Specifically, the DOL made clear that bonus and premium payments are compatible with the use of the fluctuating workweek method of compensation.
On May 20, 2020, the U.S. Department of Labor (DOL) unveiled a final rule that updates the “fluctuating workweek” method of calculating overtime compensation under the Fair Labor Standards Act (FLSA). The final rule, which followed the DOL’s Notice of Proposed Rulemaking in November 2019, allows employers to include incentive-based payments such as bonuses, premium payments and other additional pay of any kind. The rule revamps the DOL’s existing regulatory framework for how overtime is calculated under the FLSA for salaried workers who are not exempt from overtime and whose hours vary every week. Specifically, the rule clarifies that payments in addition to the fixed salary are compatible with the use of the fluctuating workweek method of compensation, and that such payments must be included in the calculation of the regular rate as appropriate under the FLSA.
The DOL believes this rule will allow employers and employees to better utilize flexible work schedules, especially as workers return to work following the COVID-19 pandemic. As the DOL states in its preamble:
Some employers are likely to promote social distancing in the workplace by having their employees adopt variable work schedules, possibly staggering their start and end times for the day. 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.
Background on the Fluctuating Workweek Method of Overtime Compensation
By way of background, under the FLSA, overtime for nonexempt employees generally must be calculated at one and a half times an employee’s regular rate of pay. If certain conditions are met, however, the FLSA authorizes an alternative method of calculating overtime for nonexempt employees who work hours that vary widely from week to week. Under the fluctuating workweek method, employers may pay such employees overtime at only one-half their regular rate for all hours worked over 40 in a workweek.
Employers may only use the fluctuating workweek method if:
- The nonexempt employee’s hours fluctuate from week to week;
- The employer pays the employee a fixed salary each workweek, regardless of the number of hours worked by the employee, sufficient to ensure the employee is paid at least minimum wage for all hours worked; and
- There is a “clear mutual understanding” between the employer and the employee that the fixed salary is compensation for all hours worked each workweek (apart from overtime premiums).
The DOL’s Final Rule
As mentioned above, the DOL had announced its proposed modifications to the existing rule in November 2019, which was followed by a 30-day period of public comment. After considering the comments, the DOL issued its final rule clarifying that payments in addition to the fixed salary are compatible with the use of the fluctuating workweek method of compensation, and that such payments must be included in the calculation of the regular rate as appropriate under the FLSA. Specifically, the DOL made clear that bonus and premium payments (whether hours-based, production-based or other) are compatible with the use of the fluctuating workweek method of compensation. The DOL also clarified that the principles that govern whether a bonus is or is not discretionary―and therefore excludable from the regular rate―are the same whether an employer is using the fluctuating workweek method or some other method of determining the regular rate. In general, employers are able to exclude discretionary bonuses from the regular rate, but must include nondiscretionary bonuses.
For example, an employee receives a weekly salary of $500 and works 50 hours during a workweek, and that same workweek the employee also receives a $100 nondiscretionary bonus. Per the fluctuating workweek, the regular rate is $600 (i.e., $500 in salary plus $100 in bonus compensation divided by 50 hours equals $12 an hour). The overtime premium is 0.5 times ($12 an hour) times 10 hours equaling $60, for a total weekly compensation of $660.
In addition, the final rule incorporates examples to illustrate the fluctuating workweek method of calculating overtime where an employee is paid (1) a nightshift differential, (2) a productivity bonus in addition to a fixed salary and (3) premium pay for weekend work. For example, suppose an employee was paid $491 in fixed weekly salary plus an $8 per hour nightshift premium. In a week in which the employee works 50 hours, including four hours for which the employee receives the nightshift premium, the employee’s straight time pay is $523 ($491 salary plus $32 nightshift premium), and the regular rate is $10.46. The employer need only pay an additional $5.23, half time the regular rate, for each of the 10 overtime hours, for a total of $52.30.
The final rule also makes nonsubstantive revisions to enhance clarity.
While the final rule generally followed the Notice of Proposed Rulemaking, it should be noted that in comparison, the final rule provides more (albeit nonexhaustive) examples of the types of additional compensation that may be included while using the fluctuating workweek method, specifically stating that “any bonuses, premium payments, commissions, hazard pay, or other additional pay of any kind” may be included. This includes premium pay for weekends, graveyard shift differential and nondiscretionary bonuses.
The final rule will be effective 60 days after publication in the Federal Register.
Takeaway for Employers
While traditionally the fluctuating workweek was rarely used by employers, the fallout of the COVID-19 pandemic and resultant need for flexibility may encourage more employers to adopt the fluctuating workweek as a way to provide flexibility and retain top talent in an uncertain economic environment. Before incorporating the fluctuating workweek, however, employers should consult with counsel to determine if this method is allowed, since not all states permit the use of the fluctuating workweek method (e.g., California, New Jersey, Pennsylvania and Connecticut (for retail employees)).
For More Information
If you have any questions about this Alert, please contact Eve I. Klein, Adam Keatingany of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.