Overtime Rule Changes—Have You Considered All Your Options?

the situation

As most employers are well aware, as of December 1, 2016 (unless something changes before then), the salary minimum for many white collar exemptions under the FLSA will significantly increase from $23,600 to $47,746.  If you have an employee who is making less than the new minimum salary, but also often works over 40 hours in a week, two options are clear–to either raise her salary to the new level to maintain her exemption status or to begin paying her time and a half for all hours worked over 40 in a week. But are there any other options available?

the ruling

Yes—you can consider implementing a fluctuating workweek method of pay.  The fluctuating workweek method is a method of paying an employee a set salary for an irregular schedule and then paying at a half time premium for any hours over forty.  The concept is that the employer and employee have already agreed that the salary is meant to compensate the employee for all hours worked, even though they may vary week to week, and so when the employee works more than 40, because he or she has already been compensated for the straight time, he or she only needs an extra half time to get to the usual one and half time premium.

The fluctuating workweek method follows a United States Supreme Court decision and a rule issued by the DOL.  The regulation, issued in 1968, is titled “Fixed Salary for Fluctuating Hours.”  29 C.F.R. § 778.114. Although there has been some discussion of changing the regulation in recent years, no changes have been made at this point. There are basically five requirements which must be met to utilize the fluctuating workweek method:

(1)    The employee’s hours must fluctuate week to week;
(2)    The employee must receive a fixed weekly salary that remains the same regardless of the number of hours worked;
(3)    The fixed paid amount must be at a rate no less than the legal minimum wage;
(4)    The employee and employer must have a clear, mutual understanding that the employee will receive a fixed salary regardless of hours worked; and
(5)    For the time worked in excess of 40 hours in a given week, the employee must receive a 50% overtime premium in addition to the fixed weekly salary.

The regular rate of pay to be used when calculating the additional half time pay will vary depending on how many hours have been worked in a certain week.

Example:  Employee works varying hours, sometimes up to 50 in week.  Employee is paid $800.00 per week.  In the first week, she works 50 hours. For this week, her regular rate is $16.00 and she will be paid $880.00 ($800.00 weekly salary plus ten hours of overtime at $8.00 per hour).  During the second week, the employee works 40 hours a week. She will be entitled to $800.00, the fixed weekly salary. The third week, the employee only works 35 hours.  Again, she will be entitled to $800.00.  In the fourth week, she works 44 hours.  She will be entitled to $836.36 ($800.00 weekly salary plus four hours of overtime at $9.09 per hour, based upon her regular rate for this week of $18.18).

the point

Although the fluctuating workweek method is a good solution for some, it is not the answer for all employers. The use of this method can be an administrative challenge—and can potentially be distasteful to employees given that their regular rate effectively goes down the more hours they work.  There are also some other issues that may arise—can the payment of a bonus invalidate the use of the fluctuating workweek?  What constitutes a “clear, mutual understanding” about the fixed salary?

Additionally, it is important to note that some states specifically prohibit the use of this method of pay and you want to make sure that you are aware of any such restrictions. Finally, like the FLSA generally, compliance with the law related to this issue can be tricky.  Employers should consult with legal counsel before implementing this new method of pay to make sure they are not exposing themselves to a later claim for unpaid overtime.