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DOL final rule to expand access to bonuses for workers paid using fluctuating workweek method

By Ronald Miller, J.D.

The final rule clarifies that payments in addition to a fixed salary are compatible with the use of the fluctuating workweek method under the FLSA.

On May 20, 2020, the U.S. Department of Labor announced a final rule that allows employers to pay bonuses or other incentive-based pay to salaried, nonexempt employees whose hours vary from week to week. The rule clarifies that bonuses, premium payments, commissions and hazard pay on top of fixed salaries are compatible with the fluctuating workweek method of compensation. Such payments must be included in the calculation of the regular rate as appropriate under the Act. As compared to the proposed rule, the Department’s final rule adds examples and makes minor revisions designed to make the rule easier to understand.

Flexible work schedules. The Department believes that this rule will allow employers and employees to better utilize flexible work schedules. This is especially important as workers return to work following the COVID-19 pandemic. Some employers are likely to promote social distancing in the workplace by having their employees adopt variable work schedules, possibly staggering their start and end times for the day. This rule will make it easier for employers and employees to agree to unique scheduling arrangements while allowing employees to retain access to the bonuses and premiums they would otherwise earn.

In the final rule, the Department:

  • Adds language to 29 CFR 778.114(a) to expressly state that employers can pay bonuses, premium payments, or other additional pay, such as commissions and hazard pay, to employees compensated using the fluctuating workweek method of compensation. (The rule also states that such supplemental payments must be included in the calculation of the regular rate unless they are excludable under FLSA sections 7(e)(1)–(8)). The rule grants employers greater flexibility to provide bonuses or other additional compensation to nonexempt employees whose hours vary from week to week, and it eliminates any disincentive for employers to pay additional bonus or premium payments to such employees.
  • Addresses the divergent views expressed by the Department and courts―and even among courts―that have created legal uncertainty for employers regarding the compatibility of various types of supplemental pay with the fluctuating workweek method.
  • Adds examples to 29 CFR 778.114(b) to illustrate these principles where an employer pays an employee, in addition to a fixed salary, (1) a nightshift differential, (2) a productivity bonus, and (3) premium pay for weekend work.
  • Revises the rule in a non-substantive way to make it easier to read, so employers will be able to better understand the fluctuating workweek method. Revised 29 CFR 778.114(a) lists each of the requirements for using the fluctuating workweek method, and duplicative text is removed from revised 29 CFR 778.114(c).
  • Changes the title of the regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of Computing Overtime.”

Fluctuating workweek method. Under the current 29 CFR 778.114, an employer may use the fluctuating workweek method if the employee works fluctuating hours from week to week and receives, pursuant to a clear and mutual understanding with the employer, a fixed salary as straight time compensation for whatever hours the employee is called upon to work in a workweek, whether few or many.

In such cases, because the salary “compensate[s] the employee at straight time rates for whatever hours are worked in the workweek,” the regular rate “is determined by dividing the number of hours worked in the workweek into the amount of the salary,” and an employer satisfies the overtime pay requirement of section 7(a) of the FLSA if it compensates the employee, in addition to the salary amount, at a rate of at least one-half of the regular rate of pay for the hours worked each overtime hour. Because the employee’s hours of work fluctuate from week to week, the regular rate must be determined separately each week based on the number of hours actually worked each week.

The payment of additional bonus and premium payments on top of the fixed salary to employees compensated under the fluctuating workweek method has presented challenges to employers and the courts alike.

Fixed salary requirement. The Department is adopting its proposed regulatory language regarding the requirement that an employee must receive a fixed salary that does not vary with the number of hours worked in the workweek, whether few or many, for the fluctuating workweek method to be applicable. To prevent any further misunderstanding, however, the Department is also clarifying that the regulation does not require that an employee’s hours must sometimes fluctuate below 40 hours per week, so long as the employee’s hours worked do vary.

The regulation maintains the requirement for the use of the fluctuating workweek method that the fixed salary be sufficient to compensate the employee for all hours worked at a rate not less than the applicable minimum wage. The Department has determined that where an employer has reasonably calculated the fixed salary to cover at least the minimum wage for all hours worked, an occasional workweek where the fixed salary does not at least equal the applicable minimum wage, due to unusual and unforeseeable circumstances, does not invalidate the use of the fluctuating workweek method in other workweeks in which the salary equals or exceeds the applicable minimum wage as anticipated.

Clear and mutual understanding. The Department believes that the clear and mutual understanding requirement is an important condition placed upon the usage of the fluctuating workweek method. However, the Department has decided to add clarifying text in § 778.114(a) to emphasize that, although the parties must have a clear and mutual understanding that the fixed salary is compensation for all hours worked in the workweek, they need not possess such an understanding as to the specific method used to calculate overtime pay.

Bonus and premium payments. In the final regulation, the Department is adding language to § 778.114(a) clarifying that bonuses, premium payments, and other additional pay of any kind are compatible with the use of the fluctuating workweek method of compensation. The Department is also adding examples to § 778.114(b) to illustrate the fluctuating workweek method of calculating overtime where an employee is paid (1) a nightshift differential, (2) a productivity bonus in addition to a fixed salary, and (3) premium pay for weekend work.

Finally, the Department is changing the title of the regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of Computing Overtime.”