Unless you have been living under a rock for the last few months, you are undoubtedly aware that December 1, 2016 marks the day that the U.S. Department of Labor’s (“DOL”) new overtime rules become effective. The new minimum salary level for the executive, administrative, and professional employee exemptions under the Fair Labor Standards Act (“FLSA”) will be $913 per week, or $47,476 per year, which more than doubles the current minimum salary levels. You will recall from our October 13, 2016 post that 21 states jointly filed a lawsuit in the Eastern District of Texas asking that the Court block the DOL from implementing the rules. Shortly after filing their Complaint, the states filed a Motion for Preliminary Injunction, asking the court to block enforcement of the new rule pending a final ruling. A hearing has been scheduled for November 16, 2016, just two weeks before the new rule is scheduled to take effect. Accordingly (and because the issuance of an injunction is a long-shot), employers must prepare for the new overtime rules to go into effect. One option employers are considering is the implementation of a fluctuating workweek to reduce the financial implications of the new overtime rules.
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What is a Fluctuating Workweek?
Under the FLSA, employers may pay non-exempt employees a flat salary, as long as that salary:
(1) provides employees at least the minimum wage for all hours worked in that workweek; and
(2) pays overtime at 1.5 times the employee’s “regular rate” of pay for all hours worked in excess of 40 in a single workweek. Under the fluctuating workweek approach, an employee is paid a fixed salary for all hours worked in the week. When the employee works in excess of 40 hours in the week, then the salary is divided by the total hours worked, which yields the “regular rate.” Hours worked in excess of 40 hours in a week are paid at half the regular rate (which then gets added to the fixed salary).
There are four basic requirements for an employee to be paid on a fluctuating work week under the FLSA:
(1) The employee and employer must jointly agree to adopt a fluctuating workweek. While the agreement is not required to be in writing, it should be.
(2) The employee’s work week must actually fluctuate. According to the DOL, not only do hours have to fluctuate, but they have to fluctuate both above and below 40 hours per week.
(3) The employee must receive a guaranteed salary for each workweek that complies with the minimum wage requirements.
(4) The employee must receive 0.5 times regular rate of pay of at least minimum wage for each hour worked in a workweek over 40.
What Does a Fluctuating Workweek Look Like?
After reading the paragraph above, if you still don’t understand how a fluctuating workweek works, you are not alone. It is one of the most complicated and least understood aspects of the FLSA. Here is an illustration to help you understand how a fluctuating workweek may be implemented.
Under the Standard FLSA Overtime Rules
Employee A, a non-exempt employee, works anywhere from 30 to 50 hours in any given week. She earns an hourly rate of $12.50 per hour, which equates to $500.00 in a standard 40-hour workweek. However, when Employee A works overtime in any given week, it’s paid at a rate of $18.75 (1.5 times Employee A’s hourly rate of $12.50 per hour). In a 50 hour workweek, Employee A would then earn $687.50 ($12.50 x 40 = $500.00 + $18.75 x 10 = $187.50).
Under a Fluctuating Workweek
Employee A, a non-exempt employee, works anywhere from 30 to 50 hours in any given week. She and her employer agree (in writing!) to a fluctuating workweek schedule, where she earns a fixed salary of $500.00 per week, no matter how many hours she works in that week. When work is slow, and she works 30 hours, that equals earnings of $16.67 an hour for that week. That calculation is pretty easy. More complicated is determining Employee A’s wages where she works 50 hours in a workweek. The calculation for a 50 hour workweek would be determined as follows:
Employee A’s regular fixed salary ($500.00) divided by hours worked (50) equals an hourly rate of $10.00 per hour (Employee A’s “regular rate” of pay). Employee A’s 10 hours of overtime would be paid at one-half her regular rate ($5.00 per hour), for a total of $50.00 (10 hours times $5.00). Therefore in that workweek, Employee A would earn a total of $550.00 (her fixed salary of $500.00, plus overtime owed of $50.00).
As you can see, in this scenario, there is a significant savings for the employer during those weeks Employee A works significant overtime. Indeed, in a 50-hour workweek, the employer saves over $100.00 in overtime by implementing a fluctuating workweek.
Final Comments and a Word of Caution
Fluctuating workweeks can be difficult to administer and are equally misunderstood by employees and employers alike. As improperly implemented fluctuating workweeks give rise to expensive administrative and civil claims, it is crucial to ensure the implementation of a FLSA-compliant fluctuating workweek. Also, fluctuating workweeks are not permitted in all jurisdictions. As such, employers should determine whether a fluctuating workweek is permissible under state rules prior to implementation. If properly done, however, fluctuating workweeks could ease some of the pain inflicted by the upcoming DOL overtime rules, and the inevitable future increases.