Paying Incentives Under Fluctuating Workweek Method Violated FLSA

 

By Roger S. Achille January 2, 2019
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​Employers can generally use the fluctuating workweek (FWW) method to calculate overtime pay under the Fair Labor Standards Act (FLSA) if certain requirements are met. But an employer could not use this method when it also provided incentive pay, the 5th U.S. Circuit Court of Appeals ruled.

Saybolt, a petroleum products company, used two different methods to pay overtime to oil and gas inspectors. One group was paid overtime using the FLSA's standard calculation of one and a half times their regular rate for all hours worked beyond 40 in a week.

A second group of inspectors received overtime compensation under the FWW method. Federal regulations state that this method is permissible when an employee works hours that fluctuate from week to week and the employee agrees that a fixed weekly salary will constitute straight-time pay for all hours worked in a week.

The regular rate of pay is determined by dividing the employee's weekly base salary by the total number of hours the employee actually works during the week. Because the hours worked each week fluctuate, the regular rate under the FWW method will fluctuate from week to week as well. Notably, under the FWW method, the overtime rate is one-half the regular rate because the fixed weekly salary is meant to compensate all hours worked, including overtime hours, with a premium added for hours worked beyond 40.

[SHRM members-only toolkit: Complying with U.S. Wage and Hour Laws and Wage Payment Laws]

The company also paid incentives to employees who worked on a scheduled day off, worked at sea or worked on a scheduled holiday. Non-FWW inspectors were ineligible for these incentives. When calculating the regular rate, Saybolt added weekly incentive payments to the weekly base salary.

The 5th Circuit held that Saybolt's incentive payments disqualified it from using the FWW method. The court explained that the FWW method requires a fixed weekly salary that does not vary by the number of hours worked, whereas Saybolt's incentive payments caused weekly variances in the FWW inspectors' straight-time pay. Saybolt argued that nothing in the federal regulations expressly prohibits an employer from paying additional sums on top of a fixed salary—particularly when those payments are included in the regular rate and increase the overtime premium. Unpersuaded, the court emphasized that because Saybolt's incentive payments depended on the types of hours FWW inspectors worked each week, their weekly straight-time compensation was not a fixed rate, as required under the FLSA. Consequently, the 5th Circuit concluded that Saybolt failed to comply with the FWW method's requirements.

Dacar v. Saybolt, L.P., 5th Cir., No. 16-20751 (Oct. 18, 2018).

Professional Pointer: Time-based bonuses, unlike performance-based commissions, violate fluctuating workweek regulations because they make weekly pay dependent on the type of hours worked.

Roger S. Achille is an attorney and a professor at Johnson & Wales University in Providence, R.I.

[Visit SHRM's resource page on FLSA exemption classification.]

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