DOL allows bonuses under fluctuating workweek method

The DOL has issued a final rule that allows employers to offer bonuses or other incentive pay to employees who are paid overtime under the fluctuating workweek method of the Fair Labor Standards Act (FLSA). The final rule takes effect August 7, 2020.

Background:

To use the fluctuating workweek method of calculating overtime under the FLSA:

• The employee's hours must fluctuate from week to week;
• The employee must receive a fixed salary for whatever hours they are called upon to work in a workweek, regardless of how few or how many;
• The employee and employer must have a clear mutual understanding (which should be in writing) that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek;
• The salary must be sufficient enough to meet the applicable minimum wage for each hour worked in the workweeks in which the number of hours worked is greatest; and
• The employee must receive extra pay for overtime hours worked at a rate no less than one-half times their regular rate of pay. Since the salary is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the employee's regular rate will vary from week to week. To obtain an employee's regular rate for a particular workweek, divide the number of hours they worked into their salary.

Previous administrations and courts have taken different views about whether bonuses and other incentive pay were compatible with the fluctuating workweek method.

Final Rule:

The final rule clarifies that:

• Bonuses, premium payments, commissions, and hazard pay on top of fixed salaries are compatible with the fluctuating workweek method.
• Employers must include these payments when calculating the regular rate of pay if otherwise required under the FLSA.
• While the fixed salary may not vary with the number of hours worked in the workweek, employers using the fluctuating workweek method may take occasional disciplinary deductions from the employee's salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions don't cut into the minimum wage or overtime pay required by the FLSA.
• To use the fluctuating workweek method, an employee's hours don't necessarily need to fluctuate below forty hours per week, so long as the employee's hours worked do vary.
• The "clear and mutual understanding" of the fluctuating workweek arrangement doesn't need to extend to the specific method used to calculate overtime pay.

Examples:

The final rule also includes examples to help illustrate these principles. Here's one example:

An employee receives a weekly salary of $600 with the understanding that the salary is compensation for all hours worked in the workweek (apart from overtime (OT), bonuses, and other incentive pay). The employee's work hours never exceed 50 hours per week. The employee works 37.5 hours during week one, and 48 hours during week two. During weeks one and two, the employee works four night-shift hours per week, which are compensated at the premium rate of $5 per hour.

Calculating Straight Time Earnings, Regular Rates of Pay, and Total Compensation

Compliance Recommendations:

The DOL says the final rule on the fluctuating workweek can help employers navigate the challenges of the COVID-19 pandemic by offering an alternative pay method to address varied schedules implemented to promote social distancing. While the fluctuating workweek method can seem like an attractive option for reducing overtime costs when compared with the standard overtime calculation, there are some things to consider. For example, some states, including California, expressly prohibit employers from using the fluctuating workweek method for paying overtime. Additionally, this method is also a common source of employee lawsuits. Employers should check their state (and local) law and consult legal counsel as necessary before using it. Please contact your dedicated service professional with any questions.