Proposed Rule Would Change the FLSA’s Fluctuating Workweek Method of Calculating Overtime Pay

As part of its spring 2019 regulatory agenda, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) will consider a proposed revision to the Fair Labor Standard Act’s (“FLSA”) regulations on calculating overtime pay for workers whose hours fluctuate from week to week.

Generally, non-exempt employees covered by the FLSA must receive overtime pay for hours worked in excess of 40 in a workweek at a rate at least time and one-half their regular rates of pay – the standard calculation of overtime.  However, the FLSA provides an alternative method of calculating overtime for employees with fluctuating work weeks (i.e., above and below 40 hours per week).

Under the fluctuating workweek method, an employer and non-exempt employee can agree that the non-exempt employee will be paid a fixed salary as straight-time compensation for any and all hours that are worked in a workweek, whether less or greater than 40, and that the non-exempt employee will also be paid an additional one-half the non-exempt employee’s regular rate of pay as overtime compensation for all hours over 40 in that workweek.  See 29 C.F.R. § 778.114.

As the regulations explain, half-time overtime satisfies the overtime pay requirement because all hours worked have already been compensated at the straight regular rate per the parties’ agreement.  The regulations provide that employees paid pursuant to the fluctuating workweek method of overtime payment must receive a salary sufficient to ensure that the employee’s average hourly wage meets the minimum hourly wage rate.

In 2011, the WHD issued an announcement advising that bonuses and premium pay “are incompatible with the [fluctuating workweek] method of computing overtime under Section 778.114.”  76 Fed. Reg. at 18850.  Notwithstanding this somewhat ambiguous statement, the WHD never issued an actual rule or regulation regarding its view.  Since then, most courts have deferred to the WHD’s position with respect to extra pay that is time-based but have ignored the DOL’s view with respect to performance-based commissions in conjunction with the fluctuating workweek method.

Perhaps as a response to comment and criticism that its position on bonuses and premium pay vis-à-vis the fluctuating work week was undeveloped and unclear, the WHD now proposes to revise the fluctuating workweek regulations to provide employers greater flexibility to include additional forms of compensation in the fluctuating workweek calculations.  See Office of Information and Regulatory Affairs, Office of Management and Budget Website, available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201904&RIN=1235-AA31 (last accessed Aug. 21, 2019).

Allowing additional incentive pay or bonuses in the fluctuating workweek calculation could be a benefit to employers, especially those whose methods of payment to non-exempt employees is not based in whole or part on a traditional time-based method.

In any event, until the statutory text of the proposed rule becomes available for public comment, it remains to be seen to what degree the WHD will retract its current view that bonuses and premium pay must be excluded.

We will continue to monitor developments regarding the proposed rule and share any notable developments.