United States: New York Federal District Court Endorses Use Of Fluctuating Workweek Overtime Payment Method Where Employer Pays Performance-Based Bonuses To Non-Exempt Salaried Employees

Last Updated: January 20 2014
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True story: the other day I was speaking with a friend in the HR realm and I asked him whether he was familiar with the fluctuating workweek. He jokingly answered: "does that have anything to do with my weight gain during the holiday season?" His answer, while (somewhat) amusing, was entirely consistent with others I have quizzed on this topic: they have never heard of this alternative method of overtime pay. Below I will briefly discuss the fluctuating workweek method of overtime pay and a recent challenge in a New York federal district court to its use.

So What is this Fluctuating Workweek You Speak Of?

Time and half. That's how everyone knows it. If your non-exempt employee works more than 40 hours in a single workweek, you have to pay them time and half. It's that simple, right? Well, of course it's not. Otherwise, people like me wouldn't have a job. Little known to employers (like my friend above) is that you can pay your employees just the "half" part of time and half without violating the law – better known as the "Fluctuating Workweek Method" – as long as you satisfy the following five conditions:

1. The employee's hours fluctuate from week to week. Not sometimes, but regularly – so, for example, in one month he or she could work 42 hours one week, 31 the next, 43 the following week and then 62 in the last week of the month.
2. You pay that employee the same fixed weekly salary regardless of the number of hours the employee works in any given week (exclusive of any overtime payments due). Thus, you pay a \$1,000 weekly wage whether the employee works 42, 31, 43 or 62 hours in the week.
3. This fixed amount when divided against the number of hours worked in any given week will not result in a regular rate of pay that dips below the minimum wage. Consider this: \$1,000 weekly wage ÷ 62 hours worked = \$16.13 per hour regular rate of pay. \$16.13 > \$7.25 minimum wage rate = thumbs up. However, if the weekly salary was let's say just \$400, the regular rate of pay when divided against a 62 hour workweek would equal just \$6.45, well below the current \$7.25 minimum wage rate = thumbs down.
4. You and the employee have a clear mutual understanding that you are paying him or her a fixed salary regardless of the number of hours the employee works that week.
5. Lastly, you pay the employee a 50% overtime premium (AKA, the "half") in addition to the fixed weekly salary for each hour worked over 40 hours in a workweek. This is sometimes better known as the "halftime rate." Back to our example of a \$1,000 fixed salary and 62 hour workweek: \$1,000 ÷ 62 hours = \$16.13 regular rate of pay. One half of \$16.13 is \$8.065 per hour – the halftime rate. The employee worked 22 hours of overtime that week and 22 hours x \$8.065 = \$177.43 in overtime pay due to that employee on top of the \$1,000 fixed salary, for a total weekly salary of \$1177.43.

Using the traditional time and half rate overtime payment method in the above example would have cost the employer substantially more. The time and half overtime rate would have been \$37.50 per hour (= \$1,000 ÷ 40 hours x 1.5) resulting in overtime costs of \$825.00 (= 22 OT hours x \$37.50) – more than four and half times higher! At first glance, employers salivate over the possibility of utilizing a halftime rate rather than paying time and half. So why not use it all the time then?

First, the above five conditions are hard to satisfy consistently – you may not have a workforce whose hours fluctuate regularly or your pay practices result in the modification of the "fixed" salary (i.e. additional payment for working night shifts). Second, the use of this method, which encourages fewer employees to work longer hours, may affect employee morale negatively and the employer's ability to attract and retain talent. Third, application of this method can cause administrative headaches. But in the right situations, the fluctuating workweek method may be the right solution for you. It keeps overtime costs down where non-exempt employees work more than 40 hours a week regularly and where onboarding costs remain high (i.e. costs related to screening, recruitment and training, providing benefits packages, and securing unemployment insurance and workers ' compensation for additional employees).

So What Just Happened in New York?

In Wills v. RadioShack Corp., RadioShack utilized the fluctuating workweek method to calculate overtime owed to its non-exempt store managers. RadioShack paid its non-exempt store managers a base salary for all hours worked each workweek, plus overtime (at the halftime rate), along with certain non-discretionary quarterly and year-end bonuses that were tied strictly to certain performance metrics and not to the number of hours the employee worked. At issue before a New York federal district court was whether RadioShack satisfied the second condition of the fluctuating workweek test – that its store managers received a fixed weekly salary that did not vary with the number of hours they worked – where it also paid out these bonuses at various times of the year.

The court, in throwing out the case, found that RadioShack correctly utilized the fluctuating workweek method despite its payment of these bonuses because they were strictly performance-based and untethered to the hours they worked. Had it paid the store managers additional "hours-based" bonuses (i.e. bonuses for working holidays, weekends, nights, etc.) it may not have been eligible to use this method because employees working those types of hours cannot be said to have received a "fixed salary" regardless of the number of types of hours they worked. Instead, they would have been paid additional amounts given their work during "premium" hours.

The win for RadioShack was significant because, as shown above, the cost to an employer forced to calculate overtime using a time and half method rather than the half time method can be substantial. This is especially true where an employer like RadioShack is facing a class action lawsuit.

Other courts (including a case involving RadioShack in Ohio) have taken a different view than the Wills court did and we still have not heard from the Second Circuit on this issue. What we can say is that use of the fluctuating workweek method has real advantages for certain employers, but it also carries real risks. We recommend therefore, that you consult with outside counsel before implementing its use in your workplace.

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