Global Compliance Desk – United States

DOL Amends Regulation on Fluctuating Workweek Method of Calculating Overtime

Introduction

The Department of Labor (the Department) is revising its regulation under the Fair Labor Standards Act (FLSA or the Act) for computing overtime compensation of salaried non-exempt employees who work hours that vary each week (fluctuating workweek). On May 20, 2020, the U.S. Department of Labor announced a final rule, which among other requirements allows employers to include bonuses or other incentive-based pay into overtime compensation calculation of salaried, non-exempt employees whose hours vary from week to week. The final rule is effective from August 7, 2020.

Overtime Requirements under FLSA

FLSA requires employers to pay their non-exempt employees overtime pay of at least “one and one-half times the regular rate at which the employee is employed” for all hours worked in excess of 40 in a workweek (29 U.S.C. 207(a)). In other words, for each hour over 40, an employee works in a workweek, the employee is entitled to straight-time compensation at the regular rate and an additional 50 percent of the regular rate for that hour. 

Current Fluctuating Work Week Rule applies to employees whose hours of work do not customarily follow a regular schedule but vary from week to week. An employer may use the fluctuating workweek method if the employee works fluctuating hours from week to week and receives, pursuant to a fixed salary as compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period. Such a salary arrangement is permitted, if the amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate{29 CFR 778.114(a)}. 

The regular rate of the employee is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week. As the employee’s hours of work fluctuate from week to week, the regular rate must be determined separately each week based on the number of hours actually worked each week.

The employer satisfies the overtime pay requirement under FLSA, if it compensates the employee, in addition to the salary amount, at a rate of at least one-half of the regular rate of pay for the hours worked each overtime hour.

As per this rule, it was unclear whether employers could pay things like bonuses in addition to the fixed salary and still use the fluctuating workweek method.

The Changes to Fluctuating Workweek Overtime Calculations

On November 5, 2019, the Department issued a Notice of Proposed Rulemaking (NPRM) proposing to revise its existing regulation at § 778.114(a) to clarify that any bonuses, premium payments, or other additional pay of any kind must be included in the fluctuating workweek method of calculating compensation of the regular rate unless they are excludable as per statutory law.

The Department also proposed simplifying revisions § 778.114 by listing each required circumstance for the fluctuating workweek method to correctly compute overtime pay and removing duplicative text from revised § 778.114(c). 

Finally, the Department proposed to change the title of the regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of Computing Overtime” to better reflect the purpose of the subsection and to improve the ability of employers to locate the applicable rules.

Circumstances Where an Employer May Use the Fluctuating Workweek Method To Compute Overtime Pay

There are five circumstances that enable an employer to use the fluctuating workweek method to properly compute the regular rate and overtime pay owed under the FLSA. Each of these circumstances is discussed below.

• The employee’s hours must fluctuate from week to week.
• The employee must be paid a fixed salary that does not vary with the number of hours worked (though the new rule states that employers using the fluctuating workweek method may take occasional disciplinary deductions from an employee’s salary for willful absences or tardiness or for infractions of major work rules);
• The fixed salary must satisfy the minimum wage;
• The employer and employee must have a clear mutual understanding that the fixed salary is compensation (apart from overtime premiums) for whatever hours the employee works each week. The NPRM clarifies that employers may pay bonuses, premium payments, and other additional pay of any kind in addition to the fixed salary; and
• 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. Since the salary is fixed, the regular rate of the employee will vary from week to week and is determined by dividing the amount of the salary and any non-excludable additional pay received each workweek by the number of hours worked in the workweek.

This method of payment is not permitted in states that prohibit non-exempt employees’ salaries from compensating more than forty (40) hours of work per week.  These states include; Pennsylvania, California, Alaska, and New Mexico.

Conclusion

The fluctuating workweek method does not deviate from the standard method of computing overtime pay under the FLSA. Also, the fluctuating workweek rule will make it easier for employers to use flexible work schedules, particularly as many employers seek to promote social distancing during the COVID-19 pandemic by staggering employees’ shifts or otherwise varying work schedules.