradictions and promote clarity on the issue of alternative
workweeks. Since the Commission is assumed to know the enforcement
position of the DLSE and, so was aware of the DLSE policy in regard
to the fluctuating workweek, it should be evident that if they
intended to adopt the federal regulation, the Commission would have
directed DLSE to do so.

2 Of course, after March 1, 1998, the California "Living Wage" initiative
passed by the California voters in 1996, will require that the worker receive
$5.75 per hour so that would be the lowest the "regular rate of pay" could be
calculated.

Robert J. Nobile, Esq.
December 3, 1997
Page 4

There is no record of any such directive and the Statement of
Basis adopted by the Commission does not address the question.

In your letter of November 27, 1997, you also ask for advice
concerning the extent of the coverage of section 3(B) of Wage Order
4-98. The section excludes from overtime requirements "any
employee whose earnings exceed one and one-half times the minimum
wage if more than one-half of that employee's compensation
represents commissions."

The case of Keyes Motors v. DLSE (1987) 197 Cal.App.3d 557;
242 Cal.Rptr. 873, defined the term commission for purposes of the
IWC Orders and held that (1) the employees must be involved
principally in selling a product or service, not making the product
or rendering the service; (2) the amount of their compensation must
be a percent of the price of the product or service.

Thank you for your interest in California labor law. I hope
this adequately addresses the questions you asked in your letter of
November 27th.

Yours truly,

H. THOMAS CADELL, JR.
Chief Counsel

c.c. Jose Millan, State Labor Commissioner
Nance Steffen, Assistant Labor Commissioner
Greg Rupp, Assistant Labor Commissioner
Tom Grogan, Assistant Labor Commissioner