In light of the announced change in the minimum salary required to maintain salary exempt status under the Fair Labor Standards Act (FSLA), many employers are considering the adoption of the Fluctuating Workweek (FWW) method of compensating non-exempt employees on a salaried basis.

This article will briefly outline the FWW method of compensation as a means to conform to the FSLA for non-exempt employees after the minimum salary requirement goes into effect for exempt employees (currently scheduled for December 1, 2016).

FLUCTUATING WORKWEEK

The fluctuating workweek (“FWW”) method of paying non-exempt employees has been recognized as a valid approach since the Supreme Court decision in Overnight Motor Transp. Co. v. Missel, 316 U.S. 572, (1942).

In 1968, the current DOL regulation that approves of the FWW method was established. 29 C.F.R. § 778.114(a). Under that rule, an employee employed on a salary basis may have hours of work which fluctuate from week to week and the salary may be paid pursuant to an understanding with the employer that the employee will receive a fixed amount as straight time pay for whatever hours he or she is called upon to work in a workweek, whether few or many.

Where there is a clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period, such a salary arrangement is permitted if the amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours she works is greatest, and if she receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half her regular rate of pay. Since the salary in such a situation is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the regular rate will vary from week to week and is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week. Payment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate, under the salary arrangement. 29 C.F.R. § 778.114(a).

As explained by one court:

In other words, because the fixed salary compensates the employee for all the hours worked that week-whether more or less than 40 -- paying an additional 50% of the ‘‘regular rate’’ for every hour above 40 complies with the FLSA’s requirement that employers pay time-and-a-half for overtime hours.

Wills v. Radioshack Corp, 981 F.Supp.2d 245, 255 (S.D.N.Y. 2013).

The example given in the regulation states:

Consider an employee whose hours of work do not customarily follow a regular schedule but vary from week to week, whose total weekly hours of work never exceed 50 hours in a workweek, and whose salary of $600 a week is paid with the understanding that it constitutes the employee's compensation, except for overtime premiums, for whatever hours are worked in the workweek. If during the course of 4 weeks this employee works 40, 37.5, 50, and 48 hours, the regular hourly rate of pay in each of these weeks is $15.00, $16.00, $12.00, and $12.50, respectively. Since the employee has already received straight-time compensation on a salary basis for all hours worked, only additional half-time pay is due. For the first week the employee is entitled to be paid $600; for the second week $600; for the third week $660 ($600 plus 10 hours at $6.00 or 40 hours at $12.00 plus 10 hours at $18.00); for the fourth week $650 ($600 plus 8 hours at $6.25, or 40 hours at $12.50 plus 8 hours at $18.75).

29 C.F.R. § 778.114(b).

The FWW method of overtime payment may not be used unless the salary is sufficiently large to assure that no workweek will be worked in which the employee's average hourly earnings from the salary fall below the minimum hourly wage rate, and unless the employee clearly understands that the salary covers whatever hours the job may demand in a particular workweek and the employer pays the salary even though the workweek is one in which a full schedule of hours is not worked. Typically, such salaries are paid to employees who do not customarily work a regular schedule of hours and are in amounts agreed on by the parties as adequate straight-time compensation for long workweeks as well as short ones, under the circumstances of the employment as a whole. Where all the legal prerequisites for use of the FWW method of overtime payment are present, an employer is not prohibited from paying more.

However, when all the facts indicate that an employee is being paid for his overtime hours at a rate no greater than that which he receives for non-overtime hours, the fluctuating workweek overtime formula cannot be used. 29 C.F.R. § 778.114(c).

When the FWW method applies, ‘‘the minimum overtime rate required by the FLSA is only half-time (i.e., 50% of the regular rate), rather than time-and-a-half (150%).’’ O’Brien v. Town of Agawam, 350 F.3d 279, 286-7 (1st Cir.2003).

EFFECT OF ADDITIONAL PAYMENTS, BONUSES AND THE LIKE

On April 5, 2011, the DOL issued an announcement that it was not changing the FWW rule, but that it was advising that bonuses and premium payments ‘‘are incompatible with the [FWW] method of computing overtime under section 778.114.’’ 76 Fed. Reg. at 18850.

This pronouncement led to a spate of litigation over the legitimacy of using the FWW and whether such employees could receive any other form of compensation.

Before 2011, most court decisions held that purely time-based extra pay invalidated the FWW method. Compare O’Brien, v. Town of Agawam, 350 F.3d 279, 288 (1st Cir. 2003)($10 night-shift differential and extra pay for working more than eight hours or during off-duty time found to invalidate the FWW method) to Aiken v. Cnty. of Hampton, S.C., 172 F.3d 43 (4th Cir.1998) (employer did not violate FWW by paying plaintiffs extra for working holidays). See also Brantley v. Inspectorate America Corp., 821 F.Supp.2d 879, 890 (S.D.Tex. 2011) (increased pay for off-shore, holiday and day-off premiums violates the FWW); Dooley v. Liberty Mut. Ins. Co., 369 F.Supp.2d 81 (D.Mass.2005) (same, as to enhanced lumpsum pay for Saturday work).

Where the premium pay was not based on hours worked, the extra pay has not invalidated the FWW. Wills v. Radioshack Corp, 981 F.Supp.2d 245, 255 (S.D.N.Y. 2013) (performance based bonus does not invalidate FWW method); Switzer v. Wachovia Corp., 2012 WL 3685978 (S.D.Tex. Aug. 24, 2012) (performance based bonuses using metrics such as sales growth, portfolio growth, and customer service consistent with FWW).

In Sisson v. Radioshack Corp., 2013 WL 945372 (N.D. Ohio March 11, 2013), the court held that paying non-exempt salaried employees any bonus invalidated the FWW method.1 Six months later, in Wills v. Radioshack Corp, the court disagreed with the reasoning of the court in Sisson.

The Wills court articulated the following approach for evaluating the use of the FWW.

Under § 778.114, employers may use the FWW method only if all of the following five conditions are met:

  1. the employee’s hours fluctuate from week to week;
  2. the employee receives a fixed weekly salary which remains the same regardless of the number of hours the employee works during the week (excluding overtime premiums);
  3. the fixed amount is sufficient to provide compensation at a regular rate not less than the legal minimum wage;
  4. the employer and employee have a clear mutual understanding that the employer will pay the employee a fixed salary regardless of the number of hours worked; and
  5. the employee receives a fifty percent (50%) overtime premium in addition to the fixed weekly salary for all hours worked in excess of 40 during the week.

Wills v. Radioshack Corp, 981 F.Supp.2d 245, 255 (S.D.N.Y. 2013).

In 2016, the First Circuit Court of Appeals quoted the Wills opinion with approval. In Lalli v. General Nutrition Centers, Inc., 814 F.3d 1 (1st Cir. 2016), the First Circuit held that “the payment of a performance-based commission does not foreclose” use of the FWW method. Id. at 4. The Lalli court follows the same reasoning as the Wills court finding that the 2011 DOL announcement does not invalidate the use of the FWW method in conjunction with performance-based extra pay Courts have almost uniformly distinguished between hours-based bonuses and performancebased commissions in evaluating whether an employee’s compensation structure is permissible under [the FWW method], and we join that line of reasoning today.

Id. at 10.

Thus, the safest course for employers to follow is to use the 5 point test articulated in Wills and to be sure any bonus that is paid is performance based and not discretionary.