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Attorneys discuss pros and cons of using this technique to calculate overtime pay
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The fluctuating workweek method of calculating overtime pay can be a great tool for employers, but it doesn't work for all jobs or in all states.
Under this method, employees who are entitled to overtime pay receive a fixed weekly salary, which is divided by the actual number of hours an employee worked in the week to determine the week's base hourly rate. The employees will then receive an additional 0.5 times their base rate for each hour worked beyond 40 in the workweek.
This is an alternative to the Fair Labor Standards Act's regular method of calculating overtime pay, under which employees are paid an hourly rate and receive 1.5 times that rate for overtime hours.
[SHRM members-only toolkit: Calculating Overtime Pay in the United States]
There will nearly always be challenges when employers use an alternative method to calculate overtime pay, according to Andrew Burnside, an attorney with Ogletree Deakins in New Orleans.
However, the fluctuating workweek method is a great tool if the workplace supports it, he said in an interview with SHRM Online.
"The fluctuating workweek method presents benefits for both employers and employees," according to Steven Ferenczy, an attorney with Fisher Phillips in Atlanta.
"For employers, the fluctuating workweek method may help reduce labor costs as compared to an hourly basis of pay and can create a more efficient and effective workforce," he said.
The main benefit for employees is that they will generally receive the same fixed pay even when they work less than 40 hours in a particular week, he added.
Receiving a fixed salary can help nonexempt employees with fluctuating hours plan for their monthly expenses, Burnside said.
Employers need to be aware of the additional compliance steps they must take when using this method as opposed to the regular time-and-one-half calculation.
There are two primary requirements, Burnside explained.
First, the employees' hours actually have to fluctuate on a week-to-week basis, and employees must receive the fixed salary even when they work less than their regularly scheduled hours.
Second, there must be a clear mutual understanding between the business and employees about how workers are paid.
The agreement could be implied if an employee works under a fluctuating workweek arrangement over a period of time. However, Burnside said, the best practice is to have a written agreement—ideally one that is presented to the worker at the start of employment.
Melissa Siebert, an attorney with BakerHostetler in Chicago, noted that some states prohibit employers from using this method altogether.
Currently, Alaska, California, New Mexico and Pennsylvania do not permit its use.
Siebert explained that some states, such as California, have more stringent overtime payment laws that require payment of daily overtime.
"These states, or courts in these states, are less likely to allow the fluctuating workweek method because they more heavily regulate overtime pay overall," she said.
Other states haven't addressed the fluctuating workweek method at all. "So it is not entirely clear whether this method would be permitted," Siebert said.
She added that it's a good idea to have an attorney review the recent cases and any wage and hour statutes in the specific states where the method would be implemented.
"Employers should know that the risk inherent in the fluctuating workweek method may be the biggest in states or court districts where it remains unsettled or unclear as to whether the method is permitted," she said.
Circumstances vary so much from one employer and workforce to another and among different industries that it really isn't possible to generalize about the jobs for which this practice works best, Ferenczy said.
"But as an example, this method works well for transitioning employees who were previously treated as exempt" who have become nonexempt, he added.
Siebert noted that some employers implemented fluctuating workweek payment methods prior to December 2016, when the Department of Labor's now-delayed overtime rule was scheduled to take effect.
"Generally, it has tended to be more commonly used with well-paid employees who are eligible for overtime and whose hours vary over the course of workweeks," she added.
It is commonly used for positions "we would think of as white-collar jobs where the employee might well be eligible for overtime based on the job classification and for highly-paid blue-collar jobs where overtime is fairly frequent and varied," Siebert explained.
Burnside said it may also be useful for paraprofessionals, such as paralegals, and so-called gray-collar employees who perform some blue- and some white-collar duties and work with exempt employees and will be receptive to the salary as a status enhancer.
"Another example might be situations in which there are seasonal fluctuations in the amount of work to be done," Ferenczy said. "The fluctuating workweek method removes much of the uncertainty and variation in pay that tends to occur with seasonal fluctuation."
As an example, Burnside said this method may work well for landscaping employees. These employees might only work a few hours one week because of rain and then they may work a lot of hours the next week to make up for it when the weather is better.
"The most important thing for multistate employers to do is to ensure that they have a full understanding of all of the potential state and federal laws that may prohibit or restrict the use of the fluctuating workweek method," Ferenczy said.
Employers must ensure that any fluctuating workweek plan they adopt complies with the overtime laws of every state and other jurisdiction in which it will be used.
"Moreover, it is important for multistate employers to realize that some jurisdictions have other requirements that may impact their use of the fluctuating workweek method," Ferenczy added.
These other laws may include higher minimum wage rates, daily overtime requirements, restrictions on paycheck deductions and more.
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