Fluctuating Workweek and Bonus Payments Are Incompatible under the FLSA Per a Recent Ohio Federal Court Ruling

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The “fluctuating workweek” wage payment method is allowed under the Fair Labor Standards Act (FLSA) when (1) a non-exempt employee’s hours of work fluctuate from week to week, (2) the employer and employee agree to use this method of compensation before the work is performed, (3) the amount of the employee’s salary is adequate to cover all straight-time hours he/she works in a week, (4) a fixed salary is paid regardless of the number of hours the employee works each week, and (5) the employee is paid a 50% overtime premium (based on a regular rate of pay which is determined by dividing his/her fixed salary by actual hours worked) for all hours worked over 40 in any week.  See 29 C.F.R. §778.114.

Radioshack compensated its non-exempt store managers on a salary basis using this fluctuating workweek wage payment method.  It also paid these managers a non-discretionary bonus based on each store’s performance. 

The interplay of these two forms of compensation was challenged by these store managers in Sisson v. Radioshack, which was filed in the Northern District Court of Ohio based on a May 5, 2011 Department of Labor (DOL) rule.  This rule marked a 180º change in the DOL’s (and numerous courts’) position concerning the same.  Specifically, in the May 2011 rule, the DOL stated that paying bonuses or other non-overtime compensation to employees paid under the fluctuating workweek method invalidated the use of this wage payment method because the “fixed salary” requirement noted above was not met when the bonus payments were taken into account. 

In a recent decision, the Northern District Court of Ohio deferred to the DOL rule and held that Radioshack had underpaid these employees after May 5, 2011.

How This Decision Impacts Other Employers

This decision should serve as a wake-up call to all employers who use the fluctuating workweek wage payment method to make sure they are complying with the DOL’s May 2011 rule.  If they are not, the penalty will be paying all affected employees 1.5 times their regular rate of pay, which would be calculated by dividing their salary by no more than 40 hours per week, for any hours they have worked over 40 in any workweek since May of 2011. 

By way of illustration, if an employee has a salary of $500 per week, and is paid on a fluctuating workweek basis, in a 50-hour week he/she would be entitled to an overtime premium of $50.00 for a total weekly compensation of $550.00.  If the fluctuating workweek wage payment method is invalidated by some type of bonus or other additional payments which destroy the “fixed salary” required factor, this employee would instead be entitled to be paid 40 hours at $12.50 ($500 ÷ 40), plus 10 hours at time and a half (1.5 x $12.50 x 10), which would equal $187.50, for a total weekly compensation of $687.50 for this same 50-hour week.  

As always, should you have any questions concerning this or any other wage payment statute, rule, or regulation, please contact Bill Trumpeter or any other member of our Wage and Hour Law Practice Group.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations.  As always, readers should consult a qualified attorney for specific legal guidance.  Should you need assistance from a Miller & Martin attorney, please call 1-800-275-7303.