Many businesses find the fluctuating workweek option attractive because it has the potential to relieve some of the financial pressure associated with overtime payments. But applying it incorrectly could land you in deep trouble with the Department of Labor. Before you jump on board, make sure you understand the stipulations of the provision and how to apply it effectively. Here’s what you need to know.
The Fair Labor Standards Act (FLSA) requires employers to pay overtime to non-exempt employees at the rate of 1.5 times the hourly rate. For a salaried employee, that means dividing the weekly salary by a fixed number of hours regularly worked during the week, and then paying 1.5 times that amount for any hours worked over 40.
When an employee’s hours fluctuate from week to week, the fluctuating workweek provision allows employers to pay a fixed weekly salary, regardless of the number of hours worked during that week plus a half-rate overtime premium. The “time” part of time-and-a-half is already included in the fixed rate salary. In this scenario, the hourly rate will vary based on the number of hours worked (the higher the hours, the lower the rate), which means the overtime rate will vary also.
Example: Sally works 35 hours one week and 42 the following week. Her employer pays her a fixed rate salary of $750 per week. During the first week, her hourly rate works out to $21.42 (750÷35). During the second week, the hourly rate will be $17.86 (750÷42). For the two hours Sally worked over 40, she will receive half-rate overtime salary of $8.93 (17.86÷2).
When fluctuating workweek operates as intended, the benefit to the employer increases as the number of hours increase, and the benefit to the employee increases as the number of hours decrease.
Seeing a drop in hourly rate as the number of hours worked increases seems like a slam-dunk for employers, but you’re not free to implement fluctuating workweek at will. The Department of Labor (DOL) is extremely rigorous in ensuring that employees are not harmed by the application of the provision. In order to apply fluctuating workweek, the following requirements must be met:
- Weekly salary must be large enough that the regular rate of pay will never drop below the minimum wage for hours worked.
- This prevents employers from drastically dropping an employee’s pay and extending hours at a fixed rate.
- There must be a clear and mutual understanding between the employee and employer that the weekly salary will cover all hours worked.
- Employers are responsible for making sure that the employees understand the fluctuating workweek and how it will impact employees.
- Both the employer and the employee must benefit.
- In other words, the employee’s hours must fluctuate above and below 40. For example, the Fluctuating workweek should not be implemented for an employee who always works more than 40 hours a week, but fluctuates between 50 and 60 hours.
- Bonuses and other premium payments (other than overtime) may not supplement the fixed salary.
- This provision prevents employers from drastically dropping an employee’s pay and supplementing it with bonuses based on the number of hours worked. The salary must remain fixed.
- Overtime may not be built in to the salary.
- Pay for hours worked over 40 must fluctuate based on the number of hours worked. For example, the fixed rate salary may not cover 45 hours with a built-in time and a half rate for the extra five hours.
- Weekly salary may not be reduced for any reason.
- For example, if the employee is sick and has exhausted his or her sick leave, pay may not be docked. The two exceptions to this requirement are weeks when no work is performed and the initial or terminal weeks.
- Not all states allow fluctuating workweek.
- While the federal law provides for fluctuating hours, some states prevent employers from using this provision. Be sure to check your state laws before pursuing this option.
Once these requirements have been met, employers have some options for how they pay individual employees:
- Create a base pay greater thanthat stipulated by the FLSA.
- For example, an employee’s pay plan can stipulate that her hourly rate will never be less than $15 per hour. If her hourly rate drops below this floor based on the number of hours she worked divided into her fixed rate salary, she will still receive an overtime premium of $15÷2 for all overtime hours worked rather than the lower rate that would result from calculating based on the FLSA regulations.
- Pay time-and-a-half for overtime hours worked over a specified amount rather than the half-rate stipulated by FLSA.
- For example, if an employee works more than 50 hours per week, his pay plan can stipulate that he receives time-and-a-half for all hours worked over 50, rather than the FLSA regulated half-rate overtime pay that he receives for his first 10 overtime hours.
While fluctuating workweek is a valid option for employees who meet the requirements,the DOL will likely remain rigid in how they interpret its implications. Employers should not expect any breaks in terms of application and be careful to follow guidelines about mutual benefit and compensation restrictions.