Overtime News: Department of Labor Issues Final Rule on Fluctuating Workweek

On May 20, 2020, the U.S. Department of Labor (“DOL”) issued its final rule related to the fluctuating workweek (“FWW”) method of overtime. This method of calculating overtime has in the past been referred to as the “Fixed Salary for Fluctuating Hours” method. This allows employers to pay overtime at one-half of the employee’s regular rate, rather than time-and-one-half. When this new rule was issued, it did not get the amount of attention it really deserved, as like so many other things related to wage and hour issues, it was shadowed by the new coronavirus pandemic legislation.

Let’s take a look at the concept behind the FWW method of compensation. A non-exempt, i.e., overtime eligible, employee is paid on a salary basis. This salary is fixed and paid every week regardless of the quality or quantity of work performed. The employee is paid that salary week-in-and-week-out regardless of whether the hours worked are few or many. When the employee works over 40 hours in a workweek, the regular rate is determined by dividing the total salary paid by the total number of hours worked. Once that regular rate is determined, the overtime rate is 50%, or one-half, of the employee’s regular rate.

As an example, let’s say an employee has fluctuating hours that vary between 38 and 48 hours in a workweek. Further, let’s say the employee’s weekly salary is $600. In the first workweek, when the employee works 38 hours, the employee is not entitled to any overtime. The employee’s regular rate for that workweek would be $600 divided by 38 hours, or $15.79 per hour.

In the second workweek, the employee works 48 hours. The employee is entitled to eight hours of overtime pay. To calculate the regular rate, divide the $600 salary by the 48 hours of work. The employee’s regular rate for that workweek is $12.50. The employee would be due a half-time overtime premium. This is calculated by dividing the regular rate of $12.50 by 2, resulting in an additional $6.25 for each of the five hours of overtime. The employee’s overtime pay for that workweek would be $50.00 ($6.25 x 8).

The reason the overtime under the FWW method is paid at one‑half instead of time-and-one-half is because the employee has already received the “time” for all hours worked. The salary is intended to cover all straight time hours and all overtime hours at the straight time rate. Therefore, only the “half” overtime premium remains to be paid.

In order to have FWW, employees must have schedules that fluctuate from week to week. It would make no sense to set up this method for an employee whose workweeks were fixed and never varied. In addition, the employee and the employer need to have an understanding in advance that the FWW method of overtime would apply. Although the final rule does not require this understanding to be in writing, it is highly recommended.

It may sound like a nightmare of a mathematical calculation, but a simple Excel spreadsheet can be set up with formulas to perform the FWW calculation every workweek. An employee must have a salary level that is high enough to ensure the employee will not earn less than minimum wage per hour in the longest workweeks.

Perhaps the best part of the new final rule also clarifies how bonuses and other variable compensation, such as shift differentials, can be incorporated into this method of overtime calculation. The new rule expressly states that employers can pay bonuses, premium payments, or other additional pay, such as commissions and hazard pay, to employees subject to the FWW method. This is a change from a prior DOL interpretation that paying bonuses to employees who are compensated on the FWW method would be inconsistent with that method. That’s right; the DOL had taken the position that employers who used the FWW method could not pay employees bonuses without defeating the application of this rule to the half-time calculation of overtime. Many commentators believed it was because the DOL, at that time, discouraged the use of FWW method by employers. However, the new rule had abandoned that position, and it appears as if the DOL is fully embracing the FWW as an available and lawful method of calculating overtime.

So, how does FWW reduce overtime? Let’s take this example:

Employees usually work around 40 hours per workweek, but sometimes work is lighter and sometimes heavier. The position earns $15.00 per hour.

In a 38-hour week, the employee earns $570.00 ($15 x 38 hours). However, in the 48-hour week, the employee earns more: $600 in straight time ($15 x 40 hours) plus $180.00 in overtime ($22.50 x 8 hours) for a total of $780.00. Over the two-week period, the employee’s total earnings are $1,350.00.

Under FWW, the employee would be paid $600 in week 1 and $650 in week 2, for a total of $1,250.00.

In sum, this new rule provide clear guidance on what is required for the FWW, and it authorizes employers to pay bonuses to employees who were compensated on this method of overtime. It also provides practical examples with how to calculate the overtime correctly under this method. It really is a win-win situation, as in certain types of employment where hours fluctuate from week to week, employers can have some relief from the time-and-one-half method of calculating overtime and employees will be guaranteed a fixed weekly salary even in the shorter workweeks.

For more information on setting up the fluctuating workweek method in your workplace, contact Paul Bittner at Ice Miller or any of the members of the Labor, Employment and Immigration practice group.

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