For almost 80 years, it has been the law that an overtime-eligible employee whose hours fluctuate from week to week and who agrees to receive a fixed weekly salary covering all hours of work is entitled to a halftime premium for hours worked in excess of 40 per week—not a “time and a half” premium. The rationale is that the employee, by virtue of the fixed salary covering all hours of work, has already been paid the “straight-time” component of pay for the hours over 40. Accordingly, all that remains for the employer to pay is the “half” in the colloquial “time and a half.” This is known as the fluctuating workweek (“FWW”) method of calculating overtime pay.

The FWW principles were first articulated by the Supreme Court in Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942). In 1950, the U.S. Department of Labor (“DOL”) codified the rule in the federal regulations. The modern-day version of the rule appears at 29 C.F.R. § 778.114 (“Section 114”). The rule requires hours that fluctuate from week to week; a fixed salary that does not vary with the number of hours worked; a salary sufficiently large to cover the minimum wage; and a clear mutual understanding between employer and employee that the employer will pay the fixed salary regardless of the number of hours worked. If these requirements are met, the employer computes the regular rate by dividing the weekly salary by the total number of hours worked that week, and satisfies its overtime pay obligation by paying a premium equal to half that amount for each overtime hour worked.

Section 114’s requirement of a “fixed salary” has led to ambiguity about whether additional compensation paid to the employee—such as a bonus or commissions—was compatible with the FWW method of pay. In 2008, the DOL proposed to amend the FWW regulation to clarify that the FLSA allows employers to utilize the FWW method of pay to employees who receive bonuses in addition to a fixed salary. In 2011, the DOL withdrew the proposal, but noted in the preamble to a final rule amending other FLSA regulations that the payment of additional compensation beyond a fixed salary was incompatible with the FWW method of pay. The DOL did not make any changes to Section 114 at the time, but employers that took advantage of the FWW method of pay became more wary about paying bonuses and other compensation on top of a fixed salary. Since 2011, courts have issued diverging opinions on the weight to be attributed to the 2011 preamble language, and on the broader question of whether compensation in addition to a fixed salary is compatible with the FWW method of pay.

In November 2019, the DOL again issued a proposed rule clarifying that the payment of additional compensation above and beyond a fixed salary is not incompatible with the FWW method of pay. On May 20, 2020, the agency announced a final rule that allows employers to pay bonuses or other incentive-based pay to salaried, non-exempt employees whose hours vary from week to week without violating the FWW rule.

In the final rule, the DOL:

  • Amends Section 114 to confirm that employers can pay bonuses, premium payments, commissions, hazard pay, and other additional pay to employees paid on a FWW basis. (Such additional compensation must still be included in the regular rate unless they are excludable under sections 7(e)(1)–(8) of the FLSA [29 U.S.C. § 207(e)(1)-(8)].)
  • Adds examples to Section 114 to illustrate these principles where an employer pays an employee, in addition to a fixed salary, a nightshift differential, a productivity bonus, or premium pay for weekend work.
  • Changes the title of the regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of Computing Overtime.”

The DOL also reiterated, in the preamble to the final rule, its longstanding position that there is no requirement that the employee’s hours of work fluctuate below 40 hours per week—another issue of historical contention:

To prevent any further misunderstanding, … the Department is also clarifying that the regulation does not require that an employee’s hours must sometimes fluctuate below forty hours per week, so long as the employee’s hours worked do vary.

As the DOL explains, the amended rule “will allow employers and employees to better utilize flexible work schedules,” particularly in light of current events:

[A]s workers return to work following the COVID-19 pandemic[,] … [s]ome 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 [amended] 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.

Note that the FWW method of pay is not permitted in states that prohibit a non-exempt employee’s salary from compensating more than 40 hours of work per week, including Alaska, California, Pennsylvania, and New Mexico. As with all pay practices, employers must ensure they are in compliance with federal, state, and local law.

The amended rule will be effective 60 days after publication in the Federal Register.

Subscribe to Proskauer’s Wage and Hour blog for continued analysis of developments affecting your business.