The Fluctuating Work Week Method of Paying Overtime: The Employer's Friend (or Foe)
Under the Fair Labor Standards Act (“FLSA”), the general rule is that employers must pay overtime to non-exempt employees who work in excess of forty (40) hours per week, at the rate of one and one-half times the employee’s regular rate of pay. As a rule, most non-exempt employees are paid an hourly wage. The overtime calculation on that hourly wage is easy (i.e. time and one-half) and is also fixed by law as being time and one-half of that hourly rate.
It is perhaps a little known fact that the law does not command that employers pay non-exempt employees by the hour. It only mandates that such employees receive overtime, after forty hours of actual work. Employers may pay non-exempt employees by a salary, or per diem, or by piece rate. The overriding constant remains payment of overtime following forty hours of work. There are occasions when employers, for employee morale or “perception” reasons choose to pay non-exempt employees a salary. The FLSA (and most, but not all, state wage-hour laws) allows an employer and employee(s) to agree that they will be paid a fixed weekly wage to compensate them for all hours worked during the week. The calculation of overtime for such employees involves what is known as the “fluctuating work week” (“FWW”) method of overtime.
Employees who are compensated on a salaried basis and whose hours of work fluctuate from week to week may be paid a salary such that the fixed amount covers all straight time pay for whatever hours are worked in a given week. The following conditions must be met: 1) Hours must fluctuate from week to week; and, 2) There must be a clear and mutual understanding between the employee and employer that the fixed salary is compensation for the hours worked each work week, whatever the number; 3) The amount of salary must be sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked; and, 4) The agreed-upon salary must be paid even though the workweek is one in which a full schedule of hours is not worked.
Neither the federal regulations nor the case law establish a requirement as to the degree of fluctuation in hours that must occur, but they do state that typically the salary is paid to employees who do not customarily work a regular schedule of hours. Under this method, the salary is intended to compensate the employee at a straight time rate for whatever hours are worked during the workweek. As such, the regular hourly rate of the employee will vary from week to week and is determined by dividing the total number of hours worked in the workweek into the amount of the salary. Overtime is then calculated by multiplying the hours in excess of forty by the regular rate for that week by one-half.
There may be only limited circumstances in which an employer will choose to utilize the FWW method of paying overtime. For one thing, the calculation of the “regular rate,” upon which all overtime is based will change every week. Therefore, the employer must either assign these computational tasks to an employee or buy/devise a software program to accommodate the necessary calculations. Second, there is the quid of paying employees their full salary in weeks in which they perform any work. Balanced against these is the distinct advantage of being able to pay half-time, instead of time and one-half, overtime. This becomes of great significance if the position at issue is borderline from the perspective of exempt status and the employer wishes to lower its exposure if a subsequent Department of Labor audit or lawsuit results in a finding that the position is non-exempt. Perhaps of equal importance, there is the positive employee relations gained through employee perception of their job as a “white collar,” as opposed to a blue collar, position.
Just be aware that if this payment procedure is not implemented correctly, the workers could be transformed into hourly employees and then there would be possible significant liability for the employer
It is perhaps a little known fact that the law does not command that employers pay non-exempt employees by the hour. It only mandates that such employees receive overtime, after forty hours of actual work. Employers may pay non-exempt employees by a salary, or per diem, or by piece rate. The overriding constant remains payment of overtime following forty hours of work. There are occasions when employers, for employee morale or “perception” reasons choose to pay non-exempt employees a salary. The FLSA (and most, but not all, state wage-hour laws) allows an employer and employee(s) to agree that they will be paid a fixed weekly wage to compensate them for all hours worked during the week. The calculation of overtime for such employees involves what is known as the “fluctuating work week” (“FWW”) method of overtime.
Employees who are compensated on a salaried basis and whose hours of work fluctuate from week to week may be paid a salary such that the fixed amount covers all straight time pay for whatever hours are worked in a given week. The following conditions must be met: 1) Hours must fluctuate from week to week; and, 2) There must be a clear and mutual understanding between the employee and employer that the fixed salary is compensation for the hours worked each work week, whatever the number; 3) The amount of salary must be sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked; and, 4) The agreed-upon salary must be paid even though the workweek is one in which a full schedule of hours is not worked.
Neither the federal regulations nor the case law establish a requirement as to the degree of fluctuation in hours that must occur, but they do state that typically the salary is paid to employees who do not customarily work a regular schedule of hours. Under this method, the salary is intended to compensate the employee at a straight time rate for whatever hours are worked during the workweek. As such, the regular hourly rate of the employee will vary from week to week and is determined by dividing the total number of hours worked in the workweek into the amount of the salary. Overtime is then calculated by multiplying the hours in excess of forty by the regular rate for that week by one-half.
There may be only limited circumstances in which an employer will choose to utilize the FWW method of paying overtime. For one thing, the calculation of the “regular rate,” upon which all overtime is based will change every week. Therefore, the employer must either assign these computational tasks to an employee or buy/devise a software program to accommodate the necessary calculations. Second, there is the quid of paying employees their full salary in weeks in which they perform any work. Balanced against these is the distinct advantage of being able to pay half-time, instead of time and one-half, overtime. This becomes of great significance if the position at issue is borderline from the perspective of exempt status and the employer wishes to lower its exposure if a subsequent Department of Labor audit or lawsuit results in a finding that the position is non-exempt. Perhaps of equal importance, there is the positive employee relations gained through employee perception of their job as a “white collar,” as opposed to a blue collar, position.
Just be aware that if this payment procedure is not implemented correctly, the workers could be transformed into hourly employees and then there would be possible significant liability for the employer
