Under the current U.S. Department of Labor (DOL) regulations, if certain conditions are met, an employer may pay an employee who works fluctuating hours a fixed salary for all hours worked and then an additional half-time for all hours over 40–a number that decreases as the number of hours increases. Uncertainty regarding this fluctuating workweek method has resulted in many employers opting not to use it. However, on November 5, 2019, the DOL announced a proposed rule that seeks to clarify that employers may provide additional pay such as bonuses or premiums to employees subject to the method, even when the additional pay is tied to the number of hours worked, without jeopardizing the use of the method.
The Fair Labor Standards Act (FLSA) guarantees a minimum wage for all hours worked and overtime for any hours worked over 40 per week for all covered, non-exempt employees. Under the FLSA’s regular method of calculating overtime pay, employees are paid an hourly rate and receive 1.5 times that rate for any overtime hours.
As an alternative to this, an employer may use the fluctuating workweek method for computing overtime compensation under federal law; some states, including Alaska, California, Connecticut, New Mexico, New Jersey and Pennsylvania, prohibit employers from utilizing this method to calculate overtime pay. Under this method, if a non-exempt employee works hours that vary from week to week and receives a pre-established fixed salary intended to compensate all “straight time” (non-overtime) hours worked, the employer satisfies the FLSA’s overtime pay requirements if, in addition to the salary amount, it pays at least .5 times the base rate for any hours worked in excess of 40. The salary must remain fixed and be sufficient to pay at least minimum wage for all hours worked, and the employer and employee must have a “clear and mutual understanding” that the salary will remain the same regardless of the hours worked each week.
Over the past several years, courts throughout the United States have reached inconsistent decisions on whether additional compensation, such as bonuses, is permitted under the method. The DOL now seeks to clarify that “bonuses, premium payments, and other additional pay of any kind are compatible with the use of the fluctuating workweek method of compensation.” It also seeks to add examples to the rule to illustrate the fluctuating workweek method of calculating overtime where an employee is paid (1) a nightshift differential and (2) a productivity bonus in addition to a fixed salary.
If the proposed rule is finalized, employers will be able to further reward productive non-exempt, salaried employees with less risk of their overtime pay methods being challenged. Public comments are due by December 5, 2019, and upon review of the comments, the DOL will issue a final rule at some point in 2020.
For questions or guidance on the above proposed rule or your wage and hour policies and procedures, please contact George Morrison (646.837.5776; email@example.com) or any member of our Labor and Employment Group.