Calculating Overtime Under The Fluctuating Workweek Method: Important Changes for Employers
Calculating Overtime Under The Fluctuating Workweek Method:
Important Changes for Employers
Employers typically have to pay non-exempt employees overtime at one and a half times an employee’s regular rate of pay; however, some states allow employers to use the fluctuating workweek method and pay overtime at only one-half of an employee’s regular rate for all hours worked over 40 in a workweek. The states that do not allow use of this method are: Alaska, California, Connecticut, Montana, New Jersey, New Mexico, and Pennsylvania.
This method is only available if the employee works fluctuating hours from week to week and meets additional requirements discussed below.
Importantly, the Department of Labor (“DOL”) recently revised its regulations for computing overtime compensation under the fluctuating workweek method. The new regulations clarify that while employers that pay under the fluctuating workweek method must include as the basis to calculate the compensation rate non-discretionary bonuses, inclusion of discretionary bonuses to calculate the rate of pay is not required. The final rule is effective on August 7, 2020.
Fluctuating Workweek: How It Works
Under the Fair Labor Standard Act (FLSA), employers generally must pay non-exempt employees for overtime at one and a half times an employee’s regular rate of pay. However, in states that permit the fluctuating workweek method, the FLSA allows employers to pay employees overtime at one-half of the employee’s regular rate if certain conditions are met. An employer may use the fluctuating workweek method if 1) the employee works fluctuating hours from week to week; 2) the employee receives a regular weekly salary for all hours worked in a week (no matter how few or how many) sufficient to ensure the employee is paid at least minimum wage for all hours worked; and 3) there is a “clear mutual understanding” between the employer and employee that the fixed salary is “compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number.” 29 CFR 778.114(a). If all of the above requirements are satisfied, then an employer may pay the employee for any overtime (hours over 40 in a single workweek) at one-half of whatever the employee’s rate is for that specific workweek.
The basic idea behind the overtime calculation for a fluctuating workweek is that the employee has already received payment for any and all hours worked during the week, including hours over 40, so the employee is only entitled to receive an additional one-half of their daily rate for any overtime hours. Because an employer must include nondiscretionary bonuses and premium payments in the calculation of an employee’s weekly “rate” and because the number of hours worked changes week to week, the employee’s “rate” will vary from week to week and must also be calculated weekly before paying any overtime.
Practical tip: Employers that use the fluctuating workweek method should consider documenting the “clear mutual understanding” with the employee in writing, preferably signed by the employee, to avoid potential future employee claims that the employer violated the FLSA (i.e. because the employee did not understand how they were being paid for overtime).
DOL Revisions: What Changed and What Does It Mean
Employers who chose to pay employees under the fluctuating workweek method must include non-discretionary bonuses and premium payments as part of the employee’s “weekly rate” for purposes of calculating overtime. And prior to this new rule, employees’ additional discretionary bonuses must have been included in the rate of pay calculation. This hampered employers’ ability to use bonuses and additional premium compensation to draw in (and retain) quality employees if those employees were working under a flexible work schedule (with hours fluctuating each week) and to calculate rate of pay each pay period. The new rule clarifies 29 CFR 778.114 and makes it clear that employers using the fluctuating workweek method to calculate overtime compensation may pay bonuses and premiums in addition to the minimum salary, without having to include them in rate of pay, enabling employers a broad range of flexibility to compete in the job market as they see fit.
An example under the new rule to calculate overtime pay under the fluctuating workweek method when there is also some sort of non-discretionary bonus in play may be helpful: an employee is paid a weekly salary of $500 under a fluctuating workweek method. The employer also offers an additional $5/hr in bonus pay for any graveyard hours. If the employee works 50 hours in a workweek and 10 of those hours are graveyard hours, the employee’s weekly rate for that week is $11 an hour ($500 in salary plus $50 in bonus compensation = $550 weekly salary. $550 divided by 50 hours = $11 per hour). The employee’s overtime compensation for the week is $55 (0.5 times $11/hr = $5.50/hour for any overtime hours. $5.50 per hour times 10 overtime hours = $55). The employee’s total compensation for the week is $605 ($500 salary + $50 in bonus pay + $55 overtime pay = $605 total compensation).
Remember, non-discretionary compensation must be included in the calculation for rate of pay, but not most discretionary compensation, such as additional bonuses or premium payments. Payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, are considered discretionary (and thus do not need to be included in weekly overtime calculations), so long as the amount of the payment is not measured by or dependent on hours worked, production, or efficiency. An employer’s failure to include a non-discretionary bonus in calculating the employee’s weekly rate could result in a violation of the FLSA and a lawsuit down the road.
Practical tip: Employers using bonuses or considering whether to implement certain types of bonuses need to analyze whether the bonus would be considered non-discretionary and thus must be included for purposes of calculating overtime. Wage and hour rules and guidance can be tricky and employers could end up violating the FLSA if they are not careful.
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