For the second time this week, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) has issued a Final Rule involving the overtime provisions of the Fair Labor Standards Act (the “FLSA”).  Following closely on the heels of the revisions to the section 7(i) exemption regulations discussed here, on May 20, 2020 WHD released its revisions to the regulations regarding the “fluctuating workweek” method of paying overtime to salaried non-exempt employees.  And, as with the 7(i) Final Rule, the fluctuating workweek Final Rule eliminates confusion caused by WHD’s previous rulemaking efforts.

What is the fluctuating workweek?

Under the FLSA, the requirement to compensate for overtime hours at a rate not less than one and a half times the employee’s regular rate of pay is straightforward enough for workers paid on an hourly basis, as that simply involves paying a premium of at least 50% of the employee’s hourly rate for each overtime hour worked, in addition to the hourly rate itself.  For example, an employee who normally earns $20 per hour must earn at least $30 per hour—i.e., the $20 straight-time rate plus the $10 overtime premium—for overtime work.

For non-exempt employees who receive a salary, the idea is similar: convert the salary into the hourly rate the employee would have received had he or she earned equal money working on an hourly basis during the week, and then pay the additional 50% premium.  This method of paying overtime is the fluctuating workweek method.  (Note that some states, including Alaska, California, New Mexico, and Pennsylvania do not allow this calculation under state law.)  An example of the calculation looks like this:

• Assume that an employee receives a weekly salary of $600 and over the course of three weeks works 40, 50, and 60 hours.

• For the first week, with 40 hours worked, there is no obligation to pay an overtime premium.

• For the second week, the regular rate is $600 / 50 hours = $12 / hour, so the overtime premium is 0.5 * ($12 / hour) * 10 hours (i.e., 50 hours worked minus 40-hour threshold) = $60, for total weekly pay of $660 (i.e., $600 in salary plus $60 in premium overtime pay).

• For the third week, the regular rate is $600 / 60 hours = $10 / hour, so the overtime premium is 0.5 * ($10 / hour) * 20 hours = $100, for total weekly pay of $700.

This way of calculating premium overtime for salaried non-exempt employees has been the norm since Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942), one of the first Supreme Court decisions interpreting the FLSA.  In 1968, WHD issued regulations based on Missel and formalizing the fluctuating workweek calculation, initially under the heading of “fixed salary for fluctuating hours.”  See 29 C.F.R. § 778.114.

What if an employee also receives a bonus, commissions, or other non-salary pay?

But what if an employee on a fluctuating workweek arrangement also receives a bonus, a shift premium, extra holiday pay, commissions, or other compensation in addition to the salary?  This question flew mostly under the radar for decades, with a handful of courts confirming that these additional items of compensation do not alter the fluctuating workweek calculation, but instead simply become part of the overall regular rate analysis.

Starting in the early 2000s, however, some courts began to conclude that the presence of non-salary compensation invalidates the fluctuating workweek.  These courts determined that where a salaried employee also receives other pay, the salary compensates for only a fixed number of hours, such as 40, and required employers to pay premium overtime pay at a rate more than three times the amount required under the fluctuating workweek for the salary portion of the pay.

The following example illustrates the differences between these two interpretations:

• Assume that an employee receives a weekly salary of $600 and works 50 hours during a workweek, and that for the same workweek the employee also receives a $100 bonus.

• Under the fluctuating workweek: The regular rate is $700 (i.e., $600 in salary plus $100 in bonus money) / 50 hours = $14 / hour.  The overtime premium is 0.5 * ($14 / hour) * 10 hours = $70, for total weekly compensation of $770.

• Without the fluctuating workweek: The effect of the bonus on the regular rate is $100 / 50 hours = $2 / hour.  The effect of the salary on the regular rate is $600 / 40 hours (note: not 50 hours, as under the fluctuating workweek) = $15 / hour.  Added together, the result is a regular rate of $17 / hour.  The overtime premium is then ((0.5 * $2 / hour) (representing the additional half-time for the bonus) + (1.5 * $17 / hour) (representing the full additional time and a half attributable to the salary)) * 10 hours = $265, for total weekly compensation of $965.

In 2008, WHD issued a Notice of Proposed Rulemaking that proposed to amend 29 C.F.R. § 778.114 to state expressly that non-salary compensation does not invalidate the fluctuating workweek so long as the salary truly compensates for all hours worked, even if other forms of compensation also compensate for some or all of that working time.  WHD did not, however, issue a Final Rule concerning this proposal until 2011, following a change of administrations.  In the 2011 Final Rule, WHD declined to adopt the language it had originally proposed in 2008 regarding the fluctuating workweek, instead reversing course and declaring in the preamble to the Final Rule that additional non-salary compensation is not consistent with the fluctuating workweek after all.

In the aftermath of the 2011 Final Rule, courts found themselves even more confused about how to address this issue, including what weight, if any, to give to WHD’s shifting positions, coupled with the fact that the 2011 Final Rule did not actually alter any of the pertinent regulatory language.  In one particularly vexing instance, federal courts in two different states reached conflicting determinations as to the applicability of the fluctuating workweek with respect to the same employer and salaried non-exempt employees subject to the same bonus plan.

Because of the 2011 Final Rule, many employers either abandoned the fluctuating workweek or stopped paying salaried non-exempt employees bonuses and other non-salary compensation.  While they still had strong arguments available for applying the fluctuating workweek notwithstanding the presence of non-salary compensation, many employers concluded that the risk and cost of litigation outweighed the value to the business of using that overtime calculation.

WHD sets the record straight: bonuses and other non-salary compensation can coexist with the fluctuating workweek.

In its newly-issued Final Rule, which becomes effective 60 days after publication, WHD aims to put this issue to rest.  The Final Rule amends section 778.114 in several respects, the most notable of which is the express adoption of the following language in new subsection 778.114(a)(5):

Payment of any bonuses, premium payments, commissions, hazard pay, and additional pay of any kind is compatible with the fluctuating workweek method of overtime payment, and such payments must be included in the calculation of the regular rate unless excludable under section 7(e)(1) through (8) of the Act.

This new portion of the regulation makes it clear that WHD views the fluctuating workweek overtime calculation as available even where employees receive bonuses, commissions, and the like.  Employers may rely on this regulation, as of its effective date, in applying the FLSA.  It remains important, of course, to ensure compliance with state law as well.

What the Final Rule means in practice is that employers using the fluctuating workweek may now provide their employees bonuses and other types of non-salary payments with a significantly reduced level of risk that a court will later conclude that the fluctuating workweek is unavailable under the FLSA.  And employers that do not use the fluctuating workweek may want to reconsider that view now that bonuses and other similar payments can once again be part of the compensation package without wrecking the overtime calculations.