With the Connecticut economy slowly reopening, many employers may be having non-exempt employees work fluctuating hours for the first time. 

The U.S. Department of Labor recently announced a new rule allowing employers greater latitude in using the fluctuating workweek method of calculating overtime pay for salaried, non-exempt workers whose hours vary weekly.

Under the new rule, employers are now allowed to pay bonuses or other incentive-based pay to salaried, nonexempt employees whose hours vary from week to week (which had previously been the subject of divergent views from various courts).

Indeed, the new rule specifically clarifies that payments in addition to the fixed salary are compatible with the use of the fluctuating workweek method under the Fair Labor Standards Act.

Rule Specifics

More specifically, in the new rule, the DOL:

  • Adds language to 29 CFR § 778.114(a) to expressly state that employers can pay bonuses, premium payments, or other additional pay, such as commissions and hazard pay, to employees compensated using the fluctuating workweek method of compensation, thereby eliminating any disincentive for employers to withhold such additional bonus or premium payments to such employees; 
  • States that any such supplemental payments must be included in the calculation of the regular rate unless they are otherwise excludable from the definition of regular rate under the FLSA (e.g., 29 USC §§ 207(e)(1)–(8) provides that certain forms of remuneration may be excluded from what is meant by an employee's regular rate of pay, such as sums paid as gifts for special occasions; holiday or vacation payments, etc.); and
  • Adds examples to 29 CFR 778.114(b) to illustrate these principles where an employer pays an employee, in addition to a fixed salary (1) a night shift differential and (2) a productivity bonus.

Calculating Overtime

Accordingly, under the new rule, an employer may use the fluctuating workweek method in compliance with the FLSA to properly compute overtime compensation based on the regular rate for a nonexempt employee under the following circumstances:

(1) The employee works hours that fluctuate from week to week;

(2) The employee receives a fixed salary that does not vary with the number of hours worked in the workweek, whether few or many;

(3) The amount of the employee's fixed salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours the employee works is greatest;

(4) The employee and the employer have a clear and mutual understanding (best practice to be in writing) that the fixed salary is compensation (apart from overtime premiums and any bonuses, premium payments, commissions, hazard pay, or other additional pay of any kind not otherwise excludable from the regular rate under 29 USC §§ 207(e)(1)–(8)) for the total hours worked each workweek regardless of the number of hours, although the clear and mutual understanding does not need to extend to the specific method used to calculate overtime pay; and

(5) The employee receives overtime compensation, in addition to such fixed salary and any bonuses, premium payments, commissions, hazard pay, and additional pay of any kind, for all overtime hours worked at a rate of not less than one-half the employee's regular rate of pay for that workweek. Since the salary is fixed, the regular rate of the employee will vary from week to week and is determined by dividing the amount of the salary and any non-excludable additional pay received each workweek by the number of hours worked in the workweek. Payment for overtime hours at not less than one-half such rate satisfies the overtime pay requirement because such hours have already been compensated at the straight time rate by payment of the fixed salary and non-excludable additional pay. 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 otherwise excludable under 29 USC §§ 207(e)(1)–(8)). 

Examples

In implementing this new rule, DOL provided the following examples to illustrate the application of the principles stated above by describing a case of an employee:

(a) whose hours of work do not customarily follow a regular schedule but vary from week to week;

(b) whose work hours never exceed 50 hours in a workweek; and

(c) whose salary of $600 a week is paid with the understanding that it constitutes the employee's compensation (apart from overtime premiums and any bonuses, premium payments, commissions, hazard pay, or other additional pay of any kind not otherwise excludable from the regular rate under 29 USC §§ 207(e)(1)–(8)): 

Example One. If during the course of 4 weeks this employee receives no additional compensation and works 37.5, 44, 50, and 48 hours, the regular rate of pay in each of these weeks is $16, $13.64, $12, and $12.50, respectively. Since the employee has already received straight time compensation for all hours worked in these weeks, only additional half-time pay is due for overtime hours. For the first week the employee is owed $600 (fixed salary of $600, with no overtime hours); for the second week $627.28 (fixed salary of $600, and 4 hours of overtime pay at one-half times the regular rate of $13.64 for a total overtime payment of $27.28); for the third week $660 (fixed salary of $600, and 10 hours of overtime pay at one-half times the regular rate of $12 for a total overtime payment of $60); for the fourth week $650 (fixed salary of $600, and 8 overtime hours at one-half times the regular rate of $12.50 for a total overtime payment of $50).

Example Two. If during the course of 2 weeks this employee works 37.5 and 48 hours and 4 of the hours the employee worked each week were nightshift hours  compensated at a premium rate of an extra $5 per hour, the employee's total straight time earnings would be $620 (fixed salary of $600 plus $20 of premium pay for the 4 nightshift hours). In this case, the regular rate of pay in each of these weeks is $16.53 and $12.92, respectively, and the employee's total compensation would be calculated as follows: For the 37.5 hour week the employee is owed $620 (fixed salary of $600 plus $20 of non-overtime premium pay, with no overtime hours); and for the 48 hour week $671.68 (fixed salary of $600 plus $20 of non-overtime premium pay, and 8 hours of overtime at one-half times the regular rate of $12.92 for a total overtime payment of $51.68). This principle applies in the same manner regardless of the reason for the hourly premium rate (e.g., weekend hours).

Example Three. If during the course of 2 weeks this employee works 37.5 and 48 hours and the employee received a $100 productivity bonus each week, the employee's total straight time earnings would be $700 (fixed salary of $600 plus $100 productivity bonus). In this case, the regular rate of pay in each of these weeks is $18.67 and $14.58, respectively, and the employee's total compensation would be calculated as follows: For the 37.5 hour week the employee is owed $700 (fixed salary of $600 plus $100 productivity bonus, with no overtime hours); and for the 48 hour week $758.32 (fixed salary of $600 plus $100 productivity bonus, and 8 hours of overtime at one-half times the regular rate of $14.58 for a total overtime payment of $58.32).

Flexibility

According to DOL, this new rule should help employers "navigate the challenges of the coronavirus by providing flexibility to provide hazard pay and to promote health and safety in the workplace through flexible work schedules."

However, it is important for employers to remember and understand that this new rule is not an exemption from the FLSA's overtime requirements. 

Instead, it should be seen as helpful in budgeting for labor costs while still giving non-exempt employees a salary in combination with other compensation, particularly incentive pay.


About the author: Patrick McHale is a partner at the labor and employment law firm Kainen, Escalera & McHale in Hartford.