On November 5, 2019, the United States Department of Labor (“DOL”) announced a proposed rule that would give employers more flexibility in the way they calculate overtime pay for salaried, non-exempt employees with inconsistent schedules. More specifically, the rule would expressly allow employers to offer bonuses or other incentive-based pay to salaried, non-exempt employees whose hours vary from week to week. The proposal would clarify that these payments, in addition to a fixed salary, are compatible with the use of the “fluctuating workweek” (or “half-time”) method of calculating overtime under the Fair Labor Standards Act (“FLSA”), which reduces an employer’s overtime liability to salaried, non-exempt workers as compared to the more traditional time-and-a-half method of overtime calculation.
The FLSA requires employers to pay non-exempt employees time and a half their regular rate of pay for hours worked over forty in each workweek. However, if certain conditions are met, the DOL permits employers to use the “fluctuating workweek” method, which allows employers to pay a fixed salary to employees whose hours vary from week to week, and calculate their overtime by dividing the salary by the actual number of hours that they work in a given week. See 20 C.F.R. §778.114. The employees still receive premium pay for each hour of overtime worked, but the rate is one-half of the employee’s regular rate instead of 1.5 times the regular rate.
Under the current rules, the following conditions must be met to use the fluctuating workweek method: (1) an agreement exists with the employee to pay “a fixed amount” each week regardless of the hours worked; (2) the employee’s hours fluctuate from week to week; (3) the fixed amount is 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 definitions of the terms “fixed amount” and “amount of salary” within the regulation have caused disagreement on whether any additional compensation would prevent an employer from using this method of overtime compensation. During the Bush administration, the DOL proposed allowing employers who use the fluctuating workweek method to pay bonuses and other premium pay to workers, as long as they included that pay in calculating the regular hourly wage upon which overtime premiums are based. However, the regulations were not finalized until after President Obama took office and the final rule published by the Obama administration did not include the proposed changes to the fluctuating workweek regulations allowing incentive compensation and bonus pay.
Since that time, federal courts have been split over whether the FLSA allows for bonuses and premium pay when the fluctuating workweek method is being used. Some courts have said it does, others have said it does not, and still others have said the payments are only allowed when they are performance-based, rather than reflecting the number of hours an employee works. This confusion regarding additional compensation has deterred some employers from using the fluctuating workweek method or not paying any additional compensation other than a fixed amount.
The Proposed Rule
Now, the DOL is attempting to eliminate this confusion by expressly permitting employers to use the fluctuating workweek method for salaried, non-exempt employees who also receive additional bonuses, premium payments, and incentive compensation, so long as the additional pay is properly factored into the employee’s regular rate of pay for purposes of calculating overtime.
In addition, the proposed rule also seeks to revise the regulation to increase readability. The DOL is also proposing a title change to the regulation to better reflect the purpose of the subsection. Finally, the DOL plans to add examples to better illustrate how the regulation works operationally.
The proposed rule is available for review and public comment through December 5, 2019 at https://www.federalregister.gov/documents/2019/11/05/2019-23860/fluctuating-workweek-method-of-computing-overtime. This can be done online through the Federal eRulemaking Portal at https://www.regulations.gov, or by mail to: Division of Regulations, Legislation, and Interpretation, Wage and Hour Division (WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, D.C. 20210.
If the proposed rule is implemented and survives potential court challenges, it will make it easier for employers to use the fluctuating workweek method—which reduces overtime liability—and still provide salaried, non-exempt employees with additional incentives and other types of compensation. However, employers need to be cognizant of certain states (such as California, New Mexico, and Pennsylvania), which do not recognize the DOL’s fluctuating workweek method, and in which employers must calculate overtime pay to salaried, non-exempt workers by other means.