Employers are required by the Fair Labor Standards Act (“FLSA”) to pay overtime for hours worked over forty (40) in a single week to non-exempt employees based on the employee’s “regular rate.” This general principle has led to both complicated and nuanced questions in application when non-exempt employees are paid on other than an hourly basis.
To wit, nearly eight decades ago, the United States Supreme Court approved of the fluctuating workweek method of compensating non-exempt employees whereby an employee receiving a “fixed salary” for all hours of work in the week, which vary on a weekly basis. Under this method, in addition to the “fixed salary,” the employee is also entitled to receive a halftime premium for any overtime hours worked over 40 in a workweek, provided that the fixed salary provides at least the minimum wage and the employee and employer have a clear and mutual understanding that the salary covers all hours worked. See Overnight Motor Transp. Co. v. Missel, 316 U.S. 572 (1942). The Department of Labor codified the rule in the federal regulations in 1950, currently codified at 29 C.F.R. § 778.114 (“Section 114”). The theory underlying this approach is that the employee was already compensated at the regular rate for all hours in the week, including the overtime hours, so the only remaining amount due is the halftime premium. Sounds simple…but it’s not.
A longstanding question with respect to the fluctuating workweek method is what constitutes a “fixed salary”? More specifically, does the payment of additional compensation such as bonuses, per diems, night shift differential, and the like, disqualify the pay from being a fixed salary?
Soon neither employers nor courts will have to wrestle with that question. On May 20, 2020, the Department of Labor issued a final rule (effective August 7, 2020) amending Section 114 in several important ways:
• It expressly states that in addition to the weekly fixed salary, employers can also pay bonuses, premium payments, commissions, hazard pay, and other additional pay to employees paid under the fluctuating workweek method. But note—these additional payments must still be included in the regular rate for calculating the overtime premium unless otherwise excludable under Sections (7)(e)(1)-(8) of the FLSA.
• It provides examples demonstrating how this operates when an employee is paid a nightshift differential, a productivity bonus, or premium pay for weekend work.
In addition to the formal amendments to Section 114 described above, the preamble also resolved another historical question—do the employee’s weekly hours have to also fluctuate below forty (40) to qualify for the fluctuating workweek method? According to the preamble, the DOL “does not require than an employee’s hours must sometimes fluctuate below forty hours per week, so long as the employee’s hours worked do vary.”
For more information, the text of the final rule is available at: https://www.federalregister.gov/documents/2020/06/08/2020-10872/fluctuating-workweek-method-of-computing-overtime.
Note that employers must still comply with state and local law as well, and some states (e.g., California and New Mexico) do not permit a fluctuating workweek method of pay.
The Bottom Line
The DOL’s recent final rule resolves important historical questions about the fluctuating workweek method and allows employers additional flexibility with respect to scheduling, an increasingly important option in light of the COVID-19 pandemic. Employers utilizing the fluctuating workweek method should consider the rule’s impact on their pay structure, and employers not utilizing the method should consider whether the new ability to pay bonuses and other additional pay makes this an attractive compensation structure in light of current events.