In the past, we have discussed how to calculate paying overtime to salaried, non-exempt employees, including those employees who also receive commissions. One area that we have not touched on is a potentially employer and employee friendly method of calculating overtime that is nonetheless fraught with some risk: the fluctuating workweek. As you know if you read us regularly, simply paying an employee a salary does not mean that the employee is automatically “exempt” from the Fair Labor Standards Act (FLSA) overtime requirements, or parallel requirements in state and (increasingly) local law. Paying an employee on a salary basis is just one part of the test for exemptions, as we have explained in our recurring Wage and Hour Basics series.
What positions are often salaried, but classified as non-exempt? In the tech and telecom industries, network administrators, computer analysts (not programmers), installers, and technicians are often paid a salary but just as often do not meet any of the other requirements for exempt status. In the retail sector, front line supervisors and sometimes even assistant managers may fall into the same category. Even positions with titles such as “working foreman” or “manager” do not necessarily denote an exempt employee in practice.
If you have a salaried, non-exempt employee, you must compensate them for hours worked in excess of 40 hours in a single workweek with an overtime premium. So, how do you calculate these rates? In short, you have two options. The first is the one we have described in the past. You pay the employee a rate of one and one-half times their regular rate of pay for each of those overtime hours. For simplicity’s sake, let’s assume that you pay your employee Chuck a salary only, which is intended to cover 40 hours per week (see this post if it covers more or fewer hours than that). Under this first method, you simply calculate Chuck’s “regular rate” by dividing his salary by the number of hours it covers. Assuming that Chuck’s base salary of $1,000 is intended to cover 40 hours of straight-time work, and that he works 50 hours, Chuck’s pay would be as follows:
Regular rate = $1,000 / 40 hours = $25.00/hour
Total pay = Regular salary + 10 hours at time-and-a-half (10*$25.00*1.5)
$1,000 + ($375) = $1,375
Now, let’s assume that you and Chuck both understand that his salary is intended to cover his straight-time compensation for all hours that he happens to work in any given week, regardless of how many or how few. That’s the more traditional view of how a salary is supposed to work (at least for exempt employees), but it presents a challenge for calculating overtime for non-exempt employees. In addition to the traditional overtime method, you have another potential option: the fluctuating workweek. The Supreme Court first recognized this method more than 70 years ago in Overnight Motor Transport Co. v. Missel, and the DOL later codified it in the FLSA wage and hour regulations.
Often called the “half-time” measure of overtime, the fluctuating workweek is available if you can meet four tests:
- You must pay a fixed salary each week that does not vary based on the number of hours worked (a stricter test than the “salary basis” test for exempt white collar workers);
- You and the employee must share a “clear mutual understanding” that you will pay this fixed salary regardless of the number of hours worked;
- The fixed salary must be sufficiently large to provide compensation that at least equals the minimum wage; and
- Your employee’s hours must fluctuate from week to week both above and below 40 hours.
If all four elements of the test are satisfied, you can use a “half-time” overtime calculation. Since you have already compensated your employee for all straight time hours, you only need to pay the overtime premium. Using the same example as above, Chuck’s fixed salary covers all the hours he worked during the week:
Regular rate = $1,000 / 50 hours = $20.00/hour
You calculate the overtime rate by dividing salary by the number of hours that Chuck actually worked in a week. Under the fluctuating workweek method, you have already paid him $20 of the $30.00 hourly overtime rate by virtue of his base salary, so you owe him just the half-time overtime premium:
Total pay = Regular salary + 10 hours at half time (10*$20.00*0.5)
$1,000 + ($100) = $1,100
Are you thinking that this seems like a good way to avoid some overtime expenses? Don’t! That’s where employers tend to get tripped up. The fluctuating workweek is an alternative to the traditional method of calculating overtime compensation, not an excuse to cheat or oppress employees.
The federal regulations are not clear about how often or how much an employee’s hours worked need to dip below 40 in a week, but just like rounding, the fluctuating workweek method must work in your employee’s favor sometimes, too. In that sense, #4 above is the most important part of the test. If their hours truly fluctuate, then in some weeks, your employee will get a full salary while working fewer than 40 hours. In others, the employee will receive that same salary for working more than 40 hours (plus the half-time overtime premium). The flipside calculation is simple. Let’s say that in week two, Chuck works only 25 hours. You will still pay him his fixed $1,000 salary (and not $625).
If your employee always works 40 or more hours and rarely (if ever) works fewer than 40, then you cannot use this method. The fluctuation need not be unpredictable, and an employee’s hours do not have to be different every week. However, there must be some evidence of fluctuation—in the favor of both employee and employer—over a period of time to validly use the fluctuating payment method.
The fluctuating workweek method also is not a mitigation strategy in litigation, either. If you have misclassified your employees as exempt, you likely will not have the fluctuating workweek method to fall back on. Remember #1 above. Employers who want to use the fluctuating workweek must establish a “clear mutual understanding” with employees (preferably in a written agreement or a job offer letter). If you have misclassified your salaried employees as exempt, it may be hard to show the required understanding. If you don’t have a mutual understanding with your non-exempt employee about what his or her salary covers, then courts will fill in the gaps for you, and almost always lock you into using the standard overtime calculation. For instance, in Black v. SettlePOU, the Fifth Circuit denied the employer’s claim to the fluctuating workweek method by relying on the company handbook, which defined “workweek” as a fixed number of hours. The court then determined that the fluctuating workweek was unavailable since there was no other “clear mutual understanding” between the employer and employee (having a policy of refusing to pay overtime did not help matters either). Accordingly, the court required the employer to compensate the employee for all of his unpaid overtime at the standard, time-and-a-half calculation.
The fluctuating workweek ideally should be a win-win for employers and employees. It provides a guaranteed salary despite uncertain hours, a clear perk for employees, whether used for retention or as part of a promotion or other career advancement. For employers, it simplifies your overtime calculations and can eliminate some of the peaks and valleys in your weekly payrolls. On occasion, it might even save you some payroll expense, but that should not be your primary goal (unless you really like defending yourself in wage and hour litigation).
Are you not sure whether your salaried employee is exempt? Not sure if the fluctuating workweek is a good idea in your situation? It’s okay—these questions are very fact intensive and position specific.