On November 5, 2019, the Wage and Hour Division of the U.S. Department of Labor proposed a new Rule which would allow employers to offer bonuses and other incentive-based payments to salaried nonexempt employees whose work hours fluctuate each week.  This Rule clarifies the DOL’s position that such payments in addition to fixed salary are compatible with the fluctuating workweek method of computing overtime compensation under the Fair Labor Standards Act (FLSA).  This Rule, if adopted, would revise the DOL’s fluctuating workweek regulation at 29 C.F.R section 778.114.

The DOL has long recognized the fluctuating workweek method for compensating the overtime hours of an nonexempt employee who works varying hours from week to week.  Under this arrangement as stated in section 778.114, and pursuant to the employee’s understanding with the employer, a “fixed salary” may be paid to such employee as straight time compensation (apart from overtime premiums) for whatever hours the employee works in a workweek, whether few or many.  The employer may then satisfy the overtime pay requirements of the FLSA if it compensates the employee at a rate of at least one-half of the regular rate of pay for the hours worked each workweek in excess of 40.  The regular rate must be determined separately each week by dividing the fixed salary by the number of hours actually worked in that week.  The fluctuating workweek method also requires that the amount of the fixed salary does not result in an hourly wage of less than the minimum wage required by the FLSA.

The question has arisen, however, as to whether the payment of bonuses and other supplements to employees, in addition to a fixed salary, is permissible under section 778.114.  In 2008, the DOL issued a proposed rule that such payments are compatible with the fluctuating workweek method and must be included when calculating overtime compensation.  However, the DOL subsequently reversed course and stated a contrary position in 2011.  Federal courts have also expressed divergent interpretations of section 778.114, some holding that the payment of bonuses (especially when based on working extra hours) is inconsistent with the concept of a “fixed salary” for varying work hours and therefore impermissible under the fluctuating workweek method of compensation.  In its 2019 proposed Rule, the DOL discusses the confusion and uncertainty created by these holdings, and the need for clarity in the fluctuating workweek regulation.  The DOL also observes that the existing confusion in the law has deterred employers from paying bonuses to fluctuating workweek employees, or caused some employers to avoid using the fluctuating workweek method of compensation altogether.

Under the 2019 proposed Rule, the DOL essentially restates its earlier position from 2008 that any bonuses, premium payments, or other additional pay of any kind are compatible with the fluctuating workweek method of compensation.  Accordingly, the DOL would revise the fluctuating workweek regulation to require that such payments be included in the calculation of the regular rate unless they are excludable under FLSA sections 7(e)(1)-(8). The proposed Rule also includes:

Pursuant to the DOL’s rulemaking process, the public may now offer comments to the proposed Rule until December 5, 2019.  Employers should monitor this process and watch for the issuance of a Final Rule adopting some or all aspects of the proposal in the near future.  Employers should also note that the DOL’s fluctuating workweek regulation only applies to overtime compensation under the FLSA.  Some states have enacted specific laws which do not permit the fluctuating workweek method.  Employers should consult with employment counsel regarding compliance with applicable Federal and state wage and hour laws.

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