A Novel Idea Commonly Ignored:  Using Employer/Employee Consensus to Alleviate Overtime Costs

 

Does your business ever face overtime cost overrun issues?  Does your business require valued employees to work fluctuating hours each week?  Do your employees need a predictable income to budget their expenses?  If you answered, "Yes," to these questions, then a little known regulation to the Fair Labor Standards Act (FLSA) may assist you and your employees – it is called fixed salary for fluctuating hours.  The FLSA permits employers such as you to pay non-exempt employees (those eligible for overtime pay) on a salary basis.  However, there are a few catches.  An Ice Miller labor and employment attorney can help assist you in navigating the complex nuances of the fluctuating workweek rules.

 

Overtime And Regular Rate Of Pay

 

The key provision of the FLSA is its mandate that employers must compensate non-exempt employees for all hours worked in excess of forty hours in a workweek at a rate that is not less than one and one-half times their "regular rate" of pay.  In order to be exempt from this provision, an employee must satisfy all requirements of at least one of the FSLA's defined exemptions (which are not discussed or covered in this article).  If an employee is classified as non-exempt, he or she may be paid on an hourly, piece rate, commission, salary, or other basis.  However, whether paid by the hour, on a salary, or otherwise, the non-exempt employee must still receive overtime for all hours worked over forty hours in a workweek at a rate of not less than one and one-half times their "regular rate."

 

Paying A Salary To Non-Exempt Employees

           

            As noted above, the FLSA permits employers to pay non-exempt employees on a salary basis.  The FLSA provides two types of salary plans of particular relevance to the issues at hand.  First, the FLSA permits an employer to pay its employees a fixed salary to compensate for a fixed number of hours.  The only limitation to this provision is that the resulting hourly rate may not fall below minimum wage.  Second, an employer may pay its employees a fixed salary to compensate them for a fluctuating number of hours.  This article discusses the latter plan only.

 

Fixed Salary For Fluctuating Hours

 

Under a "Fixed Salary for a Fluctuating Workweek Agreement," an employee is paid a fixed salary that is intended to compensate him/her for all straight time hours of work, regardless of the number of hours worked.  The practical effect of this arrangement is that the employee is paid a fixed salary for all work performed, and then "half time" for all hours in excess of forty.

 

The employee's regular rate of pay would equal the weekly salary divided by the number of hours actually worked.  The regular rate, on which the half-time calculation would be made, would proportionately decrease with the number of hours worked (i.e., more hours means a lower regular rate).  However, the regular rate of pay may not fall below minimum wage.  

 

The application of the principles stated above may be illustrated by the case of an employee whose hours of work do not customarily follow a regular schedule but vary from week to week, whose overtime work is never in excess of 50 hours in a workweek, and whose salary of $250 a week is paid with the understanding that it constitutes his compensation, except for overtime premiums, for whatever hours are worked in the workweek.  If during the course of four weeks this employee works 40, 44, 50, and 48 hours, respectively, his regular hourly rate of pay in each of these weeks is approximately $6.25, $5.68, $5.00 and $5.21, respectively.  Since the employee has already received straight-time compensation on a salary basis for all hours worked, only additional half-time pay is due.  The following illustrates his total pay:

 

First Week

·        Regular rate of pay - $250.00 / 40 hrs = $6.25/hr

·        Overtime premium - .5 x 0 hrs x $6.25/hr = $0.00

·        Total pay for First Week:  $250.00

 

Second Week

·        Regular rate of pay - $250.00 / 44 hrs = $5.68/hr

·        Overtime premium – .5 x 4 hrs x $5.68/hr = $11.36

·        Total pay for Second Week:  $261.36

 

Third Week

·        Regular rate of pay - $250 / 50 hrs = $5.00/hr

·        Overtime premium - .5 x 10 x $5.00 = $5.00

·        Total pay for Third Week:  $275.00

 

Fourth Week

·        Regular rate of pay - $250.00 / 48 hrs = $5.21/hr

·        Overtime premium - .5 x 8 x $5.21 = $20.84

·        Total pay for Fourth Week:  $270.84

 

            This plan is relatively simple to manage and limits the amount of overtime pay due.  It does, however, have a few non-negotiable requirements:

1.      the employee's hours fluctuate from week to week;

2.      the employee receives a fixed weekly salary that remains the same regardless of the number of hours worked per week;

3.      the fixed salary is sufficient to provide compensation at a regular rate not less than the legal minimum wage;

4.      the employee receives at least 50 percent of his regular hourly pay for all overtime hours worked; and

5.      the employer and the employee have a clear mutual understanding that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek.

If you would like to discuss a possible "Fixed Salary for a Fluctuating Workweek Agreement" or other payment arrangement options for your non-exempt employees, or any other questions you may have to ensure your business's compliance with the rules and regulations of the FLSA, please contact Paul C. Sweeney or any other member of the Labor and Employment Practice Group at Ice Miller LLP.

 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.