On November 5, 2019, the Department of Labor (DOL) published, for public comment, a proposed revision to its interpretation of the fluctuating workweek (FWW) method of computing overtime. Under the revised interpretation, bonuses, commissions, shift differentials and other additional payments will not prevent an employer from using that method.

When non-exempt employees are paid a salary for varying hours, their additional overtime pay is computed, each week, by dividing the salary by the number of hours to obtain the “regular rate,” and then paying one-half the regular rate for overtime hours. As the number of hours increases, the half-time overtime rate decreases. The employees receive only a half-time premium because one times the regular rate is already included in their pay. This formula was established in an early Supreme Court decision and has come to be known as the FWW method. (The method is not allowed in Alaska, California and New Mexico and, according to a November 20, 2019 decision, Pennsylvania).

The DOL’s longstanding interpretation of the FWW method, published at 29 C.F.R. § 778.114, allows it to be used when employees receive a “fixed salary” for fluctuating hours. Some courts held that that additional compensation, such as bonuses or shift differential, mean that the salary is not “fixed,” which in turn means that the FWW method cannot be used. Other courts say that additional hourly compensation, such as shift differential, is incompatible with the FWW method, but that non-hourly compensation, such as sales commissions, is compatible. This confusion is partially of the DOL’s own making, due to some earlier proposals that were considered and withdrawn, and partially the result of some courts’ hostility to the FWW method.

The DOL’s new proposed interpretation says that additional payments of any nature are compatible with the FWW method of computing overtime. Only the salary portion of the compensation must be “fixed.” The additional payments would still be included in the regular rate for purposes of computing overtime. To compute overtime, the salary and additional payments would be combined, and divided by hours worked, to obtain the regular rate. The overtime premium rate would still be one-half the regular rate.

The DOL does not have statutory authority to issue regulations on the computation of overtime, and courts have the final say on the issue; however, courts normally defer to the DOL’s interpretation if it is well-reasoned. The DOL’s proposed new interpretation of the FWW method is consistent with the Supreme Court’s holdings on the issue and is, in our view, legally correct.

The notice period for the proposed new interpretation closes December 5, 2019. Comments may be submitted here. Once the comment period has closed, the DOL will consider the comments received and will eventually issue final regulations. We will publish an update when the new interpretation is issued in final form.