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Oct 6, 2016

Fluctuating Workweek: Don't Think of It as a "Loophole"


Category: Employment

As the summer air begins to chill, folks around the workplace are talking (and maybe worrying) about the DOL's proposed increases to the minimum salary to get overtime. Beginning December 1, 2016, the DOL will double the minimum salary needed to qualify for a white collar exemption from overtime from the current $455 a week ($23,660 a year) to $913 a week ($47,476). The DOL's rules might require employers to reclassify part-time white collar employees as hourly, non-exempt employees, which means they would be entitled to overtime. The Fair Labor Standards Act (FLSA) requires employers to pay time-and-one-half the regular rate of pay for all hours over 40 that an employee works in a given week, unless the employee is "exempt."
 
As December 1st approaches, employers are turning to the FLSA's fluctuating workweek method of calculating overtime. There are pros and cons to adopting this method. The fluctuating workweek may seem like a clever loophole for employers to use in order to reduce overtime payments and reduce the number of employees that they may need to reclassify. BUT - there are some serious downsides to adopting the fluctuating workweek. Namely, it could negatively affect employee morale. Read on.

First, what is the fluctuating workweek? The fluctuating workweek method permits employers to pay non-exempt employees a fixed salary, even if the employee's hours fluctuate from week-to-week. This method also permits employers to pay fluctuating workweek employees overtime at an additional one-half the regular rate of pay, instead of 1.5 times the regular rate. That's a big "pro" for employers.
 
EXAMPLE: Sarah has agreed to work a fluctuating workweek salary for her employer. Her fixed salary is $500 per week. Here is a potential monthly break down of her compensation:
 
Week
Hours Worked
Amount Paid
Week 1
35
$500.00
Week 2
37
$500.00
 
Week 3
29
$500.00
Week 4
43
$500.00 (+) ½ of regular rate of pay* for additional hours over 40 (3 hours) = $17.44
Total: $517.44
 
*In Week 4, Sarah's regular rate of pay is determined by her salary ($500) divided by the hours worked (43), or $11.63. ½ of $11.63 is $5.81. $5.81 (x) 3 is $17.44.
 
To use the fluctuating workweek method of payment, five requirements must be met:
1. The employee must work hours that fluctuate from week to week.
The law says that the fluctuating workweek method of payment may be used for employees with "hours of work which fluctuate from week to week," and that it is "typically" used to pay "employees who do not customarily work a regular schedule of hours." However, nothing in the regulation requires that the employee's hours be unpredictable or unknowable in advance. This means that, even if you work in an environment that regularly encourages employees to work 40-hour weeks, you may need to shift (or re-imagine) or workplace culture. Perhaps the fluctuating workweek is a new way of promoting independence among employees. Employees no longer have to have 40-hours of facetime on the job. They can set their own hours. They can have more flexibility - all as long as they are meeting their performance targets, of course.  

2. The employee must be paid a fixed salary that serves as compensation for all hours worked.
 
Pretty self-explanatory. See the chart above.
3. The fixed salary must be large enough to compensate the employee for all hours worked at a rate not less than the minimum wage.
This is an important one. The salary used to compensate an employee under the fluctuating workweek method must be large enough that the regular rate-the amount found by dividing the fixed salary by the total number of hours worked in any week-is at least equal to the minimum wage. Remember: the regular rate of pay will vary due from week to week because the hours that the employee works fluctuate from week to week.
 
 4. The employee must be paid an additional one-half of the regular rate for all overtime hours worked
. . . just like in Sarah's Week 4 (above).
 
5. There must be a "clear mutual understanding" that the fixed salary is compensation for however many hours the employee may work in a particular week, rather than for a fixed number of hours per week.
This is a biggie too. An employer may only use the fluctuating workweek method if it has been made clear to the employee-before he or she works any hours under this payment method-that:
 
(a) the fixed salary will be compensation for however many hours the employee works in a week; and
 
(b) the salary will not increase in weeks in which the employee works a greater number of hours; and
 
(c) any hours over 40 will be compensated at one-half the regular rate for that week.
 
Although the law does not require that the agreement be in writing - get it in writing.

The bottom line is that the fluctuating workweek method of payment may seem like a great loophole to the new (and much higher!) minimum wage thresholds. However, the method is not for every workplace. Employees who regularly work more than 40 hours a week will likely find this method unfair, because it essentially reduces overtime compensation the more the employee works. Here's a "pros" and "cons" chart to consider:

PROS
 
Employers are paying one-half the regular rate of pay for hours worked -over 40, instead of one and one-half for all overtime hours worked.
 
For employees who work less than 40 hours in a week, they are still guaranteed the same fixed salary regardless of hours put in.
 
Employers who use this method can avoid making mistakes about tricky, fact-intensive classification questions(because all employees are now salaried);
 
Where overtime hours are unpredictable, this reduces the amount of potentially unbudgeted overtime liability. 
CONS

Because the regular rate is calculated based on the total number of straight and overtime hours worked that week, the cost of overtime to the employer goes down the greater the number of overtime hours an employee works.
 
Employees may be incentivized to work less - think about it: if the more you work, the less you earn . . . . who's going to want to work more?
 
Similarly, for employees who routinely work more than 40 hours, this method may seem unfair.   (See above)
 
This could be a big shock to the work place culture (especially one that promotes 40+ hours of facetime) in the office. Employers should be ready to address these shifts in workplace culture so employees don't feel punished for working more than 40 hours. 

 


This article is not legal advice but should be considered as general guidance in the area of employment and corporate law.  Bryan Dench, Amy Dieterich, Jordan Payne, and Rebecca Webber are employment and labor law attorneys; others at the firm handle business and other matters.  You can contact us at 207.784.3200.  Skelton Taintor & Abbott is a full service law firm providing legal services to individuals , companies, and municipalities throughout Maine.  It has been in operation since its founding in 1853.