On May 20, 2020, the U.S. Department of Labor (DOL) announced a new final rule clarifying that employers are permitted to pay bonuses or other incentive-based pay to salaried, nonexempt employees whose hours vary from week to week. Such bonus or premium pay, on top of the fixed salary paid to an employee, are compatible with the use of the so-called “fluctuating workweek” method of compensation under the Fair Labor Standards Act (FLSA). The DOL issued the final rule to highlight the flexibility that employers have to provide bonuses or other forms of additional compensation under the fluctuating work method of compensation and to clear up the differing judicial opinions that have resulted from the DOL’s past guidance.
An overview of a few FLSA tenets may be helpful to an understanding of the DOL’s new final rule. The FLSA mandates that employers pay non-exempt employees overtime pay of no less than one and one-half times the employee’s “regular rate” of pay for all hours worked over 40 in a workweek. Under the FLSA’s “fluctuating workweek” method, employers are permitted to pay an employee who works fluctuating hours from week to week, pursuant to a clear and mutual understanding with the employer, a “fixed salary” as straight time compensation for all hours the employee is called upon to work in a workweek, whether those hours are fewer than 40 or more.
The FLSA still requires the employer to pay the employee overtime for all hours in excess of 40 in a given workweek. Overtime compensation under the fluctuating workweek method is properly computed as one-half the regular rate of pay because the straight time portion of the required one and one-half times the regular rate has already been paid. The “regular rate” of pay using the fluctuating workweek method is the employee’s total pay divided by all hours worked. Additional bonuses or premium payments must be included in the calculation of the employee’s regular rate of pay for computing the overtime compensation, unless subject to one of the FLSA’s specific exclusions.
Inconsistent opinions and confusing outcomes had arisen over the years among the DOL and courts as to whether the payment of a bonus or other performance-related pay to an employee could be squared with the “fixed salary” requirement of the fluctuating workweek method of employee compensation. Did the employer’s payment of a bonus or other additional remuneration in effect vary the employee’s salary thereby contravening the fixed salary requirement of the fluctuating workweek method?
No, is the DOL’s answer with the final rule, which clarifies that employers are permitted to pay employees compensation in addition to the standard fixed salary – a nightshift differential, productivity bonus, or premium pay for weekend work, for example – and still use the fluctuating workweek method of compensation. According to the DOL:
[T]his rule will allow employers and employees to better utilize flexible work schedules…This 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 bonuses and premiums they would otherwise earn.
If you do not currently use the flexible workweek method of compensation for your employees and would like to learn more about the greater flexibility it allows, please contact Doug Taylor at (703) 525-4000 or firstname.lastname@example.org.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors, and are not necessarily the views of any client.