Seyfarth Synopsis: The U.S. Department of Labor’s Wage & Hour Division has entered the final phase of issuing a new rule concerning the fluctuating workweek (FWW) method of compensation under the FLSA. The new rule represents the culmination of a regulatory seesaw that began with a Bush Administration proposal in 2008 that was abandoned by the Obama Administration in 2011. It was revived as a proposed rule in 2019 and is now on the precipice of finality.
On April 14, 2019, the White House’s Office of Information and Regulatory Affairs received the DOL’s new final rule regarding the fluctuating workweek method of calculating overtime pay. This is expected to be the last step before publication of the new rule.
Under the FWW method, an employer pays a non-exempt employee a salary intended to compensate them for all hours worked each week. If the employee works overtime, the employer may compensate the employee at a rate of one-half (½) the employee’s “regular rate” of pay for the overtime hours. This difference from the conventional time and a half (1½) overtime rate is due to the fact that the employee’s salary is intended to compensate them for all hours worked in the week, including any hours in excess of 40. (Importantly, however, this is not allowed in states like California and Pennsylvania, where the FWW approach is not compatible with state overtime laws.)
In addition to the advantage that the half-time rate offers, the FWW method incentivizes efficiency—or at least disincentivizes inefficiency—by causing the “regular rate,” upon which the overtime rate is based, to decrease with each hour worked. This is due to the fact that the regular rate is calculated by dividing remuneration for the week by the hours it is intended to cover. Because a FWW employee’s salary is intended to cover all hours worked, the denominator in the regular rate formula (i.e., the hours covered by the salary) gets bigger as the employee works more, thus driving the regular rate of pay down.
Notwithstanding the flexibility it provides, the FWW rule has been read by some courts to contain an important restriction—namely that if an employer provides an employee with any extra compensation, that would violate the “fixed amount” requirement and render the FWW method unavailable. Other courts have taken a more nuanced approach, concluding that “productivity-based” bonuses are allowed, but not “hours-based” bonuses. The DOL’s view of the issue has shifted over time.
Last year, the DOL sought public comment on proposed revisions to the FWW regulation. Assuming the final rule resembles what the DOL proposed, it will clarify that bonus payments, premium payments, and other forms of incentive compensation (e.g., a night-shift premium or a productivity bonus) are consistent with the FWW method, and that such payments should be included when calculating the regular rate (unless an exclusion applies under the FLSA). As the proposed rule states, the DOL has never drawn a distinction between “productivity-based” and “hours-based” bonuses, and thus any supplemental pay should still allow use of the FWW method, provided its other requirements are satisfied.
This is an important development. The final rule, assuming it resembles the proposed version, will offer employers greater freedom to provide non-exempt employees with the certainty of a predetermined salary, and incentives if they so choose, in exchange for the benefit of a more favorable approach to overtime compensation. At a moment when many employers are looking for new ways to incentivize employees and manage costs, the timing of the new rule could hardly be better.