In what Labor Secretary Eugene Scalia called a step in the US Department of Labor’s (DOL) goal of lessening “unnecessary regulatory burdens” on businesses, on May 20, 2020 the DOL released a final rule regarding the calculation of overtime for salaried non-exempt workers with fluctuating workweeks. The rule change may encourage payment of additional incentive compensation to non-exempt employees paid using the “fluctuating workweek” (FWW) method of computing overtime without jeopardizing the advantageous overtime calculation.

Ordinarily, to calculate overtime, an employer determines a non-exempt employee’s regular rate of pay by dividing their total remuneration earned in the workweek by the number of hours worked, and then pays the regular rate plus an additional 50% of the regular rate for any overtime hours worked by the non-exempt employee. By contrast, the FWW formula of overtime payment allows businesses to pay employees whose hours vary widely from week to week overtime at diminishing rates, as long as they pay workers a fixed salary that is understood to be compensation for the variable work schedule, whether few or many hours. Because the workers are non-exempt, they are still entitled to payment of overtime. The regular rate of pay in the FWW method equals the quotient of the weekly salary and the number of hours worked, which changes as the number of hours vary. Then, because the weekly salary is intended to compensate the employee for all hours worked, overtime hours are paid at only 50% of the regular rate; no straight time pay is required for the overtime hours. Because hours worked vary from week to week – indeed, variable is a requirement of qualifying for the FWW method of computing overtime – this regular rate computation must be performed weekly, and the amount of overtime paid per hour decreases the more hours are worked.

During the current pandemic conditions, many employers have begun to offer hazard pay, shift differentials, or incentive bonuses to encourage regular attendance, promote staggered work hours and in turn social distancing, and reward employees working through difficult circumstances. It was unclear, however, whether employers that pay fixed salaries to non-exempt employees, which are intended to compensate them for irregular schedules using the FWW method of calculating time, could also offer incentive-based compensation without jeopardizing the FWW calculation. According to the released rule, which becomes effective in sixty (60) days, although employers are permitted to pay workers additional incentive compensation without jeopardizing the FWW calculation method, the payments must be included in the worker’s regular rate of pay, which in turn will influence the amount paid to them in overtime.

Even employers who had not previously implemented FWW methods of calculating overtime may wish to consider this approach as businesses gradually reopen after the pandemic, as it will allow employers and employees to agree to scheduling arrangements that vary substantially week to week and permit employers to pay incentive compensation and still take advantage of the overtime payment savings inherent in the model. However, employers contemplating adopting a FWW model must first confirm whether state and local law permit the arrangement, as some jurisdictions do not sanction the FWW method of computing overtime.