We all know (or learn) that not everything in life can be carefully planned. For example, some weeks an employer may need a worker for just 30 hours, but in another week may need them to put in 50 hours. The Fair Labor Standards Act (FLSA) has long provided employers with the option to pay nonexempt employees whose hours vary on a salary basis, but at times has offered inconsistent guidance on the impact of bonuses and commissions, or how to calculate overtime. When courts got involved, sometimes there were conflicting rulings.
Under Secretary Scalia's leadership, the U.S. Department of Labor (DOL) is offering some clarification. On May 20, 2020, DOL announced a Final Rule https://www.dol.gov/sites/dolgov/files/WHD/fww/FR-FWW.pdf that clarifies that employers may pay bonuses or other incentive-based pay to salaried, nonexempt employees whose hours vary week-to-week. The Final Rule applies to employees who meet the following criteria:
(1) the employee's hours fluctuate from week to week;
(2) the employee receives a guaranteed salary that does not vary with the number of hours worked (docking employees in "short weeks" is fatal);
(3) the amount of the employee's fixed salary is at least equal to minimum wage for every hour worked;
(4) the employee and the employer have a clear and mutual understanding about the manner of pay; and
(5) the employee receives overtime pay, in addition to salary and any bonuses, for all overtime hours worked.
Note that in this scenario the employer pays an overtime premium of one-half - not one-and-a-half - times the regular hourly rate for each overtime hour. Assuming a worker is paid $400/week for all hours, and works 50 hours and also gets a $50 bonus, pay should be the base salary ($400) plus $50 bonus ($450), divided by the total number of hours worked (50), for a 'regular rate" of $9/hour; plus $4.50 (one-half of $9) per overtime hour, yielding a total paycheck of $495 (base $400 + bonus $50 + 10 hours OT premium = $45).
In addition to changing the title of the regulation from "Fixed salary for fluctuating hours" to "Fluctuating Workweek Method of Computing Overtime," the Final Rule achieves the following:
- Expressly states that employers can pay bonuses, premiums, or other additional pay, such as commissions and hazard pay, to nonexempt employees compensated on a salary basis using the fluctuating workweek method. (See 29 CFR 778.114(a).) These supplemental payments must be included in calculating the employee's "regular rate" (for purposes of overtime) unless they are excluded under other provisions of the FLSA. This allows employers greater flexibility to provide bonuses or other additional compensation to nonexempt employees whose hours vary from week to week and eliminates any disincentive for employers to make supplemental payments.
- Illustrates how an employer may pay an employee a shift differential or productivity bonus in compliance with the rules. (See examples in 29 CFR 778.114(b).) This may be particularly valuable guidance for employers who want to reward their workers with more pay for their efforts in dealing with the COVID19 crisis.
- Clarifies confusing language to make the fluctuating workweek method easier to understand and administer. (See revised 29 CFR 778.114(a).)
There are several other things to understand about the Final Rule. First, it is not strictly speaking a regulation, but rather a statement of general policy and official interpretation. This affects the degree of deference a court will give it. Regulations have more authority than interpretations; this is an interpretation, and some courts may be less willing to find it binding. Second, there are some surprising omissions. For example, if a nonexempt employee's hours don't vary weekly, but are regularly scheduled; and the employer wants to pay a guaranteed salary for all hours worked, it's not clear that the rule would apply.
The new Final Rule also addresses divergent views that have been expressed by DOL and courts in the past, with a view to eliminating legal uncertainty for employers regarding the compatibility of various types of supplemental pay with the fluctuating workweek method, which can generate significant savings in overtime. In sum, the new rule provides employers concrete guidance to ensure compliance - and avoid punishing employers who give workers extra pay, as the old rules sometimes were interpreted to do.