On May 20, 2020, the U.S. Department of Labor issued a final rule about the acceptability of paying bonuses, premium payments or other additional pay. Additional pay, in this context, could be commissions or hazard pay to nonexempt salaried employees whose hours vary from week to week, and who are being paid under the fluctuating workweek method of calculating the payment of overtime. For years both the DOL guidance and court decisions have created uncertainty about the acceptability of such additional payments or supplemental pay with the fluctuating workweek method.
Understanding this final DOL final rule requires an understanding of the fluctuating workweek method of paying overtime. As a starting point, Section 7(a) of the FLSA requires employers to pay their nonexempt employees overtime pay of at least “one and one-half times the regular rate at which [the employee] is employed” for all hours worked in excess of 40 in a workweek. (Overtime thresholds for law enforcement personnel and firefighters are different.) So, for each hour over 40 that an employee actually works in a workweek, the employee is entitled to straight-time compensation at their regular rate and an additional 50 percent of the regular rate for any additional hours.
The Fair Labor Standards Act offers employers another option for computing overtime if an employee’s hours fluctuate from pay period to pay period. For example, a non-exempt employee can receive a fixed salary for such fluctuating hours under the “fluctuating workweek method” to calculate overtime compensation owed, if certain conditions are met. An employer may use the fluctuating workweek method if the employee works fluctuating hours from week to week and receives a fixed salary as straight-time compensation for whatever hours the employee is called upon to work in a workweek, regardless of the number of hours worked. To have this pay arrangement, there must be a clear understanding with the employee as to how this method will compensate them. This method considers the salary to compensate the employee at straight-time rates for whatever hours are worked in the workweek, and “the regular rate” for each workweek is determined by dividing the number of hours worked into the amount of the salary.
An employer satisfies the overtime pay requirement of section 7(a) of the FLSA if it compensates the employee, in addition to the fixed-salary amount, at a rate of at least one-half of the regular rate of pay for the each overtime hour worked in the work period. Because the employee’s hours of work fluctuate from week to week, the regular rate must be determined separately each week based on the number of hours actually worked each week. Again, this period can be longer for law enforcement personnel and firefighters. As noted before, the propriety of paying additional bonuses and premium payments on top of the fixed salary to employees compensated under the fluctuating workweek method has been uncertain for some time.
This rule makes clear that such additional payments are allowed when employees are paid this way. These supplemental payments, together with the fixed salary, provide straight-time compensation for all hours worked. The regular rate is then determined by dividing that total amount by the hours worked in the workweek. The additional bonuses or premium payments must be included in the calculation of the regular rate unless they may be excluded under another Rule. For more information, see U.S. Code Title 29, Section207(e)(1)-(8).
The DOL’s final rule also provides several examples which illustrate the fluctuating workweek method of calculating overtime where an employee is paid
- a nightshift differential,
- a productivity bonus, and
- premium pay for weekend work.
Because of the fluctuating work hours of many law enforcement officers and firefighters, some municipalities use the fluctuating workweek method of paying such employees and calculating overtime. The May 20 final rule clarifies this pay method and allows for the payment of additional bonus or premium payments when they are deemed appropriate and necessary.
The South Carolina Municipal Insurance and Risk Financing Fund employment liability hotline offers members 10 free hours to discuss employment issues with an assigned attorney. For more information contact Cindy Martellini at cmartellini@masc.sc or 803.933.1235.