United States: The DOL's New Proposed Overtime Rules And Part-Time White Collar Employees: Can The Fluctuating Workweek Method Solve The Problem?

The big questions often have surprisingly simple solutions, staring right back at us:

  • If a tree falls in the forest, and no one hears it, does it make a sound? Sound exists as a mechanical wave of pressure, regardless of whether anyone hears it.
  • What came first, the chicken or the egg? The egg. Evolution shows that, whatever came before the chicken, it assuredly hatched from an egg.
  • What is the answer to life, the universe, and everything? 42.

Employers should keep this lesson in mind, when considering how to respond to the Department of Labor's new proposed rules concerning the Fair Labor Standards Act's so-called "white collar" exemptions (e.g., the executive, administrative, and professional employees). Many employers fear that the DOL's proposed rules will make it impossible to pay part-time managers or administrative employees on a salary basis. This is because the DOL has proposed doubling the minimum salary needed to qualify for a white collar exemption from the current $455 a week ($23,660 a year) to $970 a week ($50,440). And very few part-time managers or administrative employees earn that kind of money, particularly in the retail and hospitality industries (think store or restaurant managers). Thus, many believe, the DOL's rules might require employers to reclassify part-time white collar employees as hourly, non-exempt employees. This, in turn, would deprive employers of one of the major benefits to paying a salary: predictable, non-fluctuating wage costs. But if the DOL adopts its proposed rules, a little-used, largely ignored piece of the FLSA's regulatory framework may provide a solution to employer fears: the "fluctuating workweek" method of calculating overtime.

The fluctuating workweek method permits employers to pay non-exempt employees a fixed salary, even if the employee's hours fluctuate from week-to-week. 29 C.F.R. § 778.114. This method also permits employers to pay fluctuating workweek employees overtime at an additional one-half the regular rate of pay, instead of by dividing the salary by 40 and then multiplying that number by 1.5 for all overtime hours worked. To take advantage of this method, an employer need only: (1) tell the employer that the "fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number"; and (2) pay a salary large enough to ensure that fluctuating workweek employees earn more than the minimum wage. Id.

Using the fluctuating workweek method, employers could continue to pay part-time managers and administrative employees in the same way they do now, even if the DOL adopts its proposed rules. Like now, employers could continue to pay these employees a fixed salary (say, $500 a week), could continue to schedule them for 20, 30, or 35 hours week, could continue to schedule them for variable hours, and could even continue not paying these employees additional compensation if they work a few more hours than usual in a given week. Additionally, because fluctuating workweek employers are not technically overtime exempt, employers who use this method can avoid making mistakes about tricky, fact-intensive classification questionssuch as whether a particular employee exercises enough discretion and independent judgment to qualify for the administrative exemption.

From a human resources perspective, this kind of reclassification should not prove disruptive. Employers would just need to make clear, in writing, what these employees already knowthat their salaries cover all hours worked. Employers will, however, need to address some other complications. But most or all of these should be solvable.

For example, employers may need to carefully track hours for newly-classified fluctuating workweek employees, and they will need to pay overtime (albeit at just a half-time rate) if those employees exceed 40 hours a week. Yet neither of these concerns will pose a problem if employers schedule their fluctuating workweek employees comfortably below 40 hours a week, such as by limiting this method to part-time employees who regularly work only 25 or 30 hours a week. Similarly, the time-tracking requirements would not otherwise differ from reclassifying these workers as non-exempt hourly employeesexcept that, as hourly employees, small errors in tracking hours are more likely lead to liability. This is because, under the fluctuating workweek method, it is irrelevant whether an employee worked 23.2 hours or 23.4 hours in a given week. The salary covers everything.

One concern, however, may not be surmountable: the fluctuating workweek method is not available in every state. Some states, such as California, have expressly determined that the method does not comply with state wage-and-hour laws. In other states, such as Pennsylvania, negative case law makes relying on the fluctuating workweek a risky proposition at best. Accordingly, before adopting a fluctuating workweek method, employers should ensure that the method complies with all applicable state and local laws. Additionally, in states where the method is available, employers will need to ensure that they satisfy any state or local procedural peculiarities that might be impactedsuch as, for example, state laws requiring employers to provide notices, on wage statements, regarding a non-exempt employee's hourly rate of pay.

The fluctuating workweek method also might not makes sense for everyone. For example, the weight of authority suggests that employers should not use the fluctuating workweek for employees who receive premium rates for work done on nights, weekends, holidays, and other undesirable shifts. Some creative plaintiff's attorneys have further argued, based on an "out of context" DOL statement, that commissions and performance bonuses also invalidate the fluctuating workweek method. Wills v. RadioShack Corp., 981 F. Supp. 2d 245, 259 (S.D.N.Y. 2013) (rejecting this argument, and finding that employers who use the fluctuating workweek method can pay performance bonuses). Most of these attorneys have not had success with this argumentso far. But there is relatively little case law on the subject, leaving the issue somewhat unsettled. Employers who adopt the fluctuating workweek method should keep an eye out, as more courts address this issue.

On the whole, however, many employers will find that the fluctuating workweek method's advantages will be well-worth these hassles. At least in most states, the answer to the question, How do we classify part-time white collar employees, if the DOL adopts its proposed new rules?, could be very simple: pay them a salary, just like you do now, but call them fluctuating workweek employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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