New DOL Guidance on Fluctuating Workweek Compensation Method

On May 20, 2020, the U.S. Department of Labor (DOL) announced a final rule that allows employers to pay bonuses or other incentive-based pay to salaried, nonexempt employees whose hours vary from week to week. This means employers can pay such bonuses to employees while using the fluctuating workweek method under the FLSA.

What is the fluctuating workweek method?

Under the “fluctuating work week method,” employers and employees can agree the employee will be paid a fixed salary regardless of the hours actually worked. The following circumstances must exist to use this method:

1. The employee’s hours fluctuate from week to week;

2. The employee receives a fixed salary that doesn’t vary depending on the hours worked;

3. The amount of the employee’s fixed salary never drops below the minimum wage for any week;

4. The employer and employee have a clear and mutual understanding that the fixed salary is compensation for the total hours worked each week, regardless of the hours actually worked; and

5. The employee receives overtime compensation in addition to the salary for all overtime hours worked at a rate of not less than one-half of the employee’s regular rate of pay for that workweek.

What does this have to do with bonuses or premium pay?

As all HR professionals know, the Fair Labor Standard Act (FLSA) requires employers to provide overtime pay to employees who work over 40 hours in a workweek. For employees who are compensated under the “fluctuating work week method,” employers must determine the regular rate of pay in order to determine the overtime rate. This requires the employer to divide the employee’s total pay by the number of hours actually worked. The final rule provides clarification on how to include bonuses or premium pay when calculating regular rate of pay and overtime pay. Now, it is clear that payment of any bonuses, premium payments, commission, hazard pay, and additional pay of any kind is compatible with the fluctuating workweek method of overtime payment, and such payments must be included in the calculation of the regular rate (unless such payments are excludable under section 7(e)(1) through (8) of the FSLA).

Can we see some examples of how to include additional compensation when calculating the regular rate and overtime rate?

Here are the examples provided by the DOL:

1. Example. If during the course of 4 weeks this employee receives no additional compensation and works 37.5, 44, 50, and 48 hours, the regular rate of pay in each of these weeks is $16, $13.64, $12, and $12.50, respectively. Since the employee has already received straight time compensation for all hours worked in these weeks, only additional half-time pay is due for overtime hours. For the first week the employee is owed $600 (fixed salary of $600, with no overtime hours); for the second week $627.28 (fixed salary of $600, and 4 hours of overtime pay at one-half times the regular rate of $13.64 for a total overtime payment of $27.28); for the third week $660 (fixed salary of $600, and 10 hours of overtime pay at one-half times the regular rate of $12 for a total overtime payment of $60); for the fourth week $650 (fixed salary of $600, and 8 overtime hours at one-half times the regular rate of $12.50 for a total overtime payment of $50).

2. Example. If during the course of 2 weeks this employee works 37.5 and 48 hours and 4 of the hours the employee worked each week were nightshift hours compensated at a premium rate of an extra $5 per hour, the employee’s total straight time earnings would be $620 (fixed salary of $600 plus $20 of premium pay for the 4 nightshift hours). In this case, the regular rate of pay in each of these weeks is $16.53 and $12.92, respectively, and the employee’s total compensation would be calculated as follows: For the 37.5 hour week the employee is owed $620 (fixed salary of $600 plus $20 of non-overtime premium pay, with no overtime hours); and for the 48 hour week $671.68 (fixed salary of $600 plus $20 of non-overtime premium pay, and 8 hours of overtime at one-half times the regular rate of $12.92 for a total overtime payment of $51.68). This principle applies in the same manner regardless of the reason for the hourly premium rate (e.g., weekend hours).

3. Example. If during the course of 2 weeks this employee works 37.5 and 48 hours and the employee received a $100 productivity bonus each week, the employee’s total straight time earnings would be $700 (fixed salary of $600 plus $100 productivity bonus). In this case, the regular rate of pay in each of these weeks is $18.67 and $14.58, respectively, and the employee’s total compensation would be calculated as follows: For the 37.5 hour week the employee is owed $700 (fixed salary of $600 plus $100 productivity bonus, with no overtime hours); and for the 48 hour week $758.32 (fixed salary of $600 plus $100 productivity bonus, and 8 hours of overtime at one-half times the regular rate of $14.58 for a total overtime payment of $58.32).

Other Considerations?

It is important to remember that the fluctuating workweek method of pay is for employees whose workweeks truly vary. Where the facts indicate that an employee is being paid for overtime hours at a rate no greater than which the employee receives for non-overtime hours, an employer cannot rely on the fluctuating workweek overtime formula to show compliance with the FMLA.

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