The Department of Labor is again addressing employers’ use of the “fluctuating workweek” method of pay for salaried non-exempt employees (FWW). This issue has been a political football in the most recent changes in administration, and the Trump DOL has now proposed rules that clarify that payments to employees in addition to a fixed salary – bonuses, premiums, and the like – will not defeat the application of the FWW compensation method. These additional payments, however, would have to be included in the calculation of the regular rate of pay.

FWW Background: FWW is a federally-permitted method of calculating overtime pay for non-exempt employees who are paid a fixed salary but whose work hours fluctuate from week to week. Under the FWW, such employees who work overtime receive an overtime premium, but that premium rate is one-half of the employees’ regular rate instead of the usual 1.5 times the regular rate, because the base portion of the wage is provided via the agreed-upon fixed salary. More specifically, overtime obligations are met by (a) dividing the fixed weekly salary by the number of hours worked that week to determine the regular rate applicable to that week, and (b) paying half of that amount as overtime premium. This method, of course, is less expensive than paying time-and-a-half, and it results in decreasing overtime premiums as employees work more overtime hours in any particular week. As discussed below, it has also been controversial, and some states have rejected its use altogether.

DOL’s Fluctuating FWW Position and Proposed Rule: The Obama DOL took the position that the compensation of employees subject to the FWW had to be limited to their pre-set salary. In a 2011 preamble to a revision to the applicable regulation, DOL stated that premium pay (bonuses, premiums, on call time, commissions, etc.) were inconsistent with the principle that such employees must earn a “fixed” salary for fluctuating workweeks. Now, however, DOL has revised its position on this issue. Citing to statistics showing that supplemental pay represents only a small fraction of employees’ overall compensation, it proposes to permit employers to pay various forms of supplemental compensation to FWW employees without defeating the application of this overtime method. Importantly, however, such payments beyond the base salary must be allocated to particular workweeks and be included in the calculation of the regular rate of pay for each week.

Expected Next Steps: The DOL is accepting comments on the proposed rule through December 5, 2019. FWW has long been controversial, and the proposed rule is expected to draw many comments, both in favor and in opposition. The battle lines on this issue are so well drawn that the public comments appear unlikely to sway DOL’s rulemaking plan. Expect a final rule with a year.

The publication of a final rule on this subject will not fully resolve this controversial issue.

First, the existing requirements that must be met before the rule can be applied continue in effect. Therefore, FWW is only available when (a) the employee’s work hours actually fluctuate week to week, (b) the employee receives a guaranteed salary each workweek, regardless of actual hours worked, (c) the salary is sufficient to meet the applicable minimum wage for all hours worked, and (d) there is a “clear mutual understanding” between the employer and the employee that the salary constitutes base compensation for all hours worked.

Second, states and localities that issue their own wage-hour rules may not follow the DOL’s lead. In fact, a number of states, whether by statute, regulation, or case law, specifically reject the use of FWW generally (these states include Alaska, California, New Mexico, and Pennsylvania). In fact, the Pennsylvania Supreme Court just this month further established that the use of FWW is not permitted under the state’s overtime laws. See Chevalier and Hiller v. General Nutrition Centers, Inc., decided November 20, 2019. It is therefore imperative for employers to consider the full array of applicable laws before deciding whether to pursue the savings associated with the FWW method of calculating overtime.