Department of Labor seeks to clarify compatibility of bonuses with fluctuating workweek method

By Michael B. Cohen

Among the alternatives for calculating overtime under the Fair Labor Standards Act, the fluctuating workweek method is perhaps one of the least familiar and used techniques. The fluctuating workweek method enables employers to pay overtime to certain non-exempt employees at one-half their regular rate, rather than one and one-half times their regular rate, if certain conditions are met:

(1) the employee’s work hours must fluctuate from week to week;

(2) the employee must be paid a fixed salary each workweek, regardless of the number of hours worked;

(3) the fixed salary must be large enough to compensate the employee at a rate of not less than the minimum wage for all hours worked;

(4) there must be a “clear mutual understanding” between the employer and the employee that the employee’s fixed salary is compensation for all hours the employee may work in a particular week; and

(5) the employee must receive additional pay at one-half the regular rate for all overtime hours worked.

Essentially, the fixed salary compensates the employee at the straight-time rate for all hours worked. Thus, the employee has already been paid the “time” element of the FLSA’s “time and a half” commandment – and is owed only the additional “half” premium for the overtime hours.

Although the fluctuating workweek method is relatively straightforward (notwithstanding several nuances that are beyond the scope of this post), the second requirement in particular – that an employee must be paid a fixed salary each workweek – has been the source of significant confusion over the past two decades or so. Specifically, the U.S. Department of Labor has given mixed signals as to whether payments made in addition to a fixed salary – such as bonuses or other premiums – mean that the employer has failed to satisfy the “fixed salary” requirement.

In 1999, the DOL’s Wage and Hour Division issued an opinion letter providing that an employer may pay bonuses for holidays and vacation days without violating the requirements of the fluctuating workweek method because the FLSA “does not prohibit paying more [than the fixed salary].” However, in a 2004 amicus brief, the Bush Administration DOL advanced an ambiguous argument indicating a conflicting position. The DOL said that two prior court decisions did not suggest that 29 C.F.R. § 778.114, the regulation governing the fluctuating workweek method, “extends, contrary to its terms, to a pay system in which an employee, while receiving a fixed salary for a certain minimum number of hours, is paid more for additional straight time worked beyond a regular schedule.” (Emphasis in DOL brief.)

In 2008, the Bush DOL shifted gears again, proposing a rule to clarify that bonuses and premium payments, paid in addition to a fixed salary, are compatible with the fluctuating workweek method.  The Wage and Hour Division reaffirmed this stance in a 2009 opinion letter, issued shortly before President Obama took office, saying that “[r]eceipt of additional bonus payments does not negate the fact that an employee receives straight-time compensation through the fixed salary for all hours worked whether few or many, which is all that is required under [section] 778.114(a).” But when the Obama DOL issued its final rule in 2011, it did not act in accordance with the 2008 proposal or the 2009 opinion letter, and instead clarified that its position was quite the opposite. According to the 2011 rule, “the payment of bonus and premium payments . . . [is] incompatible with the fluctuating workweek method of computing overtime under section 778.114.”

After the 2011 rule took effect, confusion ensued. Courts nationwide issued contradictory opinions as to its effect, with some saying that it rendered bonuses and premium payments incompatible with the fluctuating workweek method, and others saying that it did not modify the DOL’s previous stance. Several courts also developed a dichotomy between “productivity-based” supplemental payments, which were deemed compatible with the fluctuating workweek method, and “hours-based” supplemental payments, which were deemed incompatible.

Earlier this month, the DOL rejected the distinction between productivity- and hours-based premiums. Citing to the “divergent views of the Department and courts . . . [which] have created considerable uncertainty for employers regarding the compatibility of various types of supplemental pay with the fluctuating workweek method,” the DOL proposed a new rule. The proposed rule provides that the payment of additional compensation above an employee’s fixed salary, such as bonuses or incentive premiums, will be compatible with the fluctuating workweek method, regardless of whether it is based on productivity or hours. The additional pay, however, must be included in the computation of the employee’s regular rate for purposes of calculating overtime. The only exceptions are payments that are excluded from the regular rate under 29 U.S.C. § 207(e), such as gifts, paid time off, certain reimbursements, or retirement contributions. Thus, instead of dividing the fixed salary by the number of hours worked to calculate the regular rate, an employer would divide the fixed salary plus any bonuses or premium payments, such as incentive payments or shift premiums, by the number of hours worked.

The proposed rule on the fluctuating workweek method adds to what has been a fairly active year for the DOL, including its issuance of rules concerning the overtime salary threshold and the tip credit. The DOL is accepting comments on the proposed rule, and a final rule is likely to be issued next year. In the meantime, employers and practitioners should monitor so that they will be prepared when the final rule takes effect.