The Often Overlooked Fluctuating Workweek Method of Computing Overtime
The U.S. Supreme Court recently ruled that a worker who earned more than $200,000 still had to be paid the overtime rate for hours worked over 40 in a workweek. As more fully explained in the recent article by my colleague Brittany Clark found here, the employer could not meet the requirement that an employee must be paid on a salary basis in order to meet one of the “white collar” exemptions and avoid the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). As a result, despite paying the employee over $200,000 per year the employer owed that employee overtime for his hours worked over 40 in a workweek. This ruling presents a good opportunity for employers to consider the often overlooked fluctuating workweek (FWW) method of pay and its advantageous overtime rate.
First, a quick review of the overtime rate under the FLSA. The overtime rate under the FLSA is commonly referred to as time and one-half the employee’s regular rate of pay, meaning the employee must be paid the regular rate for the hour worked plus 0.5 times that rate for the overtime premium (1.5 times the regular rate). Often, employers pay employees 1.5 times their hourly wage for overtime hours (those over 40 in a workweek). The “regular rate” and “hourly wage” are not necessarily the same thing, since the regular rate includes other forms of compensation received in addition to an hourly wage. But, that is a topic for another article.
This article will focus on the FWW, which allows employers to pay non-exempt employees only 0.5 times the regular rate for overtime hours instead of 1.5 times (time and one-half) the regular rate.
The FWW applies to: (1) non-exempt employees, those who must be paid at least the minimum wage and the overtime rate; (2) whose hours fluctuate from week to week, i.e. those who do not work a set schedule (hours do not have to fluctuate above and below 40 in a workweek to qualify); (3) who are paid on a salary basis and receive the same amount of salary from week to week regardless of the number of hours they work and whose salary must be enough to satisfy the minimum wage in weeks when employees work their greatest number of hours.
The theory of the FWW is that if an employer pays a non-exempt employee a regular salary, then that salary will compensate for straight time for all hours worked in the workweek, including those hours over 40. Because all straight time hours have been compensated, the employer only owes the employee 0.5 times the regular rate (the actual overtime premium) for overtime hours, instead of 1.5 times the regular rate. The FWW allows employers more certainty as to the amount of compensation for employees who work fluctuating hours (and therefore receive fluctuating pay) from week to week by stabilizing their straight time pay and reducing the amount of pay specifically for overtime hours.
The fluctuating workweek method of pay has been in existence for a long time but was often ignored because for many years it could not be used if the employer paid other forms of compensation in addition to the weekly salary, such as non-discretionary bonuses, commissions, or premium payments like hazard pay. However, in 2020, the U.S. DOL clarified that the FWW is acceptable even if these additional payments (bonuses, commissions, premiums, etc.) are included.
To properly implement the FWW, the employer and employee must “have a clear and mutual understanding” that the weekly salary is compensation for the total hours worked in the workweek, regardless of how many hours that is. This clear and mutual understanding is best shown by a written document signed by the employee. Also, because employees paid using the FWW method are non-exempt, employers still must follow the FLSA’s record keeping requirements for them, including tracking their hours worked. Finally, some states preclude the use of the FWW, and any employer considering the FWW should determine whether it is allowed in the applicable state.
We encourage you to monitor our Mid-Week Memos for future articles and to reach out to Grant Close or any member of our Employment & Labor group with any questions.
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