On November 2, 2019, the Department of Labor (DOL) proposed a new rule seeking to provide clarity and predictability to one of the most confusing areas of wage and hour law – the fluctuating workweek. The DOL is proposing a rule that would expressly permit employers to use the fluctuating workweek method for employees who also receive additional bonuses and incentive compensation, so long as the additional pay is properly factored into the employee’s regular rate of pay for purposes of calculating overtime.

Under the Fair Labor Standards Act (FLSA) an employer is required to pay non-exempt employees time and a half their regular rate of pay for hours worked over forty in each week. However, if certain conditions are met, the DOL will also permit an employer to pay “a fixed salary for fluctuating hours” and overtime at a half-time rate. See 20 CFR 778.114.

To use the fluctuating workweek method, there must be: 1) an agreement with the employee to pay “a fixed amount” each week regardless of the hours worked, 2) the employee’s hours fluctuate week to week, 3) that the fixed amount will be greater than the minimum wage for all hours worked in any given week and 4) the overtime rate is equal to half of “the amount of the salary” divided by the total hours worked in a week. The definition of the terms “fixed amount” and “amount of salary” within the regulation has led to disagreement among courts, and arguably the DOL itself, on whether any additional compensation would negate an employer’s ability to use this method of overtime computation.

Where some courts have disallowed all bonuses and additional compensation, other courts attempt to resolve this by creating a dichotomy between “productivity based” (for example commissions) bonuses and “hours based” (for example night shift differential) bonuses, finding that only productivity bonuses are compatible with the fluctuating workweek method of compensation. However, there are bonuses (such as for retention, safety and referral) that do not fall neatly into either category. The confusion concerning additional compensation has discouraged many employers from using this method of overtime compensation or not paying any supplemental compensation other than a fixed weekly amount. The DOL’s newly proposed rule addresses this confusion.

The DOL is ultimately seeking to simplify the fluctuating workweek rule, starting with the title. The DOL’s proposed rule changes the title from “fixed salary for fluctuating hours” to the “Fluctuating Workweek Method of Computing Overtime.” Pursuant to the proposed rule, five conditions must be met in order to use the fluctuating workweek method of computing overtime, they include:

  1. An employee’s hours must fluctuate week to week;
  2. An employee must receive a fixed salary that does not vary week to week;
  3. The salary must be sufficient to pay at least the minimum wage for all hours worked;
  4. There is a clear and mutual understanding that the fixed salary is compensation for all hours worked each week – fixed salary excludes overtime premiums, bonuses, premium payments or any payment excluded from the regular rate; and
  5. Calculation of the overtime rate will be equal to the amount of the fixed salary plus any bonuses, premium pay, or additional pay of any kind (unless excluded from the regular rate under Section 7(e)) earned in that week divided by total hours worked within the same week. The overtime premium will be equal to half of the overtime rate times the number of overtime hours worked.

The proposed rule also provides two clear examples of how to calculate overtime when an employee receives a night shift premium or a weekly production bonus. However, the proposed rule does not address the question of how to treat a bonus that is not paid on a weekly basis. Notwithstanding, this was recently addressed this in opinion letter FLSA 2019-7 issued on July 1, 2019, where it was explained that the employer must reallocate the bonus over the workweeks in which it was earned.