Earlier this week, the DOL proposed a change to the lesser-used FLSA overtime rule that allows employers to pay nonexempt employees who work variable hours each week a set weekly salary from which the regular rate of pay is calculated. Here’s an example: A water operator works 40 hours every other week, but on the opposite weeks is required to go to the water plant on weekends and make various checks on water levels and purity tests. This might mean that the employee works somewhere between four and six hours extra in those opposite weeks. The employee and employer to that the employee will receive a set salary for every week, let’s say $1,000. So, when the employee works 40 hours in a week, the employee’s hourly or regular rate of pay is $25 per hour. When the employee works 44 hours, the hourly or regular rate of pay drops to $22.73 per hour. Since the fluctuating workweek rule allows the employee and employer to agree that the $1,000 is the straight time rate, the employee only owes an additional half time payment based on the $22.73 hourly rate for the additional four hours worked. This method, while a bit cumbersome, can maximize an employer’s savings on overtime when operational needs result in variable schedules for employees.
Currently, the DOL’s regulations find the payment of bonuses or other extra compensation to be “incompatible” with fluctuating workweek arrangements, which has created some confusion among the courts. The proposed rule will eliminate this part of the regulations, thus allowing payment of discretionary and non-discretionary bonuses to employees paid this way.
The fluctuating workweek is appropriate for employees whose hours legitimately vary week by week and should be considered as an option to control overtime liability. Five elements must exist to establish a valid fluctuating workweek arrangement as follows:
- the employee must work hours that fluctuate from week to week, although the hours of work can be static, such as 45 hours every other week and 40 hours in the opposite week;
- the employee must be paid a fixed salary that serves as compensation for all hours worked;
- the fixed salary must meet minimum wage laws for all hours worked in any week, not just the weeks where an employee works 40 hours or less;
- the employee must be paid an additional one-half of the regular rate for all overtime hours worked; and
- both employer and employee clearly understand that the fixed salary is compensation for however many hours the employee may work in a particular week, rather than for a fixed number of hours per week. This can be as simple as an arrangement where the parties agree that an employee will be paid a certain salary per week.