Last week, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued a new batch of opinion letters addressing compliance issues involving the Fair Labor Standards Act (FLSA). For those not familiar with such letters, an opinion letter is simply an official written response to a person or business who requested the letter, explaining how a particular law applies to specific factual circumstances. In one of the four recently issued letters, the WHD addressed whether employees’ hours must fluctuate above and below 40 hours per week to qualify for the fluctuating workweek method of calculating overtime pay under 29 C.F.R. § 778.114.
Before diving into the opinion letter, here’s a little background on the fluctuating workweek calculation. As employers are fully aware, nonexempt employees must receive one and a half times their regular hourly rate of pay for each hour worked over 40 per week. The fluctuating workweek method of calculating overtime is simply one method employers can use to compute overtime compensation. To use the fluctuating workweek calculation, the employee must:
- Work hours that fluctuate weekly;
- Receive a fixed weekly salary that does not vary with the number of hours worked in the workweek, whether few or many, and which satisfies the applicable minimum wage rate for every hour worked in those workweeks the employee works the greatest number of hours;
- Have a clear and mutual understanding with the employer that the fixed salary is compensation for the total hours worked each week regardless of the number of hours (except for overtime premiums and any bonuses, premium payments, commissions, hazard pay, or other additional pay of any kind not excludable from the regular rate under section 7(e)(l) through (8) of the FLSA); and
- Receive overtime compensation, in addition to such fixed salary and any bonuses, premium payments, commissions, hazard pay, and additional pay of any kind, for all overtime hours worked at a rate of not less than one-half the employee’s regular rate of pay for that workweek.
A helpful example illustrates how this method works. Let’s say you have an employee whose hours fluctuate each workweek, but who never works more than 50 hours, and you pay that employee a $600 weekly salary with the mutual understanding that it is the employee’s total weekly compensation apart from overtime and any bonuses, premium payments, etc. If the employee works 37.5 and 48 hours over two weeks, the employee’s total straight time earnings are $600 each week (fixed salary of $600). This means the employee’s regular rate of pay is $16.00 per hour (600/37.5) for week one and $12.50 per hour (600/48) for week two. During the first week, the employee is only owed $600 because no overtime was worked (i.e., more than 40 hours). For the 48 hour workweek, the employee is owed $650.00 ($600 plus 8 hours of overtime at one-half times the regular rate of $12.50 for a total overtime payment of $50.00 ($12.50 x ½ x 8 hours = $50.00)).
In its new opinion letter, the WHD opined whether an employee’s hours must fluctuate both above and below 40 hours per week in order to utilize this fluctuating workweek method to calculate overtime. Answering in the negative, the WHD explained that the fluctuating workweek method of calculating overtime pay can be used even where the employee’s hours do not fluctuate below 40 per week. Put another way, employers can use the fluctuating workweek method to calculate overtime even if their employees never work less than 40 hours per week.
Although not directly relevant to the opinion letter at issue, the WHD reminded employers using the fluctuating workweek calculation that they generally cannot make deductions from an employee’s weekly salary for absences. The only exceptions are for occasional disciplinary deductions for willful tardiness or absences or infractions of major work rules. Understandably, utilizing the fluctuating workweek method to calculate overtime has its benefits, but can also be confusing and sometimes difficult to keep up with and maintain.