As Employers Begin to Reopen, DOL Issues Final Rule Clarifying Fluctuating Workweek Overtime Compensation Method

The Notice of Proposed Rulemaking was available for public comment for 30 days. The Department received approximately 36 comments on the proposal, all of which are available to the public at www.regulations.gov.

According to US Secretary of Labor Eugene Scalia, the final rule “ … offers another example of how the US Department of Labor is working to reduce unnecessary regulatory burdens in order to benefit American workers. Because of the clarity provided by this rule, employers will know they can pay workers’ bonuses in a broader range of circumstances. This rule comes at a time when millions of Americans are returning to work and will benefit from added flexibility in compensation.”

Section 7(a) of the FLSA requires employers to pay their nonexempt employees overtime pay of at least “one and one-half times the regular rate at which [the employee] is employed” for all hours worked in excess of 40 in a workweek. In other words, for each hour over 40 an employee works in a workweek, the employee is entitled to straight-time compensation at the regular rate and an additional 50 percent of the regular rate for that hour. Where an employee receives a fixed salary for fluctuating hours, an employer may use the “fluctuating workweek method” to compute overtime compensation owed, if certain conditions are met.

Under current 29 CFR 778.114, an employer may use the fluctuating workweek method if the employee works fluctuating hours from week to week and receives, pursuant to a clear and mutual understanding with the employer, a fixed salary as straight time compensation for whatever hours the employee is called upon to work in a workweek, whether few or many. In such cases, because the salary “compensate[s] the employee at straight time rates for whatever hours are worked in the workweek,” the regular rate “is determined by dividing the number of hours worked in the workweek into the amount of the salary,” and an employer satisfies the overtime pay requirement of section 7(a) of the FLSA if it compensates the employee, in addition to the salary amount, at a rate of at least one-half of the regular rate of pay for the hours worked each overtime hour. Because the employee’s hours of work fluctuate from week to week, the regular rate must be determined separately each week based on the number of hours actually worked each week. The payment of additional bonus and premium payments on top of the fixed salary to employees compensated under the fluctuating workweek method has presented challenges to employers and the courts alike.

According to the DOL, the new rule:

• Adds language to 29 CFR 778.114(a) to expressly state that employers can pay bonuses, premium payments, or other additional pay, such as commissions and hazard pay, to employees compensated using the fluctuating workweek method of compensation. (The rule also states that such supplemental payments must be included in the calculation of the regular rate unless they are excludable under FLSA sections 7(e)(1)–(8)). The rule grants employers greater flexibility to provide bonuses or other additional compensation to nonexempt employees whose hours vary from week to week and eliminates any disincentive for employers to pay additional bonus or premium payments to such employees.
• Addresses the divergent views expressed by the Department and courts―and even among courts―that have created legal uncertainty for employers regarding the compatibility of various types of supplemental pay with the fluctuating workweek method.
• Adds examples to 29 CFR 778.114(b) to illustrate these principles where an employer pays an employee, in addition to a fixed salary (1) a nightshift differential and (2) a productivity bonus.
• Revises the rule in a non-substantive way to make it easier to read, so employers will be able to better understand the fluctuating workweek method. The revised 29 CFR 778.114(a) lists each of the requirements for using the fluctuating workweek method, and duplicative text is removed from revised 29 CFR 778.114(c).
• Changes the title of the regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of Computing Overtime.”

The DOL believes that this rule will allow employers and employees to better utilize flexible work schedules. According to the DOL, “[t]his is especially important as workers return to work following the COVID-19 pandemic. Some employers are likely to promote social distancing in the workplace by having their employees adopt variable work schedules, possibly staggering their start and end times for the day. This rule will make it easier for employers and employees to agree to unique scheduling arrangements while allowing employees to retain access to the bonuses and premiums they would otherwise earn.”

The new rule may encourage employers to begin use of or expand the use of the fluctuating workweek method to calculate overtime pay for employees who work varying hours. Before doing so, however, they should check the laws in their states to determine if this method is permitted.