Understanding the Fluctuating Workweek Method of OT Compensation by Thomas J. Lloyd III

20-Jul-2015Anyone who is familiar with laws governing the American workforce has at least a working knowledge of the requirements for payment of overtime compensation.  Generally speaking, employees will fall into one of two categories:  Exempt, and Non-Exempt.  Depending on that classification, which is determined based almost entirely upon the employee's job duties, the employee either will or will not be entitled to overtime compensation for all time worked over 40 hours in a workweek.  For those employees that are Non-Exempt, all time worked over 40 hours will be compensated using a "time and a half" calculation (or 1.5 times the employee's standard hourly rate).  For Exempt employees, in contrast, there is no additional compensation.

Whether an employee is to be classified as an Exempt or a Non-Exempt employee is governed by the provisions of the Fair Labor Standards Act ("FLSA").  Though many employers frequently confuse the concept of "salaried" and "hourly" employees with the Exempt and Non-Exempt classification, proper classification has very little to do with how an employee is typically paid.  As noted above, an employee will be an Exempt employee, not eligible for overtime compensation, only if the job duties fall within one of the several categories set forth in the FLSA for exempt classification.  Indeed, issues with "mis-classification" of employees are one of the most common sources for post-termination litigation over unpaid overtime wages.  While employers should be cautious and seek legal advice when classifying employees, that is a topic for another day.

An Alternate Method: The Fluctuating Workweek

Though many employers are familiar with the concepts governing overtime payment, as set forth above, there is another, less-known method of calculating overtime that can be useful in certain circumstances.  The FLSA includes a provision for what is known as the "Fluctuating Workweek," to address situations in which an employee's job duties do not neatly or consistently fall within the standard, 40-hour workweek.  For a number of reasons, including especially seasonal highs and lows, certain jobs will vary as to the time required to complete the required work within a given week. Under the standard system, a Non-Exempt employee's paycheck has corresponding variations and inconsistencies that make both the employer's and the employee's financial planning difficult.  The FLSA's Fluctuating Workweek is designed to level out those variations.

 

The basic concept behind the Fluctuating Workweek is to compensate otherwise Non-Exempt on a salary basis, such that the employee will be paid the exact same weekly compensation, regardless of whether the job required a full 40 hours in that week.  In the weeks where the workload requires more than 40 hours, the employee is paid an additional "half time," rather than the standard overtime rate of "time and a half."  The rationale for this difference is that, because the employee is paid on a salary basis for all hours worked, the baseline salary compensation has already paid the employee for working every hour over 40 that is required in that week.  In other words, the employee has already been paid for "time..." and the only additional compensation that must be paid is ".. and a half." 

Paying an employee under the Fluctuating Workweek method, however, requires satisfaction of several requirements.  If the requirements are not met, and an employer pays only "half time" under the assumption that it is utilizing the Fluctuating Workweek calculation, then liability can arise for payment of the remaining compensation that would have been due and owing to a Non-Exempt, hourly employee.  These requirements can be summarized as follows:

1. The employee must be compensated on a salary basis, meaning paid a "fixed amount" regardless of the number of hours actually worked in a given workweek;

2. There must be a "clear mutual understanding" between the employee and the employer, that the fixed salary will be compensation for all hours worked in a workweek, regardless of the number of hours actually worked;

3.  The fixed salary must be large enough to compensate the employee at a rate equal to or greater than the federal minimum wage, even in workweeks with the greatest number of hours worked; and

4.  The employee's hours must actually fluctuate from week to week.

Following these requirements, an employer and and employee can each see benefit to an arrangement under the Fluctuating Workweek.

Calculating Overtime Under The Fluctuating Workweek

The amount of an employee's overtime rate under the Fluctuating Workweek method of compensation fluctuates correspondingly with the number of hours worked, as the overtime rate is calculated using the employee's base hourly rate.  Because the agreed-upon salary amount is intended to compensate the employee for all hours worked in a given week, the base hourly rate of pay will depend on the number of hours that a given paycheck is intended to compensate.  In other words, the base hourly rate is figured by dividing the employee's weekly salary by the number of hours worked in that week.  Thus, if an employee is compensated at $1,000 per week, the calculated hourly rate will depend on the number of hours worked.  In a 40-hour workweek, the employee's base hourly rate will be $25.00 per hour, whereas in a 50-hour workweek, that base hourly rate goes down to $20.00 per hour.  Thus, the more hours worked in a workweek, the lower the hourly rate for the employee.  In contrast, however, an employee who is able to accomplish the necessary job duties in 30 hours, in this example, will make $33.33 per hour.

Once an employee's base hourly rate is determined for a given workweek, the additional compensation for hours worked over 40 will be at a rate equal to one-half of that base hourly rate.  In the above example, then, the employee salaried at $1,000 per week will continue to make $33.33 per hour in a 30-hour workweek, and $25.00 per hour in a 40-hour workweek.  In the 50-hour workweek, however, the employee must receive additional compensation for the 10 hours of work above 40.  The employee would be compensated at the base hourly rate of $20.00 per hour for all 50 hours (equaling the $1,000 weekly salary), and the additional compensation for the extra 10 hours of work would be figured using one-half of the base hourly rate for that week, or $10.00 per hour.  Thus, the employee would be paid an additional $100.00 (10 hours x $10.00), for a total compensation of $1,100 that week.  For comparison, the standard overtime calculation would have compensated this employee at $25.00 per hour for the first 40 hours, and $37.50 per hour for the 10 hours of overtime (1.5 x $25.00), for a total of $1,375.00.

Pitfalls To Avoid

Based on the figures above, the Fluctuating Workweek can be an attractive arrangement for both employees and employers.  By encouraging efficiency, an employer is able to allow employees to work fewer hours for the same rate of pay.  However, the employer is not gouged by overtime compensation during the busy season.  Still, there are a number of pitfalls that an employer can fall into when attempting to utilize the Fluctuating Workweek, any one of which can invalidate the employer's use of this method and create liability for unpaid overtime despite honest efforts to comply with the law.  Most of these pitfalls arise out of relaxed or uninformed application of the four requirements set forth above.

Courts and the U.S. Department of Labor have strictly applied the four requirements for eligibility under the Fluctuating Workweek.  If, for example, an employee is given additional compensation to cover "night shifts," Courts have held that the arrangement does not satisfy the "fixed salary" requirement.  Similarly, if an employee's pay is deducted for absences from work, the "fixed salary" requirement is lost.  Indeed, even as this article is written, there are competing appeals in two different Federal Courts, regarding whether payment of merit-based bonuses also removes an employee from the "fixed salary" requirement.

There are a number of other mistakes that can lead an employer into mis-classifying the payment structure, which can result in liability for additional compensation as well as penalties and, potentially, attorney fees.  The best practice is always to consult an attorney knowledgeable in the subject matter before making any decisions about changing compensation schemes.  However, if the employees are eligible for the Fluctuating Workweek, it certainly can be a win-win solution at all levels of a company.