LawFlash

DOL: Employers Offering Incentive-Based Pay Can Use Fluctuating Work Week Method to Calculate OT

June 08, 2020

The US Department of Labor (DOL) published a Final Rule on June 8 confirming that paying bonuses, commissions, and other incentive-based pay to salaried, nonexempt employees does not disqualify employers from using the fluctuating workweek (FWW) method of calculating overtime pursuant to the Fair Labor Standards Act (FLSA).

Under the FWW method, the employee’s salary compensates for all hours worked regardless of how many. Thus, the overtime premium for the salary component of pay is the weekly salary divided by all hours worked in the workweek multiplied by 0.5. Prior to issuing the Final Rule, there was uncertainty as to the DOL’s position with regard to whether providing compensation in addition to salary precluded the use of the FWW method.

The Final Rule, which will go into effect on August 7, 2020, also updates FWW regulations to make them easier to read, clarifies requirements, and provides examples.

Background

Section 7(a) of the FLSA requires employers to pay their nonexempt employees overtime pay of at least “one and one-half times the regular rate at which [the employee] is employed” for all hours worked in excess of 40 in a workweek.[1] Where an employee receives a fixed salary for fluctuating hours, however, an employer may use the FWW method to compute overtime compensation owed, if certain conditions are met. For example, an employee paid under the FWW method must work hours that vary from week to week and receive a pre-established fixed salary intended to compensate all “straight time” (non-overtime) hours the employee works. This salary must be sufficient to pay at least minimum wage for all hours worked, and the employer and employee must have a “clear and mutual understanding” that the salary will remain the same regardless of the hours worked each week.[2]

In such cases, because the salary compensates the employee at straight time rates for all hours worked in the workweek, the salary component of the employee’s regular rate is the salary divided by all hours worked in the workweek. The overtime premium for the salary component of pay is an additional one-half of the regular rate per overtime hour. Because the employee’s hours of work fluctuate from week to week, the regular rate (and therefore the overtime premium rate) must be determined separately each week based on the number of hours actually worked each week.

Since 2011, some confusion has developed regarding whether an employer may use the FWW method if it pays bonuses, commissions, and/or other incentive pay on top of the employee’s fixed salary. Prior to 2011, the DOL had opined that such additional compensation was consistent with the FWW method.[3]

In the preamble to new rules issued in 2011, however, the DOL opined that additional payments disqualified employers from using the FWW method, because they conflicted with the requirement that the employee receive a “fixed” salary and presumably were inconsistent with the 1942 decision of the US Supreme Court from which the FWW method originated.[4] Since 2011, courts have reached inconsistent conclusions regarding whether additional payments preclude use of the FWW method to calculate overtime premiums. Some courts have permitted so-called production bonuses but not hours-based bonuses under the FWW pay method, a distinction the DOL has never made.[5] In issuing the Final Rule published on June 8 the DOL hopes to end uncertainty and clarify its position on this issue.

The Final Rule

In the Final Rule, the DOL changed the title of the applicable regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of Computing Overtime.” The DOL clarified its position that bonuses, premium payments, commissions, hazard pay, and other incentives are compatible with the use of the FWW method of calculating overtime premiums.[6] In addition, the Final Rule provides examples of how to properly calculate pay under the FWW method when an employee receives a nightshift differential and a productivity bonus,[7] as well as several other clarifications regarding the application of the FWW method. For instance, the Final Rule provides that, although the employer and employee must have a clear and mutual understanding that the fixed salary compensates for the total hours worked each workweek, that requirement does not need to extend to the specific method used to calculate overtime pay.[8] This is significant because it removes any argument that the employee needs to understand that overtime is calculated using the FWW method.

In the preamble to the Final Rule, DOL also opined that the FWW pay method’s requirement that an employee’s hours “fluctuate from week to week” does not require fluctuation both above and below 40 hours per week.[9] DOL also explained that it rejected the proposal of some commenters to associate the term “fixed salary” with the “salary basis” requirement applicable to the executive, administrative, and professional (“EAP” or “white collar”) minimum wage and overtime exemptions under 29 U.S.C. 213(a), noting that the DOL has consistently held that the permissible deductions from salary set forth in the regulations relevant to these exemptions are inapplicable to the FWW method. Thus, an employer utilizing the FWW method may not make deductions from an employee’s salary for absences occasioned by the employee.[10] For example, an employer using the FWW method may not make deductions from an employee’s salary when the employee has exhausted his or her sick leave bank or has not yet earned sufficient sick leave to cover an absence due to illness. Nonetheless, the Final Rule states that employers using the FWW method may take occasional disciplinary deductions from the employee’s salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions do not cut into the minimum wage or overtime pay required by the FLSA.[11]

DOL expects the rule will allow employers and employees to better utilize flexible work schedules, and observed that this is especially important as workers return to work following the coronavirus (COVID-19) pandemic. According to DOL, some employers will adopt variable work schedules, including staggering their start and end times for the day, to promote social distancing in the workplace. DOL believes “this rule will make it easier for employers and employees to agree to unique scheduling arrangements while allowing employees to retain access to the bonuses and premiums they would otherwise earn.”[12]

Implications of the Final Rule and Recommendations for Employers

Employers who use the FWW method of calculating overtime may now consider paying supplemental pay, and employers who have avoided using this method may now take another look at this option. Not all states permit the FWW method, however, so employers are reminded to check each state’s law where employees are located. It also is unclear how deferential courts will be to this latest DOL rule given the agency’s changing positions and whether certain courts will continue to make a distinction between hours-based incentives and production-based incentives. Additionally, employers considering adopting the FWW method should consider non-legal factors such as how their particular workforce might react to a change in how overtime pay is calculated. But, as DOL noted, in light of the myriad and evolving workplace changes brought about by the COVID-19 pandemic, including how to safely reopen the workplace, this may be an opportune time to review whether to use the fluctuating workweek method.

If you have any questions about the Final Rule, the FWW method in general, or any other wage and hour questions, please contact the Morgan Lewis lawyer (s) with whom you regularly work or those listed below.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Los Angeles
John S. Battenfeld

Miami
Anne Marie Estevez

New York
Christopher A. Parlo
Samuel S. Shaulson

Orange County
Barbara J. Miller

Philadelphia
Michael J. Puma

Princeton
Thomas A. Linthorst

Washington, DC
Russell R. Bruch
Susan Harthill



[1] 29 U.S.C. § 207(a).

[2] 29 C.F.R. § 778.114(a).

[3] 85 FR 34612

[4] Id. at 34613

[5] Id.

[6] 29 C.F.R. § 778.114(a).

[7] Id. at § 778.114(b).

[8] 29 C.F.R. § 778.114(a)

[9] 85 FR 34615

[10] Id. at 34616

[11] 29 C.F.R. § 778.114(d).

[12] 85 FR 34631