DOL Weighs in on Fluctuating Workweek Method: Employee Hours Do Not Need to Fluctuate Below 40 to Qualify

On August 31, 2020, the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) released Opinion Letter FLSA2020-14. The opinion letter explains that an employee’s hours do not need to fluctuate below 40 hours per week in order for the employee to qualify for the fluctuating workweek method of calculating overtime pay. The opinion letter also states that employers availing themselves of the fluctuating workweek method may not “deduct from an employee’s salary for absences occasioned by the employee,” subject to a few exceptions.

Background on the Fluctuating Workweek Method

The fluctuating workweek method for complying with the Fair Labor Standards Act’s (FLSA) overtime requirements is set forth in 29 C.F.R. § 778.114. It permits the payment of a fixed salary for fluctuating hours as one way employers can meet their overtime pay obligations to nonexempt employees, if certain conditions are met.

The fixed salary compensates an employee at straight-time rates for whatever hours the employee worked in a workweek. Thus, applying the fluctuating workweek method, an employer satisfies the FLSA’s overtime requirements if it compensates the employee, in addition to the fixed salary amount, at a rate of at least one-half the employee’s regular rate of pay for the hours the employee worked each workweek in excess of 40 hours. Because the employee’s work hours fluctuate from week to week, the regular rate is determined weekly based on the number of hours actually worked. The more hours the employee works, the lower the regular hourly rate.

As we reported in June 2020, the WHD published a revised regulation clarifying the criteria an employer must meet in order to “use the fluctuating workweek method to properly compute the regular rate and overtime pay owed [to a nonexempt employee] under the FLSA.” The regulation provided, among other things, that bonuses and premium payments were compatible with the fluctuating workweek method. The regulation took effect on August 7, 2020.

The Opinion Letter’s Analysis

The WHD began its analysis in FLSA2020-14 by citing the following criteria for utilizing the fluctuating workweek method, as articulated in the revised regulation:

1. The employee’s hours of work fluctuate from week to week;
2. The employee receives a fixed salary that does not vary with the number of hours worked;
3. 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;
4. 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
5. 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.

According to the opinion letter, the regulation “makes clear that there is no requirement that an employee’s hours vary both above and below 40 per week to come within the rule; it requires only that the employee’s hours fluctuate from week to week.” The WHD also noted that the “WHD has long held that the fluctuating workweek method does not require that an employee’s hours fluctuate below 40 hours per week.” As such, the WHD concluded that “assuming all of the other conditions for using the fluctuating workweek method are satisfied, an employee may qualify for the fluctuating workweek method if their hours fluctuate only above 40 hours per week.”

But the WHD emphasized that it “has long held that an employer using the fluctuating workweek method may not deduct from an employee’s salary for absences occasioned by the employee.” Such deductions are contrary to the “requirement that an employee be paid a ‘fixed salary’” for all hours worked in a workweek. Therefore, it is the WHD’s position, for example, that an employer “may not deduct from an employee’s salary when the employee has exhausted a sick leave bank or not yet earned sufficient sick leave to cover an absence due to illness.”

According to the opinion letter, an exception to this rule exists for “occasional disciplinary deductions from [an] employee’s salary 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.” (Brackets and emphasis in the original)

Conclusion

The fluctuating workweek method for computing overtime pay remains an option for employers complying with the FLSA’s overtime requirement in relation to certain nonexempt, salaried employees. The clarity provided to employers by the revised regulation, and the WHD’s recent opinion letter, may assist employers with determining whether the fluctuating workweek method makes sense for their workforces.

It is unclear whether the new regulation will be subject to challenge, or whether courts will defer to the WHD’s interpretive guidance, including this recent opinion letter. Employers may want to confirm that the fluctuating workweek method complies with applicable state or local overtime laws.