Last week the U.S. Department of Labor (DOL) published its final rule addressing compensation for non-exempt employees that work flexible or “fluctuating” workweeks. This new rule updates the DOL’s regulations where it outlined how overtime is calculated for salaried non-exempt workers whose hours vary by week. This new rule became effective on 5/20/2020.

This new rule allows employers more latitude to make incentive payments such as bonuses, hazard pay, and commissions to salaried employees that work fluctuating hours week to week. These incentive payments must be included in the regular rate of pay to calculate overtime. But the new regulations allow businesses paying overtime hours as required to pay it at a diminishing rate as long as the minimum base salary is paid regardless of how many hours they work.

Under this method the overtime hours are paid at half of the workers “regular rate” by multiplying that by one-and one-half times that rate when paying overtime.

The regulations provide examples of how this method would work.

“Example: Suppose an employee were paid $491 in fixed weekly salary plus an $8 per hour nightshift premium. In a week in which the employee works 50 hours, including 4 hours for which the employee receives the nightshift premium, the employee’s straight time pay is $523 ($491 salary plus $32 nightshift premium), and the regular rate is $10.46. The employer need only pay an additional $5.23, half time the regular rate, for each of the 10 overtime hours, for a total of $52.30. The payment of the $8 nightshift premium is reflected in this fluctuating workweek method computation. The fluctuating workweek method therefore correctly computes overtime pay owed under the FLSA when an employee receives a fixed salary and hours-based premiums that compensate him or her for all hours worked. This is the same result as would occur if the employee were paid, for example, on a piece rate basis but also received additional pay for specific hours. See 29 CFR 778.111(a) (providing a regulatory example of payment of waiting time in addition to piece rate and explaining that only additional half time is due for overtime hours).”

The rules also outline another example where hours increased, but the regular rate with incentive did not.

“The employee was paid a fixed salary for all hours worked in a workweek plus a straight-time bonus for each hour worked in excess of 45. The bonus rate equals the weekly salary divided by 40 (which equals 0.025 of the fixed weekly salary per hour). If the employee works more than 45 hours, the regular rate equals:

(fixed salary) + ((hours worked – 45) x 0.025(fixed salary))

___________________________________________

                                  (hours worked)

Under this compensation scheme, so long as the employee works enough hours to receive the bonus, the regular rate would actually increase for each additional hour of overtime work. For example, an employee who works 50 hours and receives a fixed salary of $600 plus a straight-time bonus of $15 for each hour worked in excess of 45 would have a regular rate of $13.50. But if he or she works five additional hours, the regular rate would rise to $13.63.”

Employers that elect to use a fluctuating workweek must ensure employees go into it with a “clear and mutual understanding” as to what they are agreeing to (778.114 (a)). This is specific to the fixed salary requirement for all hours worked in the workweek – not necessarily how the overtime pay method is calculated.  

In theory some employees could see a reduction in earnings going to this method, though the DOL does not think that would be a widespread result. While it’s an infrequent situation for those employers looking to adopt this new method, they may find if not understood, worker dissatisfaction may result.

For those hourly paid employees (remember, this method was for salaried non-exempt) that are considering implementing this fluctuating workweek model, the DOL posits they may actually see an increase in pay. The employee relations result coming from getting a fixed “guaranteed” salary vs. unstable hourly pay.

The clarification and loosening of fluctuating workweek rules, allows employers to effectively and legally build incentive pay on top of base pay for salaried non-exempt employees that will work different schedules from week to week. This will benefit employers and employees that are changing work schedules to practice social distancing during this pandemic. Employers can further limit worker contact with one another by staggering their work schedule by fluctuating workweeks, while having the option to reward employees that work less stable workweek schedules and still comply with overtime pay requirements.

Sources: DOL Green Lights Bonuses For Workers Without Set Schedules LAW360 Vin Gurrieri (5/20/2020); Department of Labor Wage and Hour Division Fluctuating Workweek Method of Computing Overtime under 29 CFR 778.114 Released 5/20/2020; DOL Announces Final Rule to Expand Access to Bonuses for Workers Paid Using Fluctuating Workweek Method. CCH HR Answers Now (5/22/2020)