DOL proposes to revise the fluctuating workweek method and clarify that bonus and premium payments are compatible with its use—and must be included in the regular rate calculation.
The U.S. Department of Labor has announced a proposed rule that would revise the regulation for computing overtime compensation for salaried nonexempt employees who work hours that vary each week (fluctuating workweek) under the FLSA.
The DOL Wage and Hour Division’s November 4, 2019, announcement of the proposed rule said it will clarify that bonus and premium payments in addition to the fixed salary are compatible with the use of the fluctuating workweek method of compensation and that supplement payments must be included in the calculation of the regular rate as appropriate under the Act.
Fluctuating workweek method. Payment of a fixed salary for fluctuating hours (the fluctuating workweek method), is one way employers may meet their overtime pay obligations to nonexempt employees, if certain conditions are met. In 1968, the Department issued 29 C.F.R. § 778.114, which explains how to perform the regular rate calculation under the FLSA for salaried employees who work fluctuating hours. The fluctuating workweek method was developed to permit FLSA-covered employees who work irregular hours to negotiate a consistent minimum salary with their employers.
Under § 778.114, an employer may use the fluctuating workweek method for computing overtime compensation for a nonexempt employee if the employee works fluctuating hours from week to week and receives, pursuant to an understanding with the employer, a fixed salary as straight time “compensation (apart from overtime premiums)” for whatever hours the employee is called upon to work in a workweek.
In such cases, the salary compensates the employee at straight time rates for whatever hours are worked in the workweek. The employer satisfies the overtime pay requirement of Section 7(a) of the FLSA by compensating the employee at a rate of at least one-half the regular rate of pay for the hours worked in excess of 40 per week. The regular rate must be determined separately each week based on the number of hours actually worked each week.
Additional bonus and premium payments. The payment of additional bonus and premium payments to employees compensated under the fluctuating workweek method has presented challenges to employers and the courts. The proposed regulation would clarify that bonus payments, premium payments, and other additional pay are consistent with using the fluctuating workweek method and that such payments must be included in the calculation of the regular rate—unless they can be excluded under FLSA Sections 7(e)(1)–(8).
The Department proposed a similar clarification in 2008; however, the Final Rule issued in 2011 did not adopt this proposal. Since 2011, courts have reached inconsistent holdings based on a judicially crafted distinction between certain types of bonuses that the Department has never recognized. Therefore, the Department is re-proposing substantially similar revisions to those initially proposed in 2008.
Proposed regulatory changes. Specifically, the Department proposes to add language to § 778.114(a) clarifying that bonus, premium payments, and other additional pay of any kind are compatible with the use of the fluctuating workweek method of compensation. The Department also proposes to add examples to § 778.114(b) to illustrate the fluctuating workweek method of calculating overtime where an employee is paid (1) a nightshift differential and (2) a productivity bonus in addition to a fixed salary.
There are further revisions proposed to § 778.114(a) and (c) that were not in the 2008 NPRM to improve comprehensibility. Specifically, revised § 778.114(a) would list each of the requirements for using the fluctuating workweek method, and duplicative text would be removed from revised § 778.114(c).
Bonuses and premiums. Until 2011, the Department had never explicitly forbidden in rulemaking the payment of bonuses and premiums beyond the minimum salary to employees compensated under the fluctuating workweek method. To the contrary, in both the 2008 NRPM and in a 2009 opinion letter, the Department stated that such bonuses were consistent with using the fluctuating workweek method. However, in the Preamble to the 2011 Final Rule, the Department stated a different position. The clarifying language proposed for 29 C.F.R. § 778.114 would affirm the Department’s current position that employers using the fluctuating workweek method may pay bonuses and premiums in addition to the minimum salary.
The Department made clear that employers and courts should not rely on the statement in the 2011 Preamble that “bonus and premium payments are incompatible with the fluctuating workweek method of calculating overtime.” The Department did not modify the regulatory text in 2011 to align with that statement.
A 1999 opinion letter explained that an employer using the fluctuating workweek method may pay bonuses for working holidays or vacations. However, in 2003, the First Circuit, in O’Brien v. Town of Agawam, held that certain types of additional pay were incompatible with the fluctuating workweek method. Specifically, the appeals court held that police officers’ receipt of “bonus” pay for working nights and long hours, was contrary to the fluctuating workweek method. The O’Brien court reasoned that an employer using the method must pay a “fixed amount as straight time pay for whatever hours work[ed],” and any extra compensation would violate this “fixed amount” requirement.
2008 notice of proposed rulemaking. In an effort to “eliminate confusion over the effect of paying bonus supplements and premium payments to affected employees,” the Department’s 2008 notice of proposed rulemaking (NPRM) suggested adding a sentence to the end of § 778.114 providing that payment of overtime premium and other bonus and non-overtime premium payments will not invalidate the “fluctuating workweek” method of overtime payment, but such payments must be included in the calculation of the regular rate unless excluded under section 7(e)(1) through (8). The proposed clarifying language in the 2008 NPRM reflected the Department’s position that bonus and premium payments are compatible with the fluctuating workweek method.
On January 16, 2009, the Wage and Hour Division reaffirmed this same position when it issued an opinion letter explaining that the “[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 it required under § 778.114(a).”
On May 5, 2011, the Department issued a Final Rule, which did not adopt the clarifying language to § 778.114. Rather, the 2011 Preamble interpreted the “current rule” to mean that bonus and premium payments “are incompatible with the fluctuating workweek method of computing overtime under § 778.114.
“Productivity-based” versus “hours-based” supplemental payments? Since 2011, a growing number of courts have developed a dichotomy between “productivity-based” supplemental payments, such as commissions, and “hours-based” supplemental payments, such as night-shift premiums. Productivity-based supplemental payments have been found to be compatible with the fluctuating workweek method, but not hours-based supplemental payments.
However, the Department has never drawn this distinction, and it determined that this distinction is in tension with all of its prior written guidance and statements on the issue. The DOL has become increasingly concerned that it may be confusing and administratively burdensome for employers to distinguish between productivity- and hours-based bonuses and premium payments.
It is further concerned that the “productivity” versus “hours” based distinction fails to provide adequate guidance to employers because it has not been adopted in by all jurisdictions. Moreover, the Department believes that the distinction is unhelpful for supplemental pay that does not fall neatly into either category, such as retention bonuses, safety bonuses, and referral bonuses. Thus, the Department concluded that the need to clarify its fluctuating workweek rule is stronger now than in 2008, when it proposed substantially similar clarification.
Accordingly, this DOL proposal will clarify the current regulation to allow employers who offer both productivity and hours-based bonuses and premium payments to use the fluctuating workweek method of compensation.
Comments, please. This notice of proposed rulemaking is available for review and public comment for 30 days. The Department’s NPRM is scheduled to be published in the Federal Register on November 5, 2019. The Department encourages interested parties to submit comments on the proposed rule.
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