Background: The US Department of Labor’s Wage and Hour Division (DOL) is attempting to provide clarity and predictability to one of the most confusing areas of wage and hour law – the fluctuating workweek. The Fair Labor Standards Act (FLSA) requires employers to pay non-exempt employees time and a half their regular rate of pay for hours worked over forty in each week. However, if certain conditions are met, the DOL allows employers to pay “a fixed salary for fluctuating hours” and overtime at a half-time rate. See 20 CFR 778.114. The general requirements for utilizing the fluctuating workweek method are: 1) an agreement with the employee to pay “a fixed amount” each week regardless of the hours worked, 2) that the employee’s hours fluctuate week to week, 3) that the fixed amount will be greater than the minimum wage for all hours worked in any given week and 4) the overtime rate is equal to half of “the amount of the salary” divided by the total hours worked in a week. The definition of the terms “fixed amount” and “amount of salary” within the regulation has led to disagreement among courts, and arguably the DOL itself, on whether any additional compensation would negate an employer’s ability to use this method of overtime computation. Where some courts have disallowed all bonuses and additional compensation, other courts attempt to resolve this by creating a dichotomy between “productivity based” (for example commissions) bonuses and “hours based” (for example night shift differential) bonuses, finding that only productivity bonuses are compatible with the fluctuating workweek method of compensation. However, there are bonuses (such as for retention, safety and referral) that do not fall neatly into either category. This confusion regarding additional compensation has dissuaded employers from utilizing this method of overtime compensation or not paying any supplemental compensation other than a fixed weekly amount. The DOL’s new proposed rule attempts to address this confusion.

Summary of Proposed Rule: The DOL’s proposed rule offers to rewrite the fluctuating workweek rule in plain English. To illustrate this point, the DOL begins by changing the title from “fixed salary for fluctuating hours” to the “Fluctuating Workweek Method of Computing Overtime.” The proposed rule outlines five conditions that must be met in order to use the fluctuating workweek method of computing overtime:

  1. Employee’s hours must fluctuate week to week;
  2. Employee receives a fixed salary that does not vary week to week;
  3. The salary is sufficient to pay at least the minimum wage for all hours worked;
  4. There is a clear and mutual understanding that the fixed salary is compensation for all hours worked each week – fixed salary excludes overtime premiums, bonuses, premium payments or any payment excluded from the regular rate; and
  5. Calculation of the overtime rate will be equal to the amount of the fixed salary plus any bonuses, premium pay, or additional pay of any kind (unless excluded from the regular rate under Section 7(e)) earned in that week divided by total hours worked within the same week. The overtime premium will be equal to half of the overtime rate times the number of overtime hours worked.

The proposed regulation then provides two clear examples of how to calculate overtime when an employee receives a night shift premium or a weekly production bonus. The proposed rule does not address the question of how to treat a bonus that is not paid on a weekly basis. However, the DOL recently addressed this in opinion letter FLSA 2019-7 issued on July 1, 2019. In short, the employer must reallocate the bonus over the workweeks in which it was earned.

Employers’ Bottom Line: The DOL continues to issue rules and opinion letters that provide clarity and predictability for both employers and employees. If the proposed rule is implemented, it will make it much easier for employers to use the fluctuating workweek method and still provide employees with additional incentives and other types of compensation.

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.