By Heather Hearne
The Department of Labor (DOL) is one step closer to finalizing its proposed clarification of fluctuating workweek rules. The public comment period on the Department’s Notice of Proposed Rule Making (NPRM) related to fluctuating workweeks closed on December 5. Thirty-seven comments were submitted on the proposed rule that, if finalized, would provide much-needed clarification and relief to employers. Specifically, the rule clarifies that “bonus, premium, and any other supplemental payments are compatible with the fluctuating workweek method of calculating overtime pay” (emphasis added). This single statement seeks to set straight more than a decade of confusion and contradictory rulings by courts.
The concept of overtime is relatively straight forward. Unless an employee is classified as exempt, federal law requires that he or she be paid 1.5 times the individual’s regular rate of pay for all hours worked in excess of 40 in a week. The fluctuating workweek (FWW) method of paying overtime is slightly different and only available if certain requirements are satisfied. Under this variance to overtime rules, if an employee’s work hours fluctuate from week to week, the employer can provide that employee with a guaranteed salary each workweek, regardless of hours worked, provided that the salary is sufficient to compensate the employee at a rate in excess of the minimum wage and further provided that there is a clear and mutual understanding between the employer and employee that the fixed salary covers all of the employee’s straight time wages. The employee still gets paid overtime for all hours worked in excess of 40 in a workweek, but instead of overtime being paid at 1.5 times the regular rate, it is paid at 0.5 times the regular rate. Employers benefit from lower overtime costs while employees benefit from the predictable income level that a fixed salary provides.
This year’s NPRM is déjà vu of a similar notice issued by the DOL in 2008 under the Bush administration in response to confusion among courts and employers as to whether additional payments (e.g., bonuses) violated the “fixed salary” requirement for the FWW. Just as here, the 2008 proposal similarly stated that bonuses and other incentive payments were not inconsistent with the fluctuating workweek method of payment. By the time the rule was finalized in 2011, however, both policy and president had changed and the final version not only dropped this clarifying language but, in a drastic shift in the opposite direction, took the position that any additional compensation paid to an employee, be it a shift premium, production bonus or otherwise, was incompatible with the fixed salary requirement of the FWW method of payment. This single assertion created widespread confusion in the courts. Over the next eight years, courts attempting to determine whether particular additional payments violated the FWW requirements reached varying and often conflicting conclusions with many attempting to apply a court-contrived distinction between production and hours-based bonuses.
Enter the most recent NPRM. Acknowledging that similar clarification was proposed in 2008 but not adopted, the DOL stated that it did not at that time believe that courts needed the clarification and mistakenly concluded that the proposed clarification would be inconsistent with controlling Supreme Court precedent. In reintroducing the proposed clarification, the DOL acknowledged that that “particularly in light of the 2011 Final Rule” and the courts’ reliance on “judicially crafted distinction between certain types of bonuses that the Department has never recognized,” clarification was essential. 29 FR 59590, 59591.
Now that the public comment period has closed, the Department will review the comments submitted and (hopefully) finalize the NRPM with few if any changes. Though many of 37 comments submitted purport to oppose the NPRM, the vast majority of those criticisms are directed more generally at the FWW method of calculating overtime and not the NPRM’s proposed clarification thereof. Most common among these generalized criticisms are claims that the FWW method is difficult to explain to employees, difficult for most payroll systems to handle automatically, and bad for employee engagement because it pays employees a lower hourly rate the more overtime hours they work in a particular pay period. Critics of the NPRM in particular contend that it runs afoul of legal precedent and will harm workers by incentivizing employers to lower fixed weekly salaries and shift compensation to bonuses and other incentive payments.
Though it is true that some employers may seek to capitalize on the NPRM’s clarification as a way to reduce costs, many others may see it as re-opening the door to rewarding employees who, for example, work undesirable shifts. Indeed, proponents of the rule, celebrate the possibility of being able to reward employees for hard work through bonuses, an option the current version of the rule deems inconsistent with the FWW method of payment.
Additionally, while it is true that the FWW calculation results in progressively lower overtime rates as more and more overtime hours are worked, the DOL’s proposed clarification may actually mitigate this result. For example, take employee X who is paid a fixed salary of $1,000/week in addition to overtime under the FWW method. In week one, X works 50 hours and is paid an overtime rate of $10 hour: $1,000 divided by 50 hours equals $20/hour; $20 divided by 2 equals $10/hour. In week two, X works 60 hours, and his overtime rate drops to $8.33/hour: $1,000 divided by 60 hours equals $16.67/hour; $16.67 divided by 2 equals $8.33/hour. This is this the FWW method at work.
Now, consider that same employee, who in week three again works 60 hours, is still paid a fixed salary of $1,000/week, but now receives an additional $100 incentive payment for working overnight shifts—a payment that is disallowed under the current rule but permissible if the NPRM is finalized. That additional payment has the effect of increasing X’s overtime rate from $8.33/hour to $8.75/hour: $1,050 divided by 60 hours equals $17.50/hour; $17.50 divided by 2 equals $8.75. Naturally, critics of the NPRM do not reference this type of calculation, nor do they mention that by reinvigorating use of the FWW method, employees in some industries may actually see an increase in their wages through additional overtime hours and bonuses that would not otherwise be available at small operations or those with a limited budget.
While logic dictates that with few targeted objections to the proposal itself, the NPRM should be finalized without further changes, in light of the 2011 reverse of course and the fact that less than a year remains until the next presidential election, employers should refrain from making any major changes to their compensation structure until a final rule is issued. Additionally, any proposed revisions to employee compensation should be carefully checked against state wage and hour laws, as several states prohibit use of the FWW method entirely.
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