The FLSA contains a number of provisions that enable employers to manage, if not reduce, overtime costs.  One of these is called a pre-payment plan.  Under a Pre-Payment Plan, an employer pays anticipated overtime in advance in order to maintain the employee’s wage or salary level constant from pay period to pay period.  Excess payments made for short work weeks are treated by both the employer and the employee as a loan or cash advance to be repaid either by offset against future overtime earnings or by refund when the employee is terminated.

Under the FLSA, employers must usually pay employees their straight time and overtime compensation earned in a particular work week must ordinarily be paid on the regular pay day for the period in which the work was performed.  The US Department of Labor (“USDOL”) through a pre-payment plan, has approved a limited exception to the weekly requirement for overtime payment.

For example, an employer and employee may agree that in any work week in which the employee works less than forty hours, the employer will advance to the employee the difference between the amount equal to his regular rate of pay for forty hours and the amount he would have received if he had been paid only for the number of hours he worked.

Under these USDOL tenets, if, for example, an employee is paid $10 per hour, he would receive $400 for a 40 hour week. Under a Pre-Payment Plan, if the employee worked 36 hours, and would normally receive $360, he would still receive the full $400.  The $40 difference would be treated as a loan and “banked” against future overtime wages.  If the employee subsequently worked two (2) hours of overtime, he would be entitled to time and one-half of the $10 rate, i.e., $15 per hour, for a total of $30 in overtime payments.  Under the Pre-Payment Plan, however, the employee would not receive the $30 in cash in the week in which he actually worked the overtime, as he would have already received it under the Pre-Payment Plan.  In this example, a credit of $10.00 would remain in the “bank.”

There is no issue concerning the openness and mutual agreement to this arrangement, obviating the need for any executory agreement to implement this pre-payment Plan.   The USDOL, through an Opinion Letter, has opined that the employer and the employee must “agree” on the Pre-Payment Plan, but the nature and form of such agreement are not specified.  By analogy, employers who place employees on a “fluctuating work week” arrangement are not required by the USDOL to obtain signed agreements from the affected employees.  It is sufficient that the employer, by policy, advise the employees that they will be paid pursuant to the fluctuating work week method.

The Takeaway

The concept of a pre-payment plan arrangement fits well with an employee where the nature of his work is sporadic; it can be very busy for some/several days in a week and then tail off to nothing or it can be busy for several weeks and then tail off to nothing.  There may be situations where the employer wishes to retain the Employee’s services and also wants to provide a stable/steady income for him.  The pre-payment arrangement accomplishes both goals.

The irony is that, under this arrangement, the employee is (very likely) overpaid…

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