By now, you all are aware that on December 1, 2016, the salary threshold for the Fair Labor Standards Act (FLSA) white collar exemptions is about to jump to $47,476 per year. With estimates that 4.1 million workers will become non-exempt as a result of this change, employers are scrambling to fix pay, positions, and staffing to keep costs down after December 1, while retaining good employees. In the search for a solution, some employers are discovering two narrow and rarely used exceptions to the FLSA—the fluctuating workweek method and the Belo contract—which both allow the employer to pay non-exempt employees overtime at reduced rates. Those two payment methods, however, are fraught with challenges that render them far less appealing than they first appear. Before seizing on the fluctuating workweek or Belo contract as a panacea, employers should know the requirements for those methods.

The Fluctuating Workweek Method

The fluctuating workweek method allows an employer to pay a non-exempt employee a fixed weekly salary, plus overtime at the rate of 50% the employee’s regular hourly rate. At first blush, this sounds great: the employee’s overtime rate is only 50% rather than the usual 150%, and the more hours the employee works, the lower his hourly overtime wage will be. For example, under the fluctuating workweek method, if an employee’s weekly salary is $500 and she works 45 hours in a given week, her regularly hourly rate for that week is $11.11/hour ($500/45 hours), and her overtime rate for that week is $5.56/hour. Thus, her total wages that week are $527.80. If she works 60 hours the next week, her regularly hourly rate for that week drops to $8.33 ($500/60 hours) and her overtime rate to $4.17, for total wages of $583.40. By comparison, if the same employee were paid an hourly wage of $12.50, without the fluctuating workweek method, she would earn

$593.75 for a 45 hour workweek and $875.00 for a 60 hour workweek.

Sounds great for the employer, right? It can be, but only if you meet all of the following requirements:

  1. The employee’s work hours must fluctuate often. If the employee usually works a 40 hour week with only occasional overtime, the fluctuating workweek is not an option.
  2. The employer must pay the employee the fixed weekly salary in any week in which she performs any work, even if she only works a few hours that week. The employer cannot dock the salary in weeks were the workload is light.
  3. There must be a clear mutual understanding between the employer and employee that the fixed weekly salary compensates the employee for all hours worked, with additional pay for hours in excess of 40. While the understanding does not have to be in writing, wise employers will document it with the employee’s signature.
  4. The fixed weekly salary has to be high enough that the employee’s effective hourly rate does not drop below the federal minimum wage.
  5. The employer must track the employee’s hours and pay the employee overtime at the rate of 50% the employee’s regular rate.
  6. The employer cannot pay the employee any compensation other than the fixed salary and overtime. Bonuses, commissions, and other additional compensation are prohibited. If the employer pays any prohibited additional compensation, the employer will lose the ability to use the fluctuating workweek method and may be liable for back wages. There are limited exceptions for purely discretionary bonuses, such as a Christmas bonus.

Although the fluctuating workweek is permitted, the Department of Labor does not like it. In an audit, you can expect the DOL to scrutinize closely all time and pay records regarding anyone you pay on a fluctuating workweek basis, and to impose back wage liability if you have failed to comply with any of the requirements or paid any additional prohibited compensation.

The Belo Contract

Another option is a Belo contract, named for the Supreme Court decision that first allowed this exception to the FLSA (Walling v. A.H. Belo Co., 316 U.S. 624 (1942)). Under a Belo contract, the employer can pay a non-exempt employee a fixed weekly salary that covers all hours the employee works up to an agreed upon amount, so long as the amount does not exceed 60 hours. For example, if the parties agree that a weekly salary of $500 compensates the employee for up to 50 hours a week, then so long as the employee’s hours do not exceed 50 hours, the employer will owe him only $500, and will not have to pay any overtime premium. Only if the employee works more than the agreed upon number of hours is he owed anything beyond the agreed upon salary. Clearly, the Belo contract could significantly reduce overtime costs, but it is only available if all of these requirements are met:

  1. The employee must work irregular hours. His hours must vary in a significant number of workweeks and fluctuate both above and below 40 hours per week. The fluctuations below 40 hours must result from the employees’ duties, not from personal reasons (e.g., vacations, illness, holidays, etc.).
  2. The Belo contract must be in writing and must guarantee the employee, for any week in which he performs any work, payment for 40 hours of straight time at specific amount and payment for a specific number of overtime hours (up to 20) at a specific amount. The straight time rate must be at least the statutory minimum wage, and the overtime rate must be at least 1.5 times the straight time rate. For example, the employer and employee could agree to a guaranteed weekly payment of 40 hours of straight time at $10.00/hour and 20 hours of overtime at $15.00, for a total weekly guaranteed salary of $700. The maximum number of work hours the parties can cover in a Belo contract is 60.
  3. The employer must track the employee’s hours worked. If the employee works more than the agreed upon number of hours, then the employer must pay him additional overtime at the agreed upon rate.
  4. The employer must pay the full guaranteed salary for any week in which the employee performs any work, even if it’s less than the agreed upon number of hours.

Like the fluctuating workweek method, the Belo contract is sure to draw extra scrutiny from the DOL if your business is ever audited. It’s important, therefore, to make sure that you’ve met all the requirements before implementing a Belo contract and that you carefully monitor the employee’s hours and pay once one is in place.

With both the fluctuating workweek and Belo contract, if your business fails to meet all the requirements, there is a significant risk that the DOL or a court will disallow the arrangement and hold the business liable for back wages. Before rolling out either method, it is important to consult with a labor and employment law attorney to make sure you’ve met the requirements and are able to properly administer the plan.