Earlier this week, the U.S. Department of Labor (DOL) issued two wage and hour Opinion Letters answering questions about application of the Federal Fair Labor Standards Act (FLSA). The first letter addresses how to pay overtime when employers give nondiscretionary bonuses that do not tie to a particular workweek. The second letter addresses whether payments made to consultants working on a project basis constitute payments made on a salary or fee basis for purposes of determining white-collar exemption status.
Nondiscretionary Bonuses and the Regular Rate
The first Opinion Letter considered the following scenario: the employer announces it will pay a $3,000 bonus to employees after successfully completing 10 weeks of training and agreeing to undergo an additional 8 weeks of training. The employee does not need to complete the extra 8 weeks of training to qualify for the bonus, however. Employees worked 47 and 48 hours in weeks 5 and 9, and 40 hours all other weeks.
FLSA regulations provide two methods for calculating the regular rate of pay when a bonus cannot be proportionally allocated to a particular workweek for the amount earned. First, employers may assume the employee earned an equal amount of bonus each week worked and allocate it proportionally. Second, if weekly is an inappropriate allocation, the employer may assume the employee earned an equal amount of bonus each hour worked. The employer asked which method to employ in the scenario presented.
As a preliminary matter, the DOL explained the bonus described is nondiscretionary because (1) the employer announced it in advance, and (2) the bonus induced the employee to complete the 10-week training program.
The DOL then advised the employer to allocate the bonus over 10 weeks because the employee did not need to complete the additional 8 weeks of training and missing any week would result in loss of the bonus. Therefore, to determine the regular rate for each week of the ten-week period, the employer should add $300 each week to the employee’s total earnings.
The Opinion Letter does not explain how to calculate the regular rate or overtime owed. But let’s do that here. Simply divide $300 by the number of hours worked in each week the employee worked overtime. Multiply that figure by the number of overtime hours worked and 0.5, the overtime multiplier:
Week 5: $300/47 = $6.38 $6.38 x 7 x 0.5 = $22.34
Week 9: $300/48 = $6.25 $6.25 x 8 x 0.5 = $25
Salary or Fee Basis
In the second Opinion Letter, the DOL considered two scenarios. In the first, the employer hired a consultant to complete a 40-week project. The employer paid the employee $80,000 in 20 biweekly installments regardless of the number of hours worked per week. The consultant worked anywhere from 0 to 80 hours per week. In the second scenario, the employer hired the consultant to work on a separate 8-week project within the same period as project one. The employer paid the consultant an additional $6,000 in biweekly installments of $1,500 per week for project 2. The employer asked whether this arrangement met the salary or fee basis tests for determining overtime exemption. The DOL opined, yes, it meets the salary basis test.
The DOL began by covering the applicable tests. An employee is paid on a “salary basis” if paid a predetermined amount, regardless of the number of hours worked or quality of work, on a weekly or less frequent basis. For purposes of the administrative and professional exemptions, an employee is paid on a “fee basis” if paid “an agreed sum for a single job regardless of the time required for its completion.”
The employer paid the employee in scenario one on a salary basis because it paid the consultant an equal amount on a biweekly schedule, even though hours worked varied from week to week. In scenario two, the employer did not lose the exemption just because his weekly earnings fluctuated. FLSA regulations allow employers to pay additional compensation on any basis, whether by hour, bonus, commission, flat sum, etc. for “hours worked for work beyond the normal work week.” In this case, the employer paid more for hours worked beyond the hours the consultant worked on project 1. Therefore, it met the salary basis test.
The DOL also considered whether periodic reductions of the project fees, occasioned by changes in the scope of the project, would cause it to lose the exemption. The DOL opined no, so long as the changes to biweekly compensation do not occur so frequently that the circumstances suggest the payment amount is being reduced because of the quality or quantity of work. Despite being asked to do so, the DOL did not opine on whether the payment schemes satisfied the fee basis test.