Calculating Overtime for Nonexempt Employees on a Fixed Salary Using the Fluctuating Workweek Method
September 3, 2020 by John Freeman
The Fair Labor Standards Act (“FLSA”) requires employers to pay nonexempt employees at least one and one-half times the regular rate at which the employee is employed for all hours actually worked in excess of 40 in a workweek. In other words, for each hour over 40 that a nonexempt employee works in a workweek, the employee is entitled to straight-time compensation at the employee’s regular rate and additional overtime compensation at fifty percent of the regular rate. But what if a nonexempt employee receives a fixed salary that does not vary depending on the number of hours the employee works in a workweek yet the employee’s hours fluctuate; that is, in some workweeks the nonexempt employee works more than 40 hours and in some workweeks the nonexempt employee works less than 40 hours but the employee is paid the same fixed salary. In accordance with a revised regulation, 29 C.F.R. § 778.114, issued by the Wage and Hour Division of the Department of Labor that was effective August 7, 2020, an employer may use the fluctuating workweek method to compute whether overtime is owed and the amount of overtime owed to a nonexempt employee on a fixed salary if certain requirements are met.
Criteria Required for Using the Fluctuating Workweek Method
An employer may use the fluctuating workweek method to compute the amount of overtime pay owed to a nonexempt employee under the FLSA if five criteria set forth in 29 C.F.R. §114(a)(1)-(5) are met. These five criteria are:
- The employee’s hours of work fluctuate from week to week;
- The employee receives a fixed salary that does not vary with the number of hours worked;
- The amount of the fixed salary is sufficient to satisfy the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours the employee works is greatest;
- The employee and the employer have a clear and mutual understanding that the fixed salary is compensation (apart from overtime premiums and any bonuses, premium payments, commissions, or other additional pay that may not be excluded from the regular rate) for the total hours worked each workweek regardless of the number of hours; and
- The employee receives, in addition to the fixed salary and any bonuses, premium payments, commissions, and additional pay of any kind, compensation for all overtime hours worked at a rate of not less than one-half the employee’s regular rate of pay for that workweek.
Examples of how these criteria are applied to a nonexempt employee who is compensated on a fixed salary that does not vary with the number of hours worked in a workweek are set forth in the regulation. See 29 C.F.R. §778.114(b). Such examples include how the fluctuating workweek method is applied to calculate whether or not overtime is owed, and if owed, how to calculate the amount. The examples include those instances where the nonexempt employee on a fixed salary, and who receives no additional compensation, works less than 40 hours in a workweek and also works more than 40 hours in a different workweek, and how to calculate the nonexempt employee’s regular rate, and if overtime is owed, how to calculate the amount. Examples are also set forth where such nonexempt employee receives a fixed salary but also receives additional compensation, such as bonuses, commissions or other additional pay, and works less than 40 hours in a workweek and also works more than 40 hours in a different workweek, and how to calculate the nonexempt employee’s regular rate, and if overtime is owed, how to calculate the amount using the regular rate. In such instances where additional pay is paid, the additional pay is to be included in the calculation of the nonexempt employee’s regular rate. The examples given in the regulation cover some typical situations but there may be other situations that the examples do not cover and a legal interpretation of the regulation and the FLSA will be required. In addition, some of the examples given may raise questions about how the rule is applied and consulting with an attorney should be considered.
Recent Wage and Hour Division Opinion Letter
In an August 31, 2020 Opinion Letter issued by the Wage and Hour Division (WHD) of the U.S. Department of Labor, the WHD made it clear that the hours of a nonexempt employee on a fixed salary do not have to fluctuate above and below 40 per workweek for an employer to be able to use the fluctuating workweek method of calculating overtime pay. The only requirement relating to hours is that the hours fluctuate from week to week, and in those workweeks where the hours are above 40, then overtime must be paid. Even if the hours are always above 40 but fluctuate as to the number of hours, the fluctuating workweek method may be used if all of the criteria for using the fluctuating workweek are satisfied.
The Opinion Letter also noted that the regulation provides that an employer using the fluctuating workweek method may not deduct from a nonexempt employee’s salary for absences occasioned by the employee, except that the employer may take occasional disciplinary deductions for willful absences or tardiness or for infractions of major work rules, provided that the deductions do not cut into the required minimum wage or overtime pay. See 29 C.F.R.§ 778.114(d).
Conclusion and Employer Take-Away
If the five criteria stated above are met, an employer may be able to use the fluctuating workweek method of calculating overtime pay for nonexempt employees who are paid a fixed salary and when such employees’ hours vary from week to week. If an employer is using such method, an employer must not make deductions from an employee’s pay for absences except for occasional disciplinary deductions for willful absences or tardiness or for infraction of major work rules.
The FLSA is complicated and abiding by its provisions is difficult. Any questions about whether an employer’s action is in compliance with the FLSA should be addressed to an attorney who can assist with such compliance.