There are two ways an FLSA covered employer may pay a nonexempt employee a fixed salary: the employer may pay a salary for a specific number of hours each week or the employer may pay a salary for whatever number of hours are worked in the week. Payment of a fixed salary for fluctuating hours of work – referred to as a Fluctuating Workweek – is permitted by existing Department of Labor (DOL) guidelines at 29 CFR section 778.114, subject to certain conditions, including a mutual understanding of the parties regarding the compensation arrangement.
Importantly, under a valid Fluctuating Workweek, the employer need only pay one half (0.5) the regular rate for each hour worked in excess of forty per week, instead of time and one half (1.5) the regular rate. (For more on the regular rate, click here.) The halftime premium for overtime hours would be paid in addition to the fixed salary. Referred to as the Fluctuating Workweek Method of Calculating Overtime, this arrangement benefits employees by providing them with a fixed salary despite fluctuating hours of work and benefits employers by reducing overtime costs.
Despite its benefits, the Fluctuating Workweek Method has been challenged in courts and its application is unclear. For this reason, on November 4, 2019, the DOL proposed new guidelines on the requirements of the Fluctuating Workweek Method of Calculating Overtime. The new guidelines are expressly intended to make it easier for employers to apply this method in the modern workplace. To read the proposed rulemaking, click here.
The main thrust of the DOL’s proposed rule is that additional pay of any kind on top of the fixed salary is compatible with the Fluctuating Workweek Method. Presently, courts have issued conflicting decisions on whether add-on pay disqualifies employees from the Fluctuating Workweek Method. Under the DOL’s proposed rule, employees would be eligible for the Fluctuating Workweek method regardless of whether they receive bonuses, additional hourly pay, additional lump sum pays, premiums, shift differentials, and/or incentive-related sums.
The DOL’s proposed rule does not, however, clarify exactly what it means for workweek hours to fluctuate sufficiently to qualify for this method of compensation. But the DOL’s proposed rulemaking document does state that an employee who works a “usual” number of hours may still be paid under the Fluctuating Workweek Method if there is some weekly variation in the number of hours worked. In this way, the Fluctuating Workweek Method may be most appropriate for employees who are transitioning from exempt to non-exempt status but wish to retain their fixed salary or salaried status. Employers considering the Fluctuating Workweek Method of Calculating Overtime should consult with legal counsel prior to making any changes to employee compensation. Change to represented employee compensation is a mandatory subject of bargaining under California’s Meyers-Milias Brown Act.
The DOL has requested comments on these proposed changes. Comments are due by December 5, 2019. Those interested can submit their comments online.
LCW will continue to monitor the comment period and will provide further updates as needed. Please visit our website at www.lcwlegal.com for regular briefings on the FLSA.