Fluctuating Workweek Redux: Department of Labor Finalizes Revised Methodology

On June 8, 2020, the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) published its revised fluctuating workweek methodology regulation for calculating overtime in the Federal Register. The new final rule goes into effect on August 7, 2020. The purpose of the revised regulation is to clarify that employers can make payments of additional compensation to employees who are paid a fixed salary and work a fluctuating workweek as long as such payments are included in such employees’ regular rate determination for overtime purposes.

The fluctuating workweek methodology for complying with overtime requirement under the Fair Labor Standards Act (FLSA) is set forth in 29 C.F.R. §778.114 and has been the subject of more than one revision since 2008. Specifically, the WHD issued a notice of proposed rulemaking (NPRM) very similar to this final rule in the Federal Register in July 2008, during the final year of the George W. Bush administration, and then published the final rule several years later, on April 15, 2011, during the Barack Obama administration. The 2011 final rule took a different tack from the NPRM and stated that bonus and premium payments were not compatible with the salary requirement of the fluctuating workweek methodology. The WHD revisited this regulation when it published another NPRM in the Federal Register on November 5, 2019, and now has completed its mission to authorize the payment of bonuses and other payments to employees paid with a salary using the fluctuating workweek methodology as long as an overtime premium is paid on such additional compensation. Thus, a brief explanation is in order to identify some of the reasons exactly why the WHD changed course again.

Before doing so, it is important to summarize the fluctuating workweek methodology. Section 778.114 was originally published in 1968. It implemented a Supreme Court of the United States ruling in a 1940 case in which an employer had paid a nonexempt employee a fixed weekly salary for working a workweek of irregular or fluctuating hours of work. The Supreme Court ruled that the payment of a salary to a nonexempt employee was permissible, but that the employer was required to pay the overtime premium, or 50 percent of the employee’s regular rate of pay, for all overtime hours. The regular rate of pay in this context was computed by dividing the salary by the number of hours worked, resulting in a different regular rate for each workweek, depending upon the number of hours worked in each workweek. In this new final rule, the WHD highlighted the history of the fluctuating workweek methodology and various conflicting opinion letters and court decisions on the question of whether an employer could pay additional compensation or bonuses to nonexempt employees paid using the fluctuating workweek methodology.

In its final rule, the WHD clarified the following points:

• The fluctuating workweek methodology is one permissible way for an employer to pay a nonexempt employee a fixed weekly salary for working a workweek of irregular hours and is consistent with the overtime requirements of the FLSA.
• Five criteria (enumerated below) must be met for an employer to use the fluctuating workweek methodology to pay a nonexempt employee a fixed salary plus other payments.
• The revised rule, while inconsistent with some recent litigation outcomes, is intended to eliminate an artificial distinction some courts made between production-based payments, which were found to be permissible, and hours-based payments, which were not permissible. The agency said that it issued the revised rule “to clarify that bonus and premium payments (whether hours-based, production-based, or other) are compatible with the use of the fluctuating workweek method of compensation.”
• The revised final rule brings consistency and rationally explains the WHD’s application of the regulation since “it was not clear what precise position was taken in” the 2011 rule on the permissibilty of bonus and additional payments since it did not substantively change the language of the regulation.
• The fluctuating workweek methodology is not the only permissible way to pay a nonexempt employee overtime compensation where there is an inverse relationship between an employee’s regular rate and number of hours worked.
• The final rule would not negatively affect the compensation of nonexempt workers who may be switched to this methodology, would positively affect the compensation of employees who currently are paid based upon this methodology, and would not create confusion for employers, notwithstanding some state laws, because of the improvements to the regulation.

Thus, in its final rule, the WHD specifically enumerated the following five conditions that must be met in order for an employer to be able to use the fluctuating workweek methodology to pay overtime compensation.

• A nonexempt employee’s hours of work must fluctuate. However, the final rule clarifies that this does not mean that the fluctuations of hours must be below 40 hours in a workweek as well as above 40 hours in a workweek.
• A nonexempt employee must receive a fixed or guaranteed salary that does not vary based upon the number of hours worked in the workweek, whether the hours worked are few or many.
• The fixed salary must equal at least a minimum wage for all hours worked in a workweek. The final rule also provides that should an employee work a number of hours such that a nonexempt employee’s salary does not meet the minimum wage requirement, then the employer can pay the difference to bring the employee up to the minimum wage.
• There must be a clear and mutual understanding between the nonexempt employee and employer that the fixed salary represents compensation for all hours worked, whether they are few or many, in a workweek. The final rule clarifies that this clear and mutual understanding requirement does not extend to understanding how the methodology is used to calculate a nonexempt employee’s overtime compensation.
• The employer will pay the nonexempt employee the overtime compensation due, in addition to the employee’s fixed or guaranteed salary and any bonus or other premium payments of any kind for all overtime hours worked at not less than one-half of the employee’s regular rate of pay for each workweek.

The final rule also provides a number of examples that should assist employees and employers to know and understand their rights and obligations under the FLSA and Section 778.114. As noted above, there are a handful of states, such as California and Pennsylvania, that do not recognize the fluctuating workweek methodology as a permissible way to pay nonexempt employees a fixed salary.

Now that  the WHD has issued this final rule, which expressly authorizes employers to pay bonuses, commissions, hazard pay, premiums, and any other kind of additional pay to nonexempt employees whose hours of work are irregular, it remains to be seen just how many employers will utilize this methodology for complying with the FLSA’s overtime requirement. It is a useful tool but cannot be applied to all nonexempt employees. It also remains to be seen how some courts may view this latest rulemaking and whether they will defer to the WHD’s interpretive guidance.