HR Management & Compliance

Incentive Pay Allowed Under Fluctuating Workweek Method of Overtime Pay

The federal Department of Labor (DOL) released a final rule on May 20, 2020 addressing whether employers may pay bonuses, commissions, and other types of incentive payments to employees paid under the fluctuating workweek (FWW) method of paying overtime.

payrollThe rule states that employers may pay various types of incentive payments to employees working hours that fluctuate from week to week, including bonuses, commission payments, hazard pay, premium payments, or other additional payments. These payments must be included in the calculation of the regular rate of pay, unless specifically excluded under the Fair Labor Standards Act (FLSA).

How Does the FWW Work?

Employees who are paid a salary and whose hours vary from week to week may be paid based on the FWW method. Employers using the FWW method must meet these requirements:

  • Nonexempt employees 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. Because they are nonexempt, 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.

For example, 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 the usual 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 one-half of a $10-an-hour wage) for a total of $550 for the week.

How the New Rule Incorporates Incentive Payments

The DOL’s final rule provides the following examples of how incentive pay would factor into the FWW method of overtime compensation:

The application of the principles stated above may be illustrated by the case of 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 section 7(e)(1) through (8)) for all hours worked in the workweek.

If during the course of 2 weeks [an] 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).

If during the course of 2 weeks [an] 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).

Incentive Payments and the Regular Rate

As shown by the DOL’s examples, incentive payments paid to workers under the FWW method must be included in the calculation of the regular rate of pay, unless they are specifically excluded under the FLSA’s section 7(e)(1) through (8). Regulations regarding the regular rate are designed to preclude an employer from setting an artificially low rate of pay on which overtime is calculated and then providing additional compensation to the employee by other means. For any payment, the employer bears the burden of establishing that it need not be included in calculation of regular pay.