Seyfarth Synopsis: The U.S. Department of Labor’s Wage & Hour Division recently issued two opinion letters providing clarity to employers in determining (1) the proper overtime rate of pay for non-discretionary, multi-week bonuses; and (2) whether certain per-project payments are sufficient to satisfy the salary basis test required for the FLSA’s white-collar exemption.
WHD has been issuing a steady stream of opinion letters on a wide variety of issues–by its own count, 53 letters since the start of the Trump Administration. The most recent two FLSA letters were issued just this week and address some outstanding issues regarding overtime rates of pay and salary basis.
Calculating Overtime Due on Multi-Week Bonus
The first letter, FLSA2020-1, addresses the calculation of overtime pay for a non-discretionary lump sum bonus paid at the end of a multi-week training period. The $3,000 bonus is an inducement for the employee to successfully complete a 10-week training program (and agree to, but not necessarily complete, an additional eight weeks of training). There was no dispute that such a bonus should be included in the regular rate of pay; the employer’s question focused on *how* the bonus should be included in the regular rate.
Section 778.209(b) of the regulations provides two methods of allocating a multi-workweek bonus that cannot be allocated among the workweeks proportionally to the amount of bonus earned each workweek. The first is to divide the bonus equally across each of the workweeks in the period in which it is earned. If, however, there are facts that would make it “inappropriate” to assume equal bonuses each week, it may be reasonable and equitable to assume the employee earned an equal amount of bonus each hour of the pay period. In either case, the resulting rate is used to determine overtime pay, with one-half the rate paid for each overtime hour.
In the opinion letter, the employee worked 40 hours in 8 of the 10 weeks, 47 hours in one week, and 48 hours in another. WHD found that it was appropriate to allocate the amount equally across the 10 workweeks — missing any week would result in loss of the bonus, regardless of whether there was overtime worked. WHD also stated that equal weekly allocation of bonuses is the appropriate method for any bonus earnings that cannot be identified with particular workweeks.
In the example from the opinion letter, the $3,000 would be divided into each of the 10 weeks, for a weekly bonus of $300. For the two overtime workweeks, the $300 would be divided by hours worked, and the half-time rare would be paid for the overtime hours.
- $300/47 = $6.38; $6.38 * 0.5 * 7 = $22.34 in additional overtime due in 47 hour week
- $300/48 = $6.25; $6.25 * 0.5 * 8 = $25.00 in additional overtime due in 48 hour week
- $47.34 in additional overtime due.
The letter did not address those circumstances in which it would be “inappropriate” to use the weekly allocation. In those circumstances, however, an hourly allocation would be required, which would result in $54.22 in additional overtime due ($3,000/415 = $7.23; $7.23 * 0.5 * 15 = $54.22).
WHD’s conclusion should come as no surprise — it is its long-used method for determining the overtime due on multi-week bonuses. Nevertheless, it is welcome clarity on a regular rate issue at a time when such issues are likely to come into focus as employers adjust to WHD’s final rule on regular rate of pay, effective January 15, 2020.
Per Project Payments and Salary Basis
The second letter, FLSA2020-2, addresses the salary basis test for the FLSA’s white collar exemption. Effective January 1, 2020, executive, administrative, and professional employees must (with limited exceptions) be paid at least $684 per week on a salary or fee basis in order to qualify for an exemption from the FLSA. The letter relates to per-project payments and whether they satisfy the salary basis test.
The first proposed element of payment would be made to an educational consultant who would work on a project for a school district for 40 weeks. The hours would be irregular and would vary between 0 and 80. The consultant would be paid $80,000 for the project in 20 biweekly installments of $4,000.
The second proposed element of payment would be made to the same educational consultant. The consultant would be assigned to a second project lasting 8 weeks, and would be paid an additional $6,000 in four $1,500 biweekly payments.
As a result, the total weekly compensation of the consultant would vary depending on the number of projects to which the consultant was assigned. In the example provided, the consultant would earn $4,000 per pay period when not assigned to the second project, but $5,500 for the pay periods when performing work on the second project.
WHD first found that the first scenario met the salary basis of payment: the consultant was paid a “predetermined amount constituting all or part of the employee’s compensation” paid biweekly and without reduction because of variations in the quality or quantity of work performed. WHD then determined that the second element of payment constituted “extra” compensation under the regulations. Because an employer may provide an exempt employee with additional compensation without losing the exemption, WHD determined that the pay structure complied with the salary basis requirements. In addition, because the consultant’s pay was not computed in an hourly, daily, or shift basis, the reasonable relationship requirement would not apply.
Finally, WHD addressed the “unusual” scenario in which the consultant’s pay might increase or decrease due to prospective changes in the project(s) negotiated between the employer and its customer. WHD restated its long-held position that prospective reductions in salary do not defeat the salary basis test absent revisions that are so frequent that the compensation is rarely the same from pay period to pay period.
Unfortunately, although the employer requested guidance on the ever-elusive “fee basis” component of the salary test, WHD declined to provide it, citing its conclusion that the method of pay satisfied the salary basis test. Hopefully, WHD has another opinion letter in the hopper in which it will provide additional explanation of the manner and method in which fee basis can be used.
Overall, the letter is good for both employer and employee. The employer wants to pay more; the employee presumably wants to earn more. The letter allows that to happen. Although the pay was described a project-based, the first element of pay appeared to be a salary method of pay in everything but name — the same pay each workweek regardless of the amount of work performed. WHD’s treatment of the second element of pay — which, again, is more of an “extra salary” for a short duration than a payment for a specific project — should provide employers with comfort in designing pay plans that reward exempt employees with additional pay for tackling additional projects.