A new proposed rule from the U.S. Department of Labor (DOL) intends to clarify that employers who pay nonexempt workers bonuses or other incentive-based pay in addition to a fixed salary can use the fluctuating workweek (FWW) method of paying overtime as a way to keep costs down as long as other requirements for using the method are met.
The proposal would revise the regulation for computing overtime compensation for salaried, nonexempt employees who work hours that vary each week (i.e., a fluctuating workweek) under the Fair Labor Standards Act (FLSA). The DOL is touting the proposed rule, published in the Federal Register on November 5, as a way to expand access to bonuses to employees whose hours vary from week to week.
If finalized, the rule would likely encourage more employers to use the FWW method of computing overtime, since employers interpreting current rules might be hesitant to use the method if they also pay bonuses or other premium payments. The proposed rule clarifies that employers whose employees qualify for the FWW method can use it as long as the bonuses or other payments are included in the employee’s regular rate of pay.
‘It Can Limit Overtime Expense’
Marylou Fabbo, an attorney with Skoler, Abbott & Presser P.C. in Springfield, Massachusetts, says employers that are otherwise eligible to use the FWW method have been concerned that paying compensation in addition to a fixed salary may disqualify them from using the method. So, the proposed rule is expected to remove a barrier to keeping overtime costs down for certain types of employees.
“An organization employing nonexempt employees who do not always fall within the standard 40-hour workweek can benefit from using the fluctuating workweek method of calculating overtime because it can limit overtime expense,” Fabbo says.
How the Method Works
Not all jobs qualify for the FWW method, and employers that don’t meet the requirements can find themselves liable for unpaid compensation an employee paid on an hourly basis would have earned. Employers using the FWW method must meet these requirements:
- Nonexempt employees (i.e., those who are eligible for overtime pay) must be paid on a salary basis, meaning they earn a fixed amount regardless of the number of hours worked in a week;
- The employer and employees must have a mutual understanding of the fixed salary;
- The fixed salary must be high enough to at least equal the minimum wage, even during weeks when the greatest number of hours are worked; and
- The employees’ hours must actually fluctuate from week to week.
Under the method, employees earn a set weekly salary even if they don’t work a full 40-hour week. Since they are exempt, they also must be paid a premium if they work more than 40 hours in a week.
The FLSA requires nonexempt employees to be paid overtime at time and one-half the regular hourly rate for any hours worked over 40 in a workweek, so an employer must calculate how much a nonexempt salaried employee earned per hour to determine the overtime rate. That rate is paid for all the hours worked, giving the employees the “time” part of the overtime premium. Then the hourly rate is divided in half to get the “half” part the law requires.
So, an employee earning a base salary of $400 a week makes $10 an hour for 40 hours of work. If the worker works 50 hours in a week, that $400 base salary is divided by 50 for an hourly rate of $8. That rate is paid for all 50 hours, and half the $8 hourly rate is used to calculate the overtime pay for the 10 hours of overtime. Half of $8 is multiplied by the 10 hours of overtime, so the employee’s weekly pay plus overtime would be $440.
By contrast, an employee paid on an hourly basis at a $10-an-hour rate would earn $400 for the first 40 hours and $15 an hour for the 10 hours of overtime (time and a half of a $10-an-hour wage) for a total of $550 for the week.
Under the proposed rule, employers using the FWW method and also paying bonuses would have to include the bonus payment when calculating the hourly rate.
Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.