eTrends - Bonus Payments May Jeopardize Use of the Fluctuating Work Week Method of Calculating Overtime

In its commentary to a final rule issued April 5, 2011, the Wage and Hour Division of the United States Department of Labor ("DOL") stated that it believes that paying bonuses and other premiums to a non-exempt employee who is paid a fixed salary for fluctuating hours each week would be incompatible with the policy behind the fluctuating work week pay plan described in 29 C.F.R. 778.114. The final rule appears in the Federal Register at 76 FR 18832.

The DOL's position is stated in the Preamble to the rule. The purpose of the final rule was to revise certain regulations under the Fair Labor Standards Act that had become outdated because of subsequent legislation. The changes to the regulations were introduced in a proposed rule issued under the Bush administration in 2008. Significantly, in the final rule, the DOL, under the Obama administration, rejected proposed language that would have made it clear that providing a bonus or other non-overtime premiums to workers paid on the fluctuating work week basis is permissible.

In general, a non-exempt employee's regular rate for purposes of calculating overtime is determined by dividing the total compensation for the week by the total number of hours worked. Under a fluctuating work week pay plan, a non-exempt employee is paid a fixed salary as straight time compensation for all hours worked, including those hours above forty (40) per week. To calculate the overtime rate for such an employee, the weekly fixed salary is divided by the number of hours worked in a given week and that amount is divided in half. The employee is then owed, in addition to the fixed salary, the half time rate for each hour over forty in a given week. The employee's regular rate will fluctuate up or down as the employee's hours fluctuate.

The DOL states in the Preamble, "bonus and premium payments . . . are incompatible with the fluctuating work week method of computing overtime." The DOL concluded that the language in the proposed rule "could have had the unintended effect of permitting employers to pay a greatly reduced fixed salary and shift a large portion of the employee's compensation into bonus and premium payments." This unintended effect, according to the DOL, could have resulted in "a wide disparity in weekly pay that the fluctuating work week method was intended to avoid."

Although the DOL's position is provided only in the Preamble and not the regulations themselves, it is possible that the DOL's commentary could influence a court to adopt the DOL's opinion that payment of a bonus or premium to non-exempt employees would eliminate an employer's ability to use the fluctuating work week method of calculating overtime for those employees. Thus, the most cautious approach for employers who currently use the fluctuating work week payment method is to restrict the use of that method to employees whose compensation is limited to only a fixed salary and does not include any bonus or other premium payment.

Please contact Susan Parrott with any questions.

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Smith Anderson publishes eTrends periodically as a service to clients and friends. The purpose of this eTrends is to provide general information about a significant legal development in the field of employment law. Readers should be aware that the facts may vary from one situation to another, so the conclusions stated herein may not be applicable to the reader’s particular circumstances.

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