Our Quick Quiz Answer discussing day-rate plans led one reader to observe that the federal Fair Labor Standards Act does not always bar employers from paying non-exempt employees a fixed sum that "builds in" some FLSA overtime compensation. While this is true, the permitted arrangement is strictly limited, and it does not allow a day-rate approach.
The Fundamental Concepts
Of course, the FLSA does not require that non-exempt employees be paid on an hourly basis. But a general FLSA principle is that overtime compensation must ultimately be based upon a rate-per-hour, that is, the "regular rate". As a result, FLSA overtime pay must vary as the number of overtime hours worked varies, with a single exception.
The only way to pay a fixed amount for varying overtime hours is under a so-called "Belo" contract. This term comes from the 1942 U.S. Supreme Court decision in Walling v. A.H. Belo Corporation, which approved an overtime-including wage guarantee. However, Congress later amended the FLSA to restrict the conditions under which these may be used.
The FLSA's Section 7(f) authorizes paying a constant sum for varying amounts of overtime work if:
(1) The employee's duties "necessitate irregular hours of work";
(2) The employee is employed under an individual or union contract specifying a regular hourly rate (of at least the FLSA's minimum wage) for hours worked up to 40 in a workweek, plus 1.5 times that specified rate for hours worked over 40; and
(3) The contract provides for a weekly guarantee of straight-time and overtime pay based upon the specified rate for not more than 60 hours.
Obviously, the employee must receive additional time-and-one-half overtime compensation for FLSA overtime hours worked beyond the number on which the guarantee is based.
It's Harder Than It Might Seem
A recurring hurdle employers face in considering Belo plans is that many employees' duties do not "necessitate irregular hours of work." The requirement is generally said to be that a worker's hours:
- Must vary appreciably below 40 as well as above this threshold and must do so in a significant number of workweeks; and
- Must vary because of work requirements, rather than things like vacations, holidays, sickness, personal reasons, or scheduled time off.
Furthermore, Section 7(f) itself calls for a weekly guarantee. A daily guarantee will not do. See 29 C.F.R. § 778.410(a) ("Obviously[,] guarantees for periods less than a workweek do not qualify.").
These are not the only requirements for, or potential pitfalls of, a Belo plan. For the moment, suffice it to say that employers should move slowly and carefully in evaluating whether such a compensation method will pass muster under their particular circumstances.
It could also be that the applicable overtime requirements of another law will not permit these plans, even in situations in which the FLSA will.