DOL Clarifies the Fluctuating Workweek Method of Computing Overtime
In May 2020, the U.S. Department of Labor issued a new rule regarding overtime calculations under the Fair Labor Standards Act. The new rule amends 29 C.F.R. § 778.114 and clarifies that the fluctuating workweek method of calculating overtime can be used for nonexempt employees who are compensated with fixed salaries and who also receive bonuses, commissions, hazard pay, and other incentive compensation. Previously, it was unclear whether employers could pay things like bonuses in addition to the fixed salary and still use the fluctuating workweek method.
Who can use the fluctuating workweek method?
An employer may use the fluctuating workweek method to calculate overtime for a nonexempt employee if the employee works fluctuating hours from week to week (e.g., 40 hours one week and 50 hours the next week), and receives a fixed salary that does not vary with the number of hours worked per week. The employee and the employer must also have a “clear and mutual understanding” that the fixed salary is compensation for the total hours worked each workweek, regardless of the number of hours. The new rule clarifies that this method can be used even when employees are paid incentive compensation, such as bonuses or hazard pay, in addition to their salary.
Keep in mind that the fluctuating workweek overtime calculation may not be used if it would result in a salary that falls below the minimum hourly wage. There are also some states, such as California, that have rejected the fluctuating workweek method.
How does it work?
Under the fluctuating workweek method, if an employee works overtime, the employer can compensate the employee at one-half the employee’s regular rate of pay for the overtime hours worked. The overtime rate is not the typical one and one-half the employee’s regular rate of pay. The reason is that the “straight time” pay for the employee’s overtime hours has already been included in their regular salary.
To calculate pay using the fluctuating workweek method, the employer must (1) determine the hourly rate of pay for that week; (2) divide the hourly rate of pay in half; (3) multiply the halved hourly rate by the number of overtime hours worked; and (4) add that number to the weekly salary, including any bonus or other incentive compensation that may have been paid that week.
(hourly rate ÷ 2) × overtime hours + weekly salary + bonus, if any = total pay
The new rule clarifies that if the employee has received any incentive compensation that week—such as a bonus—that needs to be included when determining the hourly rate of pay.
hourly rate = (weekly salary + bonus, if any) ÷ total hours worked that week
Below is an example for calculating overtime in the following scenario: an employee’s weekly salary is $600, the employee works 50 hours in a week (which is 10 hours of overtime), and the employee receives a $100 bonus for that week.
First, determine the hourly rate:
($600 salary + $100 bonus) ÷ 50 hours = $14 hourly rate
Next, calculate overtime:
($14 hourly rate ÷ 2) × 10 overtime hours + $600 weekly salary + $100 bonus = $770
Under this method, the regular rate of pay may vary each week if the employee works a different number of hours. The fluctuating workweek method thus disincentivizes inefficiency, since the regular rate of pay, and in turn overtime rate, will decrease with each additional hour worked each week.
It is important to remember that certain categories of “excludible pay,” such as vacation pay, do not need to be included when calculating the regular rate.
For questions about overtime or for assistance navigating the FLSA, please contact a member of the Stokes Lawrence Employment Group.