The DOL’s proposed rule does not impact the fundamental requirements of the fluctuating workweek method. Rather, the rule would permit employers to include bonuses, premium payments and other incentives in calculating the regular rate of pay that is then cut in half for overtime calculations.
On November 4, 2019, the U.S. Department of Labor (DOL) announced a proposed rule that would update the seldom-used “fluctuating workweek” method of compensation under the Fair Labor Standard Act (FLSA) to allow employers to include various types of incentive pay in calculating the regular rate of pay for computing overtime under the fluctuating workweek method. The DOL is initiating the change – a departure from a 2011 Obama-era rule – with an eye toward providing employers who use the fluctuating workweek method with more certainty and flexibility.
The Fluctuating Workweek Method of Overtime Compensation
Under the FLSA, overtime for non-exempt employees generally must be calculated at one and a half times an employee’s regular rate of pay. If certain conditions are met, however, the FLSA authorizes an alternative method of calculating overtime for non-exempt employees who work hours that vary widely from week to week. Under the fluctuating workweek method, employers may pay such employees overtime at only one-half their regular rate for all hours worked over 40 in a workweek.
Employers may only use the fluctuating workweek method if:
- The non-exempt employee’s hours fluctuate from week-to-week;
- The employer pays the employee a fixed salary each workweek, regardless of the number of hours worked by the employee, sufficient to ensure the employee is paid at least minimum wage for all hours worked; and
- There is a “clear mutual understanding” between the employer and the employee that the fixed salary is compensation for all hours worked each workweek (apart from overtime premiums).
The DOL’s proposed rule does not impact the fundamental requirements of the fluctuating workweek method. Rather, the rule would permit employers to include bonuses, premium payments and other incentives in calculating the regular rate of pay that is then cut in half for overtime calculations.
The DOL’s Existing Rule
Prior to 2011, the DOL had never explicitly forbidden the inclusion of bonuses and other incentives in the regular rate of pay used in calculating overtime under the fluctuating workweek method. In fact, a 2008 Notice of Public Rulemaking and a 2009 opinion letter – each issued toward the end of the George W. Bush administration – stated that the inclusion of these forms of compensation in the regular rate was consistent with the fluctuating workweek method. However, in 2011, the Obama administration promulgated a rule barring employers from including bonuses and other incentives in the regular rate of pay, intending to prevent employers from reducing salaries by shifting compensation to reflect performance.
The Proposed Rule
The proposed rule rejects the existing Obama-era rule, and makes “bonuses, premium payments, and other additional pay of any kind … compatible with the use of the fluctuating workweek method of compensation.” In issuing the proposed rule, the DOL asserts that the “divergent views of the [DOL] and the courts – and indeed, even among the courts – have created considerable uncertainty for employers regarding the compatibility of various types of supplemental pay with the fluctuating workweek method.” Further, citing data from the Bureau of Labor Statistics, the DOL notes it is not concerned with “problematic pay shifting,” asserting that in situations where employers are permitted to pay bonuses and premiums, supplemental pay in any occupation accounts for no more than five percent of employees’ overall compensation.
What This Means for Employers
The fluctuating workweek method is used by employers infrequently. However, if finalized, the rule could encourage employers who do use – or would consider using – this alternative method of calculating overtime for certain employees to increase the use of incentives as a component of compensation to attract and retain talent.
Importantly, however, employers would still need to comply with the fluctuating workweek method requirements under the FLSA. Employers who attempt to use the method for employees whose work hours are relatively consistent on a weekly basis, or who do not have a “clear and mutual understanding” (preferably documented in writing) with employees that their fixed salary is intended to compensate them for all hours worked (aside from an overtime premium), are at risk of violating the FLSA.
Furthermore, the DOL’s proposed rule would not impact the availability of the fluctuating workweek method under applicable state law. Employees get the benefit of federal or state law, whichever is more favorable, which means that in states that do not permit the use of the fluctuating workweek method – such as California, New Jersey and Pennsylvania – employers cannot take advantage of this alternative method of calculating overtime.
A 30-day public comment period will follow publication of the DOL’s proposed rule in the Federal Register. Interested employers can comment on the proposed rule by visiting regulations.gov.
For More Information
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