There has been much litigation in recent years regarding the application and implementation of wage and hour regulation, particularly concerning overtime wages. This heightened awareness of the Fair Labor Standards Act (FLSA) and its requirements can actually help employers recognize potential problems with their wage practices and assist them in taking the necessary steps to prevent future litigation. These steps may even result in lower costs to employers while paying legitimate overtime.
The FLSA was enacted in 1938 following the Great Depression and it allows for the recovery of minimum wages and overtime by certain employees, unless they are somehow exempt. By now, most employers are aware that simply paying a salary does not, by itself, make an employee exempt from the overtime provisions of the FLSA. Unfortunately, many employers believe they must revert back to paying certain employees an hourly rate if their employees do not fall within an applicable exemption.
Paying certain employees a salary, however, may be the best option for an employer. Under the FLSA, employers are required to pay overtime at a rate not less than one and one-half times an employee’s regular rate of pay for all hours worked over 40 in a given workweek (29 U.S.C. §207[a]). What many employers do not realize is that, under certain circumstances, an employer has an option of how to calculate “one and one-half times the regular rate” under the fluctuating workweek overtime calculation.
Under the fluctuating workweek calculation, an employee may be paid a fixed salary to cover all hours worked in a given workweek, whether that is 40 hours, below 40 hours, or above 40 hours. There must be a clear and mutual understanding between the employee and employer that the salary paid is for all hours worked in the workweek. By using this method, the employer will, in essence, be paying the employee for all hours worked at a straight time. The employee’s effective hourly rate (i.e. the fixed salary divided by the number of all hours worked in the week) may change from week to week depending on the number of hours worked by the employee.
Under this method, the employer would only need to pay an additional half-time pay for hours over 40, as it has already paid the employee for all of his straight-time compensation, (i.e. the salary). Instead of paying one and one-half times the regular pay for each hour over 40 in a given workweek, the employer essentially feels as if it is only paying the half-time rate. The U.S. Department of Labor, in its regulations, provides an illustration of the application of the fluctuating workweek method:
The application of the principles . . . 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, his regular hourly rate of pay in each of these weeks is approximately $6.25, $5.68, $5, 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. For the first week the employee is entitled to be paid $250; for the second week $261.36 ($250 plus four hours at $2.84, or 40 hours at $5.68 plus four hours at $8.52); for the third week $275 ($250 plus 10 hours at $2.50, or 40 hours at $5 plus 10 hours at $7.50); for the fourth week approximately $270.88 ($250 plus eight hours at $2.61 or 40 hours at $5.21 plus eight hours at $7.82). (29 C.F.R. §778.114[b])
There are, of course, a number of pitfalls the employer will need to avoid. The employer must not make inappropriate deductions from the employee’s salary, which could result in finding that the employer did not intend to pay the employee a salary. As previously mentioned, the employee and employer must have a “clear [and] mutual understanding that the fixed salary is compensation (apart from overtime premiums) for the hours worked…” (29 C.F.R. §778.114[a]). Having this understanding documented in writing and acknowledged by the employee is recommended. Additionally, the salary must be sufficient to provide at least the applicable minimum wage rate for all hours worked.
Using the fluctuating workweek method of calculating overtime will not work for every non-exempt employee. However, it certainly is a tool employers should consider for those employees who do not fall within any clear FLSA exemption and whose hours are unpredictable. Likewise, it may be particularly useful in situations where an employer is unclear as to whether an employee should be classified as exempt or not. By paying such employees using the fluctuating workweek method, the employer may avoid the risk and uncertainty of FLSA litigation. Given these potential issues, the employer should also consider consulting with appropriate legal counsel about the implementation of this method.