Employers looking to control labor costs have many options, including layoffs, wage rate and salary reductions, and eliminating bonuses. But these approaches often create new problems in terms of employee retention, poor morale and encouraging unionization, and may ultimately prove unsatisfactory. Employers have other options they can consider, however: implementing a fluctuating workweek pay method for nonexempt employees and furlough days for exempt employees. These approaches have the advantage of enabling employers to realize substantial labor costs savings while simultaneously eliminating or reducing the need for layoffs and other unpalatable cost-cutting approaches.

What Is the Fluctuating Workweek Method?

The fluctuating workweek method is for salaried, nonexempt employees who are not subject to a regularly scheduled workweek (e.g., 9:00 a.m.–5:00 p.m. Monday through Friday or some other fixed weekly work period). Where an employee has hours of work which may fluctuate from week to week, a set salary may be paid to the employee pursuant to an understanding with his/her employer that the employee will receive straight-time pay for whatever hours the employee is called upon to work in a workweek, regardless of how few or how many hours that may be.

Under the fluctuating workweek method, the employee’s set weekly salary is intended to cover all hours worked, including all overtime hours. When an employee works overtime hours, the employee’s fixed salary covers the straight-time portion of the overtime premium. The employer need only pay the additional half-time in order for the employee to receive the statutorily required one and a half times his/her regular rate for overtime hours. See 29 C.F.R. § 778.114.

Examples That Highlight Potential Employer Savings

The following examples illustrate the application of the fluctuating workweek method in practice and highlight the substantial cost savings available to an employer:

Example 1 (using the fluctuating workweek method)

  • A nonexempt employee earns a salary of $500 per week. If the employee works 45 hours in a workweek and his salary is intended to compensate him for all hours worked in that workweek, then his regular rate of pay is $11.11 per hour ($500 ÷ 45 hours).
  • Under the fluctuating workweek method, the employee is entitled to receive one-half of his regular hourly rate (i.e., $5.56) for each of the five overtime hours worked during the week.
  • The employee’s weekly overtime premium is $27.80 (5 x $5.56). The employee’s total earnings for the week are $527.80 (the $500 weekly salary, plus the $27.80 overtime premium).

Example 2 (using the conventional method)

  • Using the conventional method, the regular rate of the employee in Example 1 is based on the employee’s established workweek of 40 hours or less. Assuming the employee worked a standard 40-hour week, his regular hourly rate would be $12.50 ($500 ÷ 40 hours).
  • If the employee works 45 hours in a week, he would be entitled to receive one and a half times his regular hourly rate (i.e., $18.75) for each of the five overtime hours worked during the week.
  • The employee’s overtime premium would be $93.75 ($18.75 x 5 hours) and his total earnings for the week would be $593.75 (the $500 weekly salary, plus the $93.75 overtime premium).

A comparison of these examples reveals that the fluctuating workweek method saves the employer $65.95 for this employee for one workweek. With many employees over many workweeks, the savings would be substantial.

The cost savings are magnified the more overtime hours the employee on the fluctuating workweek method works. This is because the regular hourly rate decreases as more hours are worked. The following two examples illustrate this point:

Example 3 (using the fluctuating workweek method)

  • Assume our $500 per week nonexempt employee worked 55 hours in a workweek. The employee’s regular rate for that week decreases from $11.11 in the Example 1 ($500 ÷ 45 hours) to $9.09 per hour ($500 ÷ 55 hours).
  • Under the fluctuating workweek method, the employee is entitled to receive one-half of his/her regular hourly rate (i.e., $4.55) for each of the 15 overtime hours worked during the week, or $68.25.
  • The employee’s total weekly earnings are $568.25 (the $500 weekly salary, plus the $68.25 overtime premium).

Example 4 (using the conventional method)

  • Without using the fluctuating workweek method, the employee in Example 3 would be entitled to receive one and a half times his/her $12.50 regular hourly rate (i.e., $18.75) for each of the 15 overtime hours worked during the week. The employee’s overtime premium would be $281.25 ($18.75 x 15 hours) and his total earnings for the week would be $781.25 (the $500 weekly salary, plus the $281.25 overtime premium).
  • The savings to the employer using the fluctuating week method in Examples 3 and 4 is $213.00.

What Are the Requirements for Using the Fluctuating Workweek Method?

The Fair Labor Standards Act (FLSA) imposes several requirements before employers can use the fluctuating workweek method.

  • The total number of hours worked by the employee must fluctuate from week to week (they may all be above 40 or some above and some below 40). The amount of fluctuation need not be significant. However, this makes using the fluctuating workweek method for production line employees and other positions that operate on a rigid or regular shift schedule inappropriate.
  • The employee must receive a fixed salary that remains the same regardless of the number of hours that the employee works during the week (exclusive of the overtime premium). An employer may not make deductions from an employee’s salary for absences due to personal reasons or sickness (including absences that occur after the employee has exhausted his/her sick leave bank or before s/he has worked long enough to earn his sick leave bank). An employer similarly may not make deductions from the employee’s salary for short workweeks occasioned by the employer. This is more restrictive than the salary basis test used for exempt employees.
  • The employee’s absences may be credited against his accrued vacation or sick leave banks (as appropriate).
  • The employee’s fixed salary must be sufficient to provide compensation at a regular rate not less than the legally required minimum wage. In other words, when dividing the fixed weekly salary (numerator) by the actual hours worked (denominator), the quotient must be above the minimum wage.
  • The employer and the employee must have a clear, mutual understanding that the employer will pay the employee the fixed weekly salary regardless of the number of hours worked during the week. “Understanding” does not mean agreement. Although the courts have been very lenient in how this requirement is satisfied, the simplest way to meet this requirement is to give the employees a memo explaining that they will be paid on the fluctuating workweek method and providing an example, such as Example 1 above.
  • The employee must receive an overtime premium equal to one-half of his/her regular hourly rate for all hours worked in excess of 40 in the week.
  • The employee may not be paid any non-discretionary bonuses. The FLSA has a very narrow definition of discretionary bonuses.

Finally, it is important to determine whether the use of the fluctuating method of paying overtime is permitted under state wage and hour laws in your jurisdiction.

How Do Furlough Days Work?

Furlough days allow an employer to have a planned, targeted labor cost savings without resorting to layoffs or having to communicate a general reduction in salaries. Furlough days are unpaid days off mandated by the employer. They are spread throughout the year at pre-designated times (e.g., the workday before or after a paid holiday). In contrast, forced vacation periods usually last for an extended period of time, often in full workweek increments for exempt employees. Exempt employees salaries are reduced (not docked) for each furlough day (usually by 20 percent).

It is imperative that the use of furlough days does not compromise the salary basis test; otherwise exempt employees would become nonexempt and entitled to overtime pay. Fortunately, properly implemented, furlough days are consistent with the salary basis test. The key is that furlough days involved a reduction in an exempt employee’s salary rather than deductions from that salary.

Although deductions in salary violate the salary basis test (unless the deduction falls within an established exception), reductions in salary of exempt employees are permissible. “[T]he requirement that exempt employees receive at least a ‘predetermined amount’ as salary does not preclude an employer from making occasional prospective salary reductions before the affected pay period in response to business needs.” In re Wal-Mart, 395 F.3d 1177, 1185 (10th Cir. 2005).

In order to avoid a violation of the salary basis test, the designated furlough days should be established in advance, the farther in advance the better. This means that exempt employee schedules should not be varied on a day-to-day or week-by-week basis based on anticipated needs of the following week. Finally, it is important to check state laws. Illinois, for example, permits the use of furlough days. Robinson v. Tellabs, Inc., 907 NE 2d 501 (Ill. App. 1st Dist. 2009).

Summary

Although the fluctuating workweek method and furlough days are not a viable alternatives for every situation, they can result in a considerable cost savings to employers when properly utilized. Employers who are interested in further information on the use of the fluctuating workweek method or the use of furlough days may contact the authors or their Holland & Knight representative