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Labor: Paying salaried non-exempt employees using the fluctuating workweek method

Labor Department reverses its position, restricts fluctuating workweek method

The fluctuating workweek has long been a popular method of paying salaried non-exempt employees. However, last year the U.S. Department of Labor (DOL) issued a statement invalidating this method in cases where the employer paid employees bonuses or incentives, causing confusion among employers using the fluctuating workweek method.

Traditionally, with a fluctuating workweek a salary is paid for all hours worked, with half time for all hours worked after 40 hours. Under the Fair Labor Standards Act (FLSA), employers utilizing this method must meet the following requirements:

1. The employee’s hours must fluctuate from week to week both below and above 40

2. The employee must receive a fixed salary that does not vary according to the hours worked each week

3. The fixed weekly amount must exceed the minimum wage in any given week

4. The employer and employee must have a clear and mutual understanding that the employer will pay a fixed salary regardless of the hours actually worked

This fixed salary concept has long been a source of contention for employers, courts, and the DOL. Generally, there are two types of issues that arise when the courts or the DOL examine a fixed salary concept. The first centers on whether there were any deductions made that could affect fixed wages. Both the courts and the DOL are in agreement that non-standard deductions will invalidate the use of the fluctuating workweek. The second issue — one on which the courts and the DOL disagree — concerns whether the payment of additional non-overtime bonuses or premiums restricts the use of the fluctuating workweek method of pay.  

Historically, bonuses and premiums did not affect the use of the fluctuating workweek as long as overtime was correctly paid on these additional payments. In 2003, the 1st Circuit found different premium payments made pursuant to a collective bargaining agreement caused an employee’s salary to fluctuate week to week.

The court held that these fluctuations in salary prevented the employer from using the fluctuating workweek. Shortly after, two district courts applied the 1st Circuit’s rationale to other types of premium payments and deductions that caused an employee’s weekly pay to fluctuate. In 2008, the DOL commented on these cases—stating that “bona fide bonus or premium payments do not invalidate the fluctuating workweek method of compensation” —and issued a proposed rule to clarify the issue.

In April 2011, the DOL reversed its position after reviewing the comments received from the proposed rule. The DOL stated its official position is that all non-overtime bonuses and premiums are incompatible with the fluctuating workweek. Therefore, according to the DOL, anyone who pays their employees any bonuses or premiums cannot use the fluctuating workweek. This is not only a reversal of its previous position, but also expands the holdings of the decisions cited by the DOL. 

Employers should keep in mind that the DOL’s interpretation of the courts’ rulings is just an opinion and not binding on employers. One court has already refused to accept the DOL’s opinion, holding that “the Department of Labor's reasoning is unconvincing…[n]othing prohibits the use of the fluctuating workweek method for calculating damages whenever an employer gives a bonus to an employee” (Smith v. Frac Tech Servs., LLC, 2011 U.S. Dist. LEXIS 64079 (E.D. Ark. June 15, 2011)).

Additionally, another court distinguished weekly premiums paid based on the time worked or the type of work assigned from payment of sales- or production-based bonuses or commissions, implying that sales- or production-based bonuses would not impact the use of the fluctuating workweek method of payment (Brantley v. Inspectorate Am. Corp., 2011 U.S. Dist. LEXIS 128785 (ED Texas October 17, 2011)). 

The DOL’s current position strongly suggests that it wants to restrict, and possibly eliminate, the use of the fluctuating workweek method. Employers who use or want to use this payment method, while paying bonuses or incentives to employees, must consider the DOL’s position in evaluating the risk of this method. The risk will be reduced to the extent that employer’s bonuses or incentives are not related to any specific workweek and are instead based on productivity, safety, performance or sales, and to the extent that overtime is properly paid on this additional pay. Lastly, employers who wish to utilize the fluctuating workweek method of pay are encouraged to meet with counsel to review their payment plan.

Managing Partner

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Salvador Simao

Salvador P. Simao is managing partner of Ford & Harrison LLP’s New Jersey office. Having spent the majority of his career as a trial attorney...

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