Fluctuating Workweek in Flux
The fluctuating workweek (FWW) pay method allows employers to pay salaried, nonexempt employees a fixed salary, regardless of the number of hours worked per week. Under the FWW method, employees who work more than 40-hours per week are paid overtime calculated by dividing the salary by the hours worked in that week and paying one-half that rate for all overtime hours. As a result, the overtime rate changes weekly based on the number of hours worked—the more hours an employee works, the lower the overtime rate.
Confusion about implementation of the FWW method and conflicting court decisions have resulted in many employers being reluctant to use it. The U.S. Department of Labor (DOL) proposed regulations that would permit the inclusion of any bonus or other premium payments in the regular rate calculation without losing the FWW protection. The proposal may make this method more attractive to employers in states where the method is permitted. However, courts in states including California and Pennsylvania have ruled that the method violates state law.
The Fluctuating Workweek: What Is It & How Does It Work?
Suppose a nonexempt employee’s salary is not intended to compensate a given number of hours, but is intended to cover whatever hours are worked during the week. For example, what if an employer wishes to pay an employee $500 per week, regardless of whether 10 hours or 50 hours are worked?
If there is a clear mutual understanding between the parties on this issue, the employer may take advantage of the FWW method, which provides a more favorable way of calculating overtime. First, for an employer to be able to use this method, federal regulations require:
- There is a clear mutual understanding between the parties;
- The employee’s hours fluctuate from week to week;
- The employee receives the same fixed salary regardless of the number of hours worked during a particular week;
- The salary provides an average hourly rate of more than the minimum wage; and
- The employee receives pay, in addition to salary, for overtime hours worked.
The regular rate under the FWW method is calculated by dividing the employee’s salary by the actual hours worked in a given workweek. The employer need only pay half this regular rate (as opposed to 1.5 times the regular rate) multiplied by the hours worked over 40. While this method poses some difficulties in administration, the reduced overtime rate generally results in cost savings to the employer.
Several circuit courts have applied the FWW methodology to misclassified employees seeking overtime compensation damages, while some district courts have taken a different position, deciding that the methodology should not be applied in a misclassification case. At this point, although the case law remains unsettled, the weight of authority favors permitting the methodology if the factual predicates for the method have been proven and state law allows.
State Courts Interpret the Fluctuating Workweek
Some states, including California and Pennsylvania, prohibit or restrict the use of the fluctuating hours method. For example, the Pennsylvania Supreme Court in Chevalier v. Gen. Nutrition Centers, Inc, rejected the so-called “half-time” method of overtime calculation under the Pennsylvania Minimum Wage Act (PMWA). The majority held that the PMWA permits employers to calculate the regular rate by dividing the salary by all hours worked in the week, but held that workers must receive overtime pay calculated at time and one-half that rate, rather than the half-time the FLSA permits.
The California Supreme Court, in Alvarado v. Dart Container Corp, held that the state’s formula for determining overtime is more generous than the federal formula. According to the court, most compensation, including bonuses, should be included in total compensation. Plus, only non-overtime hours worked can be counted in determining the regular rate of pay. In addition, the California Labor Code permits an employee and employer to agree to a fixed salary, but still requires overtime pay at time and one-half the regular rate.
Therefore, even if payment of one-half the regular rate is permissible when using the fluctuating workweek method under federal law, employers in Pennsylvania and California still must pay overtime at time and one-half the regular rate for all hours worked over 40.
DOL’s Fluctuating Workweek Proposal
The DOL’s November 4, 2019, notice of proposed rulemaking seeks to clarify the existing FWW rule to permit employers who utilize the FWW method to include bonuses in the regular rate for the overtime calculation, unless otherwise excluded by the FLSA. Previously, the DOL prohibited the use of certain bonus payments under the FWW method, finding that such payments contradicted the FWW—the method requires that employees are compensated with a fixed salary. The DOL’s proposal would also provide examples to illustrate calculation of overtime under the FWW where additional compensation is paid. Comments on the proposal are due to the DOL on December 5, 2019.
Other DOL Rule Changes in the Works
Over the past year, the DOL has issued a number of proposed regulations. You can read more about DOL rulemaking here. Currently, revised rules for calculation of the regular rate and the joint-employer standard remain pending. The regulations raising the salary threshold for the so-called white collar exemptions take effect January 1, 2020.
Ballard Spahr's Labor and Employment Group routinely assists employers in ensuring compliance with state, federal, and local statutes and regulations.
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