DOL Final Rule: Overtime and Fluctuating Workweek

Earlier this week, the U.S. Department of Labor (DOL) announced a final rule allowing employers to pay bonuses, premium payments, or other additional pay, such as commissions and hazard pay using the fluctuating workweek method of compensation. For overtime purposes, these supplemental payments must be included in the calculation of the regular rate unless they are excludable under the federal Fair Labor Standards Act (§§ 7(e)(1) – (8)). Currently, this fluctuating workweek method may not be used by employers who compensate their employees with bonuses or other incentive-based pay.

The Fair Labor Standards Act (FLSA) requires that employers pay their nonexempt employees overtime of at least one and one-half times their regular rate for all hours worked over 40 in a workweek. The regular rate is computed for each workweek and is all remuneration for employment, with some exclusions, divided by the number of hours worked. The regular rate is determined by dividing the total pay in any workweek by the total number of hours actually worked.

Fluctuating Workweek Method

The fluctuating workweek method allows employers to calculate overtime pay for nonexempt employees who are paid a set salary for hours that fluctuate each week.  An employer may use this method to compute overtime compensation when:

• The employee’s work hours fluctuate from week to week;
• The employee receives a fixed salary that does not vary with the number of hours they work in the workweek, whether few or many;
• The amount of the employee’s fixed salary is enough to pay them at least the applicable minimum wage for every hour they worked in workweeks when they worked the most hours;
• The employee and the employer have a clear and mutual understanding that the employee’s fixed salary is compensation (apart from overtime premiums and any bonuses, premium payments, commissions, hazard pay, or other additional pay of any kind not excludable from the regular rate under FLSA §§ 7(e)(l) – (8) for the total hours worked each workweek regardless of the number of hours; and
• The employee receives overtime pay, in addition to their fixed salary and any bonuses, premium payments, commissions, hazard pay, and additional pay of any kind, for all overtime hours worked at no less than one-half the employee’s regular rate of pay for that workweek.

Since the salary is fixed, an employee’s regular rate will vary from week to week and is determined by dividing the amount of the salary and any non-excludable additional pay received each workweek by the number of hours worked in the workweek.

Payment for overtime hours, at no less than one-half of this rate, is compliant because these hours have already been compensated at the straight time rate (by payment of the fixed salary and non-excludable additional pay). Payment of any bonuses, premium payments, commissions, 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 excludable under § 7(e)(1) through (8).

Scenario and Example

The DOL provides the following scenario and example to demonstrate overtime and a fluctuating workweek:

Scenario: An employee whose hours of work do not customarily follow a regular schedule but vary from week to week, whose work hours never exceed 50 hours in a workweek, and whose salary of $600 a week is paid with the understanding that it constitutes the employee’s compensation (apart from overtime premiums and any bonuses, premium payments, commissions, hazard pay, or other additional pay of any kind not excludable from the regular rate under §§ 7(e)(1) – (8)) for all hours worked in the workweek.

Example: If during the course of four 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).

The DOL included a disclaimer that this final rule was submitted to the Office of the Federal Register (OFR) for publication, and is currently pending placement upon public inspection at the OFR and publication in the Federal Register. The current version of the final rule may vary from the published version if minor technical or formatting changes are made during the OFR review process. Importantly, only the version published in the Federal Register is the official final rule.

The final rule is effective 60 days after final publication.

Read the announcement and final rule.