Houston, TX – On June 8, 2020, the U.S. Department of Labor promulgated a new rule that lets employers provide flexible-hour workers with incentive-based pay on top of their fixed salaries without sacrificing the reduced overtime rate for fluctuating workweeks. It takes effect on August 7.

While many employers rely on the Fair Labor Standards Act’s (FLSA) fluctuating-workweek method of computing overtime for salaried employees, its exact parameters have not always been clear. The COVID-19 pandemic has only exacerbated matters for employers (and employees). But a new rule from the DOL promises to provide some much-needed clarity.

Under current regulations, an employer may use the FWW method if an employee works fluctuating hours from week to week and receives a fixed salary as straight time compensation for whatever hours worked in a workweek. Then the regular rate “is determined by dividing the number of hours worked in the workweek into the amount of the salary.” So employers satisfy the FLSA’s overtime-pay requirements by compensating the employee, in addition to the salary amount, a rate of at least half the regular rate of pay for each overtime hour worked.[1]

Essentially, the FWW formula lets businesses pay overtime hours at diminishing rates to workers who aren’t exempt from overtime, but whose hours vary every week—if they pay workers a minimum base salary regardless of the number of hours actually worked.[2] For example, assume that an employee works 52 work weeks for a salary of $52,000 a year ($1,000 per week). If that employee works a flexible-hour schedule and doesn’t always work 40 hours a week, the overtime compensation would be $12.50 per hour worked over 40 under the FWW method. Compare that rate to the rate of $37.50 per overtime hour that would otherwise apply under the FLSA’s traditional overtime rate, and one can see how the FWW formula benefits employers.

Despite this benefit to employers, the FWW method has also generated confusion and inconsistency across different circuits when, on top of fixed salaries, employees receive incentive pay, like bonuses, hazard pay, and commissions. Whenever an employee receives incentive-based payments in addition to salary, the issue becomes whether the worker is receiving a fixed salary anymore—a prerequisite for applying the FWW method. Taking the earlier example, it is unclear whether and how any added incentive payments would affect the FWW computation. Is the bonus or hazard pay included in calculating the regular rate? What about the overtime rate? If workers are paid bonuses or commissions, does their pay still qualify as a “fixed salary” for the FWW method to apply? Results in the courts have varied, making it hard for employers to rely on the FWW method of calculating overtime.

In response, the DOL’s Wage and Hour Division published a final rule on June 8, 2020, that clarifies and amends current FWW regulations which it believes will be “especially important as workers return to work following the COVID-19 pandemic.”[3]

The new rule expressly grants employers the ability to provide flexible-hour workers with incentive-based payments on top of fixed salaries without running afoul of the FLSA, stating that such payments are compatible with the FWW method of calculating overtime. These added payments will simply be added to the calculation of a worker’s regular rate of pay.

The new rule departs from the Obama-era regulation that blocked businesses from shifting the bulk of their base salaries into bonuses. But more importantly—especially given the uncertainty surrounding the COVID-19 pandemic and its effect on businesses—the DOL hopes this rule allows employers and employees to use the FWW to implement flexible work schedules as the nation returns to work. The DOL writes that “[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 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.”[4]

Meanwhile, organizations such as the Economic Policy Institute and a group of 18 state attorneys general issued comments opposing the new rule, stating that it “runs counter to the remedial purpose of the FLSA and will result in employees working longer shifts while earning less wages.” They argue that the rule will “create unnecessary confusion for employers, potentially leading them to violate state laws and needlessly exposing them to costly enforcement actions.”[5] Some states have enacted their own FWW regulations that closely track local precedent, while other states “have expressly prohibited use of the FWW method or modified its use in their jurisdictions.”[6]

Only time will tell how the new rule works in this pandemic, but the DOL has provided clarity in a time when certainty is difficult to come by.

As the legal landscape evolves due to COVID-19, the attorneys at McDowell Hetherington LLP continue stand ready to help employers and employees navigate through this time. Contact Nick Lawson, Avi Moshenberg, and Emil Sadykhov to learn more about this new rule or answer any other labor-and-employment questions.

[1] 29 C.F.R. §778.114(a).

[2]The FWW method also requires that both the employee and employer “have a clear and mutual understanding that the fixed salary is compensation . . . for the total hours worked each workweek regardless of the number of hours.” 29 C.F.R. §778.114(a)(4) (quoting the updated rule, eff. Aug. 7, 2020).

[3]Fluctuating Workweek Method of Computing Overtime, 85 Fed. Reg. 34970, 34970(Jun. 8, 2020) (to be codified at 29 C.F.R. pt. 778).

[4] Id.

[5] 18State Attorneys General, Comment Letter on Notice of Proposed Rulemaking forFluctuating Workweek Method of Computing Overtime (Dec. 5, 2019), https://www.regulations.gov/document?D=WHD-2019-0006-0027.

[6] Id.