Employers could offer bonuses and other incentive-based compensation to employees with a fluctuating work week under a rule proposed by the U.S. Department of Labor’s Wage and Hour Division (WHD) on November 4, 2019.
The proposal modifies the current regulation which computes overtime compensation for salaried non-exempt employees who work varying weekly hours—known as a “fluctuating work week”—under the Fair Labor Standards Act (FLSA). The proposed rule clarifies that bonus and premium payments received in addition to fixed salaries can be used with the fluctuating work week method of compensation. It also calls for supplemental payments to be included as appropriate when calculating a regular rate of pay under the FLSA.
The Fluctuating Work Week
The fluctuating work week method of payment consists of employees receiving a fixed weekly salary, which is then divided by the number of hours the employee worked to arrive at the week’s base hourly pay rate. The employees will then be paid an extra 0.5 times their base rate per hour over 40 hours that they work during that work week. This an alternative to the ordinary FLSA method of paying 1.5 times the base rate per hour of overtime worked.
For an employer to use the fluctuating work week method, employee’s hours must truly vary from week-to-week, and the employees must receive the fixed salary even during weeks when they work less than ordinarily scheduled hours. There must also be a clear and mutual understanding of the payment method between the employee and employer. This method of calculating overtime pay is prohibited in some states, including Alaska, California, New Mexico and Pennsylvania.
Specific Revisions to the FLSA Proposed by the DOL
- Adds language to § 778.114(a) clarifying that bonuses, premium payments, and other additional pay of any kind are compatible with the use of the fluctuating workweek method of compensation.
- Adds illustrative examples to § 778.114(b) to demonstrate the fluctuating workweek method of calculating overtime where an employee is paid (1) a night shift differential and (2) a productivity bonus in addition to a fixed salary.
- Modifies the rule in a small way to make it easier to read and comprehend by listing in § 778.114(a) “each of the requirements for using the fluctuating workweek method” and removing any duplicative text.
- Alters the title of the regulation from “Fixed Salary for Fluctuating Hours” to “Fluctuating Workweek Method of Computing Overtime” to more clearly reflect the purpose of the subsection and to make it easier for employers to locate the applicable rules.
The proposal is aimed at reducing the uncertainty that employers face regarding their ability to offer bonuses to workers on a fluctuating work week. The proposal is intended to provide clarity for employers and job creators who are seeking new methods to compensate their employees.
Payroll calculations under the proposed rule will need to be made weekly, so employers will want to monitor this process carefully to confirm that payroll amounts are correct.
The DOL is accepting written comments on the proposed action through December 5, 2019,
Readers with questions on the proposed new overtime rule can contact partner Angel Castillo to discuss how the proposed rule may apply to them.
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