Labor Department Expands Fluctuating Workweek Overtime Rule

​Under a final rule that the U.S. Department of Labor (DOL) announced May 20, employers will have greater flexibility to use the fluctuating workweek method of calculating overtime pay for salaried, nonexempt workers whose hours vary from week to week.

With this method, an employee who is entitled to overtime pay receives a fixed weekly salary, which is divided by the number of hours the employee actually worked in the week to determine the week's base hourly rate. The employee will then receive an additional 0.5 times their base rate for each hour worked beyond 40 in the workweek.

Prior to the new rule, employers generally couldn't use this method to calculate overtime pay for employees who receive bonuses and other incentive-based pay.

The amendments to the regulations state that employers can pay bonuses, premium payments or other additional pay, such as commissions and hazard pay, to employees without jeopardizing the fluctuating workweek method of compensation, explained Charles McDonald, an attorney with Ogletree Deakins in Greenville, S.C.

U.S. Secretary of Labor Eugene Scalia said that workers "will benefit from added flexibility in compensation" as they return to work after the pandemic. "Because of the clarity provided by this rule, employers will know they can pay workers' bonuses in a broader range of circumstances."

The final rule may help employers "navigate the challenges of the coronavirus," according to DOL Wage and Hour Division Administrator Cheryl Stanton. She said the rule gives employers "flexibility to provide hazard pay and to promote health and safety in the workplace through flexible work schedules."  

Fluctuating Hours, Fixed Salary

The fluctuating workweek method is an alternative to the Fair Labor Standards Act's (FLSA's) regular method of calculating overtime pay, under which employees are paid an hourly wage and receive 1.5 times their regular rate of pay for overtime hours.

To use the fluctuating workweek method, employees' hours actually have to change week to week, and employees must receive a fixed salary even when they work less than their regularly scheduled hours. Additionally, there must be a clear understanding between the business and employees about how workers are paid.

Previously, the DOL Wage and Hour Division's (WHD's) enforcement position was that an employer would not be able to use the fluctuating workweek method to calculate overtime pay if it paid compensation in addition to the guaranteed salary.

"This was one of the few WHD enforcement positions that created an impediment to an employer providing additional compensation to a nonexempt employee," McDonald said.

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

"Employers that want to use this method should bear in mind that it is not an exemption from the FLSA's requirements," said Caroline Brown, an attorney with Fisher Phillips in Atlanta. "Rather, it is a way for employers to better budget for labor costs and still offer a nonexempt employee the consistency of a salary in combination with other pay, particularly incentive pay." 

Employers should note that nonexempt employees generally must be paid overtime premiums that are calculated based on their regular rate of pay, which includes more than just an employee's base wages. Employers must consider "all remuneration for employment paid to, or on behalf of, the employee," except for some categories that are excluded from the calculation, such as discretionary bonuses, health insurance, paid leave and certain gifts.

McDonald mentioned that any compensation that is paid in addition to the fixed salary under the fluctuating workweek method will still have to be included in the regular rate of pay for overtime calculations.

Employees and their managers should understand that, despite being paid a salary, employees still need to keep accurate records of the time they spend working, Brown noted. If an employee's hours don't fluctuate greatly, she said, accurate time-keeping will help the employer demonstrate that the hours do fluctuate somewhat, and the employer is calculating different amounts of overtime pay for each workweek.

"Employers that want to use this method should bear in mind that it is not an exemption from the FLSA's requirements. Rather, it is a way for employers to better budget for labor costs and still offer a nonexempt employee the consistency of a salary in combination with other pay, particularly incentive pay."
—Caroline Brown, an attorney with Fisher Phillips in Atlanta

More Clarity

"There has been much confusion over the fluctuating workweek method," Brown noted.  

The prior version put a spotlight on how an employer would calculate the overtime due on the salary component, she said, but the fact patterns were read too literally by some courts, leading to determinations that other payments were inconsistent with this pay structure. "This led to a mix of holdings in different jurisdictions as to whether more overtime pay was due on the salary component."

Importantly, she added, the prior rule was only a published interpretation, whereas the new version is a regulation that has gone through notice and comment and is owed more deference by the courts. 

Stanton said the final rule "will provide much-needed clarity for job creators who are looking for new ways to better compensate their workers," 

Not Permitted in Some States

In addition to following federal law, employers must ensure that any fluctuating workweek plan they adopt complies with applicable state overtime laws.

Some states, such as Alaska, California, New Mexico and Pennsylvania, do not allow employers to use the fluctuating workweek method at all, and other states haven't addressed its use.

"The amendments to the FLSA regulations will not impact any state law that does not recognize the fluctuating workweek method of computing overtime pay," McDonald noted.