The Department of Labor's Final Rule, which took effect on August 7, 2020, provides that employers may utilize the fluctuating workweek method of calculating overtime under the Fair Labor Standards Act ("FLSA") while at the same time making payments in addition to fixed salary.
The "fluctuating workweek method" provides that, when a nonexempt employee receives a fixed salary for hours that fluctuate from week to week, an employer can determine that employee's regular rate of pay for purposes of calculating overtime under the FLSA by dividing the employee's salary by the hours worked each week, as long as certain conditions are met. Many courts have held that straight-time bonuses and other premium payments were incompatible with an employer's use of the fluctuating workweek method.
In passing the Final Rule, the Department sought to give employers more latitude to provide bonuses and other additional compensation to salaried, nonexempt employees. The Final Rule expressly allows employers to pay bonuses, premium payments, and other additional pay, such as commissions and hazard pay, above workers' fixed salaries while utilizing the fluctuating workweek method. Of course, employers must include such payments in the calculation of the employee's regular rate of pay for overtime purposes, unless otherwise properly excluded under the FLSA.
The Final Rule also clarifies that:
- While an employee's hours must fluctuate from week to week to utilize the fluctuating workweek method, there is no requirement that the employee's hours fluctuate below 40 hours per week;
- The employee and employer must have a clear and mutual understanding that the salary is compensation for all hours worked each week, but the understanding need not include the specific method used to calculate overtime pay; and
- The fluctuating workweek method may be used even if an employer needs to supplement an employee's salary to satisfy minimum wage requirements, unless it was foreseeable the employee's salary would not meet the minimum wage requirement or the employee's salary frequently does not meet the minimum wage requirement.
Ultimately, the Final Rule resolves for now the legal uncertainty regarding the compatibility of supplemental payments and use of the fluctuating workweek method under federal law. The Final Rule does not affect the legality of the fluctuating workweek method under state law in jurisdictions where it is prohibited, including California, New Mexico, and Pennsylvania.
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