United States: DOL's Opinion Letter Tackles Varying Average Wage Rates And FLSA Overtime Compliance

On December 21, 2018, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) released an opinion letter, FLSA2018-28, in which it addresses minimum wage and overtime pay requirements for employees with varying average hourly rates. The employer in question calculates pay by multiplying an employee’s time with clients by his or her hourly rate and then dividing that number by the employee’s total hours worked, a figure that includes both client time and compensable travel time. The resulting pay complies with minimum wage requirements. If an employee works more than 40 hours in a week, he or she is paid time and a half using a rate of $10 an hour for overtime hours worked regardless of his or her actual average hourly rate or regular rate of pay. The U.S. DOL/WHD found that this compensation system does not comply with the Fair Labor Standards Act’s (FLSA) overtime requirement when the employee’s actual regular rate of pay exceeds $10 per hour.

What are some common, lawful ways that an employer can calculate nonexempt employees’ pay?

Under the FLSA, an employer can pay its nonexempt employees in a number of lawful ways, be it based on an hourly rate, a daily rate, a piece rate, commissions, a job rate, or a set salary. An employer also may pay its employees using a combination of these legal options. For example, an employer can pay an employee in a retail setting an hourly rate of pay plus commissions. Depending on the work performed and the type of business or industry, the manner in which nonexempt employees are paid may vary. The most common way employers pay their employees is by an hourly rate of pay. Additionally, some employers pay their nonexempt employees a type of nondiscretionary bonus or other payment for perfect attendance, quality or quantity of work, working off-shifts, etc.

Regardless of the manner in which an employer pays its employees and the type of nondiscretionary payment an employer may make to its nonexempt employees, such compensation must be reduced to an hourly rate of pay for workweeks in which an employee works overtime. This hourly rate of pay is referred to as a nonexempt employee’s “regular rate,” which is then used to compute the overtime premium pay due an employee.   

Is the method for calculating weekly pay described in this opinion letter unusual in any way?

The methodology described in this opinion letter is not all that unusual, but it is not totally legal. The opinion letter affirms that the particular employer’s pay practices comply with the minimum wage requirement but fail to meet the overtime requirement of the FLSA. The methodology used by the employer, or some variation of it, is commonly used by employers in the home healthcare industry. However, as the opinion letter points out, overtime premium pay cannot be paid based on an assumption of what a nonexempt employee’s regular rate may be. Instead, overtime pay must be computed using an employee’s actual regular rate, at a minimum. 

The opinion letter indicates that the FLSA’s overtime requirement wouldn’t be satisfied for workers whose regular rate of pay exceeds $10 per hour under this compensation plan. Is this a big change in the law that some employers will have to adjust to, or was this previously unlawful?

The opinion letter’s instructions on how to compute and pay an overtime premium to a nonexempt employee is not a change in the law, so it should not result in any employer having to modify its pay practices unless the employer previously failed to comply with the FLSA’s overtime requirement.

Is the pay method described in this opinion letter the same as the fluctuating workweek method?

The pay practices described in the opinion letter are not consistent with the fluctuating workweek methodology for a number of reasons. The pay practices described in the letter essentially represent an hourly rate methodology where a nonexempt employee is paid an hourly rate of pay for each hour spent with patients. This hourly rate sufficiently exceeds the federal minimum wage rate so that when an employee’s compensable travel time is added to their compensable work time with patients, the nonexempt employee is paid at least minimum wage for all hours worked.

Relying on a 1942 decision by the Supreme Court of the United States, the U.S. DOL/WHD and many federal courts have recognized the fluctuating workweek methodology as complying with the FLSA’s overtime requirement. The fluctuating workweek methodology is different and essentially requires that (1) an employee is paid a fixed salary for each workweek without regard to the number of hours he or she actually worked; (2) the nonexempt employee’s hours of work fluctuate or vary workweek to workweek; (3) the employee and employer understand that the salary represents straight-time compensation for all hours worked in a workweek by the nonexempt employee, regardless of the number of hours worked; (4) the salary is of a sufficient amount such that the employee receives at least minimum wage for each hour worked in any workweek; and (5) the nonexempt employee is paid an overtime premium for all hours worked in excess of 40 in a workweek by using a regular rate determined by dividing the fixed salary by the total number of hours worked in a workweek and multiplying one half of that regular rate by the total number of hours worked in excess of 40 in that particular workweek. Since a nonexempt employee’s hours will vary or fluctuate in a workweek under the fluctuating workweek method, so too will their regular rate vary in each overtime workweek. These requirements are set forth in 29 C.F.R. § 778.114. 

How might the business in this opinion letter adjust its compensation plan to comply with the FLSA?

The employer that is the subject of this opinion letter must compute the actual regular rate of any nonexempt employee when it exceeds $10 an hour for each overtime workweek in order to accurately compute the overtime premium pay to which an employee is entitled.

Is this applicable in all jurisdictions?

It is important to note that the methodology used by the employer in the opinion letter may not comply with some state laws. This methodology may not comply with some state laws because the employer does not pay an employee compensation for each hour worked by an employee, such as compensable travel time. Employers may want to check with state and local laws as well.

What can employers take away from this opinion letter?

The main takeaway is that compensation for nonexempt employees under the FLSA is a function of two components: hours worked and compensation expressed as an employee’s regular rate. The key is that an employer must use actual data for both of these components in order to compute correctly the amount of wages and overtime compensation due an employee. It is legal to pay more than is due, but it is not legal to pay an employee less than the amount of wages and overtime due to him or her.

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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