The fluctuating rules for the fluctuating workweek

After yesterday’s jaunt through Bikini Bottom, I’m swinging the blogging pendulum back to more academic pursuits. Today’s lesson: the Fair Labor Standards Act’s fluctuating workweek.

Merely paying an employee a salary does not render an employee exempt from the FLSA’s overtime requirements. Indeed. There is a whole class of non-exempt salaried employees. These employees, even though salaried, earn overtime for any hours worked in excess of 40 in a week.

How is that overtime calculated? As an employer, you have two options:

1. Under the standard method, you calculate the employee‘s weekly rate based on the salary divided by the number of hours worked that week, and then pay the employee 1.5 times that rate for all overtime hours. Thus, if a non-exempt employee earns a salary of $1,000 a week, and works 50 hours in a week, the employee would earn an additional $30 per hours worked over 40 ($1000 / 50 = $20 per hour base weekly rate x 1.5 = overtime premium of $30). Thus, in this week, the employee would earn an additional $300 for the 10 hours of overtime, rendering his total pay for that week $1,300, not his customary $1,000 salary. 

2. Under the fluctuating workweek method, you include the base-rate part of the overtime premium in the employee’s weekly salary, and only pay the 0.5 premium kicker as overtime. Using the same example as in number 1 above, the employee would still have an hourly rate of $30, but would only earn an additional $100 for the week, as under this method, $20 of the $30 overtime rate has already been paid as part of the base salary.

As you can see, there is a clear economic advantage to employers using the fluctuating workweek calculation to pay overtime to salaried non-exempt employees. Under the FLSA, however, an employer cannot unilaterally implement the fluctuating workweek calculation. Instead, to pay salaried, non-exempt employees via this advantageous method, you must meet these four elements :

1. the employee’s hours must fluctuate from week to week;

2. the employee must receive a fixed salary that does not vary with the number of hours worked during the week (excluding overtime premiums);

3. the fixed amount must be sufficient to provide compensation every week at a regular rate that is at least equal to the minimum wage; and

4. the employer and employee must share a “clear mutual understanding” that the employer will pay that fixed salary regardless of the number of hours worked.

For a salaried non-exempt employees, the first three elements are usually easy to meet. It’s number four—the clear mutual understanding—that tends to trip up employers. Consider, for example, Black v. SettlePOU, recently decided by the 5th Circuit Court of Appeals. In that case, the court relied both on the company’s employee handbook’s definition of “workweek” as a predefined number of fixed hours, coupled with the company’s refusal to pay any overtime no matter how many hours the plaintiff worked in a week, to conclude that the employer and employee lacked the requisite “clear mutual understanding.” Thus, the court required that the employer to pay back pay for unpaid overtime based on the standard overtime calculation, not the fluctuating workweek calculation.

Employers, there is a clear advantage to paying your salaried non-exempt employees via the fluctuating workweek. You’ll realize a 66 percent savings on your overtime pay. Just make sure you meet the FLSA’s four-pronged test, and, most importantly, that you and your salaried non-exempt employees share a “clear mutual understanding” (best in a written document) that you will pay them a fixed salary no matter the number of hours worked. Otherwise, your efforts to save some dollars in overtime could result in a more costly wage-and-hour lawsuit.