On November 4, 2019, the U.S. Department of Labor (DOL) announced its notice of proposed rulemaking (NPRM) that would give employers more flexibility in the way they calculate overtime pay for workers with inconsistent schedules that result in workweeks with varying hours of work. This proposal would update the Fair Labor Standards Act’s (FLSA) fluctuating workweek compensation method by allowing employers to include bonus and premium payments when calculating overtime pay.

The FLSA permits the payment of a fixed salary for fluctuating hours (an arrangement also called the “fluctuating workweek method”) as one way employers can meet their overtime pay obligations to nonexempt employees, if certain conditions are met. Under the current regulations governing fluctuating hours, an employer may use the fluctuating workweek method for computing overtime compensation for a nonexempt employee if the employee works fluctuating hours from week to week and receives, pursuant to an understanding with the employer, a fixed salary as straight-time “compensation (apart from overtime premiums)” for whatever hours the employee is called upon to work in a workweek, whether few or many.

In such cases, because the salary “compensate[s] the employee at straight time rates for whatever hours are worked in the workweek,” an employer satisfies the overtime pay requirement of the FLSA if it compensates the employee, in addition to the salary amount, at a rate of at least one-half of the regular rate of pay for the hours worked each workweek in excess of 40. Because the employee’s hours of work fluctuate from week to week, the regular rate must be determined separately each week based on the number of hours actually worked.

The payment of additional bonus and premium payments to employees compensated under the fluctuating workweek method has presented a challenge to employers and courts deciding whether the FLSA allows for bonuses and premium pay when the fluctuating workweek method is being used. Some courts have said it does, others have said it does not, and still others have said the payments are allowed only when they are performance based, rather than as a reflection of the number of hours an employee works. The DOL states that its proposal would eliminate the confusion while likely increasing the number of workers who receive bonuses and other incentive-based pay.

Specifically, the DOL proposes to revise the FLSA and do the following:

• “[A]dd language to § 778.114(a) clarifying that bonuses, premium payments, and other additional pay of any kind are compatible with the use of the fluctuating workweek method of compensation.”

• “[A]dd examples to § 778.114(b) to illustrate the fluctuating workweek method of calculating overtime where an employee is paid (1) a nightshift differential and (2) a productivity bonus in addition to a fixed salary.”

• Revise the rule in a minor way to make it easier to read and understand by listing in § 778.114(a) “each of the requirements for using the fluctuating workweek method” and removing any duplicative text.

• “[C]hange the title of the regulation from ‘Fixed salary for fluctuating hours’ to ‘Fluctuating Workweek Method of Computing Overtime’ to better reflect the purpose of the subsection and to improve the ability of employers to locate the applicable rules.”

The proposed rule will be available for review and public comment for 30 days and was published in the Federal Register on November 5, 2019.

This NPRM would reverse the final rule published in 2011, and the DOL makes clear that “employers and courts should not rely on the statement in the 2011 Preamble that ‘bonus and premium payments . . . are incompatible with the fluctuating workweek method of computing overtime.’” The 2011 final rule issued during the Obama administration did not adopt clarifications contained in a 2008 NPRM offered during the last year of the Bush administration. As this 2019 NPRM states, “the need . . . to clarify its fluctuating workweek rule is even stronger now than in 2008, when [the DOL] proposed a substantially similar clarification.”

It appears that this rule will provide much-needed clarity for employers that use the fluctuating workweek compensation method to determine overtime pay for their employees. We will continue to monitor developments regarding the proposed rule and share any notable developments.