Employment LawIn the U.S., employees must be paid overtime compensation at a rate of one-and-one-half times their regular rate of pay for all hours worked in excess of forty (40) per workweek unless specifically exempted by law. For many employees, this means payment of a straight time hourly rate, and then payment of one-and-one-half times that hourly rate for each of their weekly overtime hours. However, for many years, the U.S. Department of Labor (DOL) has sanctioned an alternate method of paying employees whose hours of work fluctuate from week to week. This method, known as the fluctuating workweek (FWW) method of calculation, not only requires that employees subject to such arrangement work a variable number of hours per workweek, but that they receive a fixed salary that does not vary with the number of hours worked, and which is sufficient to satisfy the applicable minimum wage for every hour worked in those workweeks in which the number of hours the employee works is greatest.

For the employer to take advantage of the FWW method of calculating overtime pay, the employee and employer must have a clear and mutual understanding that the salary is compensation for the total hours worked each workweek, regardless of the number of hours worked, and that any overtime hours worked by the employee are additionally compensated at a rate of not less than one-half the employee’s regular rate of pay for that workweek, a calculation that changes from week to week depending on the number of hours worked. The FWW method of calculating overtime benefits employees in that they receive their fixed salary even in weeks in which they work fewer than forty (40) hours. Conversely, the FWW method helps employers manage labor costs by requiring payment of only one-half the employees’ regular rate of pay for overtime hours because the employees’ straight time payment for such hours is already included in their fixed salary.

However, there has been some confusion over time regarding how variable an employee’s hours must be in order to partake in the FWW method of overtime calculation, with many assuming that employees’ hours must fluctuate above and below forty (40) per workweek in order to qualify. The DOL rejected that reading of the regulation this week in an opinion letter – informal guidance issued by the DOL periodically to clarify the agency’s interpretation of its own regulations – stating that it is sufficient that an employee’s hours fluctuate only above 40 hours per week in order to partake in the FWW method of overtime compensation. Applying principles of statutory construction, the DOL Wage and Hour Division opined that the “plain language of the [FWW] regulation[, 29 C.F.R. § 778.114(a)(1),] makes clear that there is no requirement that an employee’s hours vary both above and below 40 per week to come within the rule; it requires only that the employee’s hours fluctuate from week to week.” Consequently, the FWW method “is appropriate even when the employee always works more than 40 hours per week.” For instance, if an employee’s weekly workhours over the course of several workweeks were 42, 46, 50, 52, and 41, that pattern would constitute sufficient fluctuation to allow the employer to apply the FWW method of overtime computation.

Reading this, employers may wonder why they wouldn’t always apply the FWW workweek to manage overtime costs. To that end, the DOL reminds us that the fixed salary requirement is a non-negotiable feature of the arrangement, meaning that if an employee is absent for a day after exhausting available sick leave or paid time off, the employer may not deduct from the fixed salary for the day’s absence. Except for very limited disciplinary deductions permitted by law, employers availing themselves of the FWW method of overtime calculation are obligated to pay the employee’s fixed salary regardless of the number of excused absences. Furthermore, because the salary must be high enough to meet or exceed the minimum wage for workweeks in which the highest numbers of hours are worked, this may result in a significant increase in total wages than if the employer had paid the minimum hourly rate.

Employers considering the FWW method of overtime calculation must weigh the costs associated with higher salaries and paid absences over the corresponding calculation using an hourly rate alone, but for those employers whose workers routinely work significant overtime with regular variability in hours, the opinion letter provides a welcome option for labor cost management. If employers adopt this method, they are encouraged to have a written agreement with their employees documenting the decision. Although it is not required that the “clear and mutual understanding” be reduced to writing, a written agreement manifesting that understanding may prove invaluable in the event of a future dispute.