DOL Clarifies Requirements for Overtime Pay in Fluctuating Workweeks

The federal Department of Labor (DOL) has issued a final rule that will revise a Fair Labor Standards Act regulation to clarify that an employer may provide bonuses, premium pay, and hazard pay to non-exempt employees when using the fluctuating workweek method of overtime calculation. According to the DOL’s announcement, the rule “[a]ddresses the divergent views expressed by the Department and courts—and even among courts—that have created legal uncertainty for employers regarding the compatibility of various types of supplemental pay with the fluctuating workweek method.” The issuance of the final rule may be a reflection of changing political guidance at the DOL--the Bush administration proposed the clarification in 2008, the Obama administration declined to proceed with the proposal in 2011, and the Trump administration revived the Bush proposal by giving notice of the new rule in November 2019. 

Generally, an employee who is not exempt from receiving overtime under the FLSA is entitled to overtime pay at a rate equal to 1½ times their “regular rate” of pay for each hour worked over 40 hours per week. Under a fluctuating workweek or “half-time” pay plan, a non-exempt employee is paid a fixed salary as straight-time compensation for all hours worked in a workweek, including those hours over 40 per week, and the employee’s overtime pay rate is calculated by dividing the weekly fixed salary by the number of hours worked in a given week and then dividing that amount by one half. The employee is then owed, in addition to the fixed salary, the half-time rate for each hour over 40 in a workweek. The employee’s regular rate thus fluctuates as her hours fluctuate. 

The new rule revises 29 C.F.R. § 778.114 by: changing the title of that regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of Computing Overtime;” expressly stating that bonuses, premium payments, commissions, hazard pay or other additional pay can be paid to employees compensated under the fluctuating workweek method of compensation; and providing examples of calculation of overtime showing how a shift differential and a productivity bonus would affect the calculation. In addition, the revised regulation specifically lists each of the requirements for using the fluctuating workweek method: 

(1) the employee works hours that fluctuate from week to week;

(2) the employee receives a fixed salary that does not vary with the number of hours worked in the workweek, whether few or many;

(3) the amount of the employee’s fixed salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for    every hour worked in those workweeks in which the number of hours the employee works is greatest;

(4) the employee and the employer have a clear and mutual understanding that the fixed salary is compensation (apart from overtime premiums and any bonuses, premium  payments, commissions, hazard pay, or other additional pay of any kind not excludable from the regular rate under section 7(e)(1) through (8) of the Act) for the total hours worked each workweek regardless of the number of hours, although the clear and mutual understanding does not need to extend to the specific method used to calculate overtime pay; and

(5) the employee receives overtime compensation, in addition to such fixed salary and any bonuses, premium payments, commissions, hazard pay, and additional pay of any kind, for all overtime hours worked at a rate of not less than one-half the employee’s regular rate of pay for that workweek. 

29 C.F.R. § 778.114(a). 

Use of the fluctuating workweek method of calculating overtime may result in labor cost savings for some employers, however, the laws of some states prohibit the use of this method, thus, each employer must carefully review any applicable state or local wage payment laws.

If you have any questions about this alert, please contact the Smith Anderson lawyer with whom you normally work.