By Anne G. Bibeau, Esq.

By now, you all are aware that on December 1, 2016, the salary threshold for the Fair Labor Standards Act (FLSA) white collar exemptions is about to jump to $47,476 per year. With estimates that 4.1 million workers will become non-exempt as a result of this change, employers are scrambling to fix pay, positions, and staffing to keep costs down after December 1, while retaining good employees. In the search for a solution, some employers are discovering exceptions to the FLSA— one being the fluctuating workweek method and the other being the Belo contract—both allow the employer to pay non-exempt employees overtime at reduced rates. Those two payment methods, however, are fraught with challenges that render them far less appealing than they first appear. In this post, we’ll look at the fluctuating workweek.

The fluctuating workweek method allows an employer to pay a non-exempt employee a fixed weekly salary, plus overtime at the rate of 50% the employee’s regular hourly rate. At first blush, this sounds great: the employee’s overtime rate is only 50% rather than the usual 150%, and the more hours the employee works, the lower his hourly overtime wage will be. For example, under the fluctuating workweek method, if an employee’s weekly salary is $500 and she works 45 hours in a given week, her regularly hourly rate for that week is $11.11/hour ($500/45 hours), and her overtime rate for that week is $5.56/hour. Thus, her total wages that week are $527.80. If she works 60 hours the next week, her regularly hourly rate for that week drops to $8.33 ($500/60 hours) and her overtime rate to $4.17, for total wages of $583.40. By comparison, if the same employee were paid an hourly wage of $12.50, without the fluctuating workweek method, she would earn $593.75 for a 45 hour workweek and $875.00 for a 60 hour workweek.

Sounds great for the employer, right? It can be, but only if you meet all of the following requirements:

1. The employee’s work hours must fluctuate often. If the employee usually works a 40 hour week with only occasional overtime, the fluctuating workweek is not an option.
2. The employer must pay the employee the fixed weekly salary in any week in which she performs any work, even if she only works a few hours that week. The employer cannot dock the salary in weeks were the workload is light.
3. There must be a clear mutual understanding between the employer and employee that the fixed weekly salary compensates the employee for all hours worked, with additional pay for hours in excess of 40. While the understanding does not have to be in writing, wise employers will document it with the employee’s signature.
4. The fixed weekly salary has to be high enough that the employee’s effective hourly rate does not drop below the federal minimum wage.
5. The employer must track the employee’s hours and pay the employee overtime at the rate of 50% the employee’s regular rate.
6. The employer cannot pay the employee any compensation other than the fixed salary and overtime. Bonuses, commissions, and other additional compensation are prohibited. If the employer pays any prohibited additional compensation, the employer will lose the ability to use the fluctuating workweek method and may be liable for back wages. There are limited exceptions for purely discretionary bonuses, such as a Christmas bonus.

Although the fluctuating workweek is permitted, the Department of Labor does not like it. In an audit, you can expect the DOL to scrutinize closely all time and pay records regarding anyone you pay on a fluctuating workweek basis, and to impose back wage liability if you have failed to comply with any of the requirements or paid any additional prohibited compensation.

In our next post, we’ll look at the Belo Contract.

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