The U.S. Department of Labor, in its continuing effort to simplify its wage and hour rules, has proposed changes to the fluctuating workweek method of paying salaried employees who work varying hours from week to week. Under this method, employers can pay salaried employees a set salary every week, to cover all their straight time hours, whether few or many. If there are hours worked over forty, the obligation to pay overtime is met by dividing the set salary by the number of hours worked to yield the regular rate and paying half of that as the overtime premium for each hour worked over forty. This is much less expensive than paying time and a half. It also results in a reduced premium the more hours that are worked. (Examples: I. Salary of $600 per week. If it is for a fixed 40 hours, the regular rate would be $15 per hour. Each overtime hour would be paid at $22.50. If the employee works 50 hours, he would be paid $225.00 for his 10 hours of overtime, plus the $600 salary, totaling $825. II. If the $600 salary is for all straight time hours, the $600 would be divided by the total number of hours worked, so if 50 hours are worked, the regular rate would be $12.00 and the hourly premium would be half that, or $6.00. The overtime total would be $60, and the total pay for the week would be $660. That is a difference of $165. To see what happens when more hours are worked, assume a week of 60 hours: the regular rate become $10; the overtime premium goes down to $5; and the total overtime paid becomes $100.)
There has been an issue in the fluctuating workweek system with payment of bonuses and premiums in addition to the salary. For many years, the DOL did not oppose the inclusion of such extras. However, in 2011, in the preamble to a revision of the regulation, it took the position that such premiums were inconsistent with the notion of a “fixed” salary for the fluctuating workweeks. Courts added to the confusion by developing a concept of bonuses for “production” (permissible) vs. bonuses for “hours” (not O.K.) This lack of clarity for employers led some to opt to eliminate bonuses, or not use the fluctuating workweek method at all. Now, the Labor Department has revised its position and will permit employers to pay all types of bonuses and premiums in addition to the base salary. Such additional amounts must, however, be included in the regular rate calculation for each week, unless the payment is specifically excluded from the regular rate by regulation (such as the value of holiday turkeys).
The DOL has also provided several clarifying examples for applying the regulation. These should help employers understand the fluctuating workweek concept and avoid mistakes that could result in litigation. As a result, it is likely that many employers will strongly consider adopting this method for their salaried employees who work varying hours per week. With the eligibility for overtime being expanded in January due to the increase in the minimum compensation necessary for exemption from overtime, employers may find this method helpful both to pay overtime and to avoid quite as much cost as straight, conventional salaried overtime would entail.