by Robert W. Ditmer, CPP*
Fluctuating workweek overtime pay is a method of complying with the FLSA
that has the potential of saving an employer money. The employee
is paid a fixed salary for all hours worked, whether the employee
works less than 40 hours or more than 40 hours. In weeks in
which the employee works more than 40 hours, the employee is
paid an overtime premium for the extra hours. The employer
can save money because it is paying the employee a salary that
involves fewer administrative costs, and any overtime premiums
are paid at 50% of the employee’s regular rate of pay.
Because of the complex nature of the fluctuating workweek rules,
you should obtain professional legal guidance if you are considering
this method of determining employees’ pay.
To use this method of payment an employer must conform to certain rules as outlined in the CFR. [29 CFR 778.114] These rules can be summarized as follows:
- There must be an understanding between the employer and the employee
that the employee will be paid using the fluctuating workweek
method.
- The workweek of the employee must be a fluctuating one.
- The employee must be paid a fixed salary regardless of the
number of hours worked each week. Employees who are paid
an hourly wage do not qualify.
- The salary must be sufficiently large enough so that the regular
rate of pay will never drop below the minimum wage.
- In addition to his salary, the employee must be paid overtime premiums
for any hours worked over 40 in the workweek. The overtime
premium rate is 50% of the regular rate of pay for the
workweek.
Let’s examine each of these rules separately.
First, the employer and employee must have a clear understanding that the fluctuating
workweek method will be used for paying the employee. It has to be made clear
to the employee that the salary is meant to pay for all hours worked. That
means that the employee’s regular rate of pay will fluctuate each workweek
depending on the number of hours worked. If the employee is paid a salary of
$350 per week and works only 35 hours, then the regular rate of pay for that
week is $10 per hour. If, however, the employee works 48 hours in the next
week, then the regular rate of pay for that week would be $7.29 per hour. Since
the regular rate of pay changes each week, the employee is, in effect, paid
straight time for all hours worked.
Although the CFR does not require that the understanding between the employer
and employee be in writing, a written statement to employees is preferable
because it provides the employer with a basis for defending the use of the
method. For instance, in the case of Kelli K. Goodrow v. Lane Bryant, Inc.,
732 N.E. 2d 289 (Mass. S. Jud. Ct., 2000), the plaintiff tried to argue that
she had not been properly informed of how the method of payment worked. The
defendant, however, was able to show that they had provided each new employee
a memorandum explaining the method of payment.
It should also be noted that the word “understanding” is used rather
than “agreement.” In one case involving emergency medical services
workers, the plaintiffs argued that they had not agreed with the use of the
fluctuating workweek method of payment. (Griffin v. Wake County, 142
F.3d 712 (4th Cir., 1998. The court, though, agreed with the defendant that
mere employee understanding, not agreement, was all that was required to implement
the fluctuating workweek plan. The county had held mandatory meetings with
all of their workers to explain the plan, and all employees had to sign statements
that they understood the plan.
The interpretation of the requirement that the workweek be a fluctuating one
has also been addressed in the courts. The CFR states the following: “[T]he
employee clearly understands that the salary covers whatever hours the job
may demand in a particular workweek and the employer pays the salary even though
the workweek is one in which a full schedule of hours is not worked. Typically,
such salaries are paid to employees who do not customarily work a regular schedule
of hours and are in amounts agreed on by the parties as adequate straight-time
compensation for long workweeks as well as short ones, under the circumstances
of the employment as a whole.” [29 CFR 778.114(c)]
The first assumption that is often made regarding fluctuating workweeks is
that the employee has to work both long and short workweeks. In fact, the method
is most often used in situations where that occurs. Emergency medical workers
often work short weeks as well as long ones, depending on the circumstances.
The method has also been used to pay country club workers who are employed
year-round and work long hours during the summer and shorter hours during the
winter. In those cases, the employer pays overtime premiums during the summer
when business is higher and avoids paying any overtime at all during the winter
when business is slower.
The assumption, however, is incorrect. In the case of Flood v. New Hanover
County, 125 F. 3d 249, (4th Cir., 1997) the court cited a May 16, 1966,
opinion letter of the U.S. Department of Labor’s Wage and Hour Division
that had determined that where employees worked fixed, alternating workweeks
of 43 and 41-hour schedules, the workweek was a fluctuating one. Therefore,
the fluctuating workweek method can be used in cases where employees always
work overtime but the workweek fluctuates.
A second assumption is that the workweeks have to be irregular. In the case
of Flood v. New Hanover County the workers were actually on a fixed
schedule. They worked (or were engaged to be waiting) alternating days, 24
hours on and 24 hours off, with 4 days off at the end of the cycle. This meant
that an employee worked 48 hours during one workweek and 72 hours in the next
workweek. The court ruled that although the schedule was fixed, the workweek
still fluctuated, and, therefore, the fluctuating workweek method could be
used.
In a similar case, the District Court for South Carolina found that it “is
not necessary for regular hours to be sporadic for the regulation to be applied;
it is sufficient that the regular hours vary from one workweek to another.” (Roy
v. County of Lexington, S.C., 948 F. Supp. 529 (D.S.C. 1996)
The third requirement is that the employee must be paid a fixed salary regardless
of the number of hours worked each week. The employee has to understand that
the salary is for all hours worked. Employees who are paid an hourly wage,
therefore, cannot be paid using this method. An hourly employee is paid at
a fixed regular rate of pay (or multiple rates of pay), so his hourly rate
of pay is never less than a stated minimum. But an employee who is paid using
the fluctuating workweek method has a regular rate of pay that varies each
week, and the regular rate decreases as the employee works longer hours.
The fourth requirement is stated in the CFR as follows: “The ‘fluctuating
workweek’ method of overtime payment may not be used unless the salary
is sufficiently large to assure that no workweek will be worked in which the
employee’s average hourly earnings from the salary fall below the minimum
hourly wage rate applicable under the Act.” [29 CFR 778.114(c)] For instance,
in the case of Flood v. New Hanover County the workers were actually
scheduled to work 72 hours in one workweek. Based on the current federal minimum
wage of $5.15 an hour, the minimum salary would have to be $370.80. Please
note that the Code refers to the employee’s earnings from the “salary”,
not his total pay. So the overtime premium cannot be included in determining
whether or not the salary is sufficient.
With the exception of California the fluctuating workweek method can be used
in all states. Employers, therefore, must be sure that the salary is sufficiently
large that the employee’s regular rate of pay is never less than the
state minimum wage.
Payroll Calculations
To calculate the employee’s regular rate of pay under the fluctuating
workweek method, the total number of hours worked is divided into the employee’s
weekly salary. The overtime premium is 50% of the regular rate of pay times
the number of hours of overtime worked. For instance, if we use the example
of an EMS worker who works alternating weeks of 48 hours and 72 hours and is
paid $500 per week, the calculation of the biweekly pay would be as follows:
First Week
- Regular rate of pay. ($500 / 48 hr = $10.42/hr)
- Overtime premium. (.5 x 8 hr x $10.42/hr = $41.68)
- Total pay. ($500 + $41.68 = $541.68)
Second Week
- Regular rate of pay. ($500 / 72 hr = $6.94/hr)
- Overtime premium. (.5 x 32 hr x $6.94/hr = $111.04)
- Total pay. ($500 + $111.04 = $611.04)
So the employee’s gross pay for the biweekly payroll period
would be $1,152.72 ($541.68 + $611.04).
So how is this a cost savings to the employer? Suppose the above employee is
paid at $10.42/hr (his regular rate of pay in the above example) on an hourly
basis. Then the calculation would be as follows:
FirstWeek
- Total regular wages. ($10.42/hr x 48 hr = $500.16)
- Overtime premium. (.5 x 8 hr x $10.42/hr = $41.68)
- Total pay. ($500.16 + $41.68 = $541.84)
Second Week
- Total regular wages. ($10.42/hr x 72 hr = $750.24)
- Overtime premium. (.5 x 32 hr x $10.42/hr = $166.72)
- Total pay. ($750.24 + $166.72 = $916.96)
So the total gross pay for the biweekly payroll period would be
$1,458.80 ($541.84 + $916.96). An employer that uses the
fluctuating workweek method for this employee saves $306.08
every two weeks, or a total of $7,958.08 per year.
So if used properly, the fluctuating workweek method can result in substantial
savings to employers. And yet, there is an alternative that can provide employers
with additional savings in administrative costs.
Fluctuating Workweek with a Fixed Regular
Rate of Pay
This method is the same as the above method with one major exception. In this
case, the regular rate of pay is calculated by dividing 40 hours into the employee’s
weekly salary. Thus, the overtime premium will be based on a fixed hourly rate,
which can translate into administrative cost savings in certain circumstances
by eliminating the need to recalculate the regular rate of pay each week.
For instance, suppose that an employee works a schedule that results in his
workweeks fluctuating between 42 and 45 hours per week. He is paid a salary
of $452 per week. If the employee’s salary is divided by 40 hours, then
his regular rate of pay is $11.30 per hour, so the overtime premium rate will
be $5.65 per hour (50% of $11.30/hr). When the employee works 42 hours in a
week, he is paid $11.25 as an overtime premium (2 hr x $5.65/hr). When the
employee works a 45-hour week, his overtime premium pay is $28.25 (5 hr x $5.65/hr).
So his total pay for two week’s work is $943.50 ($452 + $11.25 + $452
+ $28.25).
At least one court case has upheld this use of the fluctuating workweek method.
In the case of Kelli K. Goodrow v. Lane Bryant, Inc. the court ruled
in favor of the employer. In the second case the employer (Lane Bryant, Inc.)
had relied on the Department of Labor’s Field Operations Handbook (1967)
in implementing their fluctuating workweek plan in 1992. Section 32b04b(a)
of that Handbook states: “If the employer to avoid weekly computations
chooses to pay extra half-time based on the salary divided by 40 hours, such
a method is permissible.”
Although the overtime premium rates may be higher using this method, administrative
cost savings can be realized in certain circumstances. In situations where
the fluctuation of hours each is only a few hours more than the 40-hour maximum,
such as in the example above, time is saved (and costs) by not having to recalculate
the regular rate of pay each week. Of course, the method could become very
costly in situations similar to the Flood case where employees worked 72 hours
in one week.
The next section deals with Belo Plans, a salary alternative that is even more
restrictive than the fluctuating workweek.
*Originally
published as "Using a Fluctuating Workweek May Save You Money," PAYTECH,
April 2003, pp. 42-44.
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Robert W. Ditmer, CPP, is the owner of RWD Financial Support Service, located in Columbia, Maryland. Mr. Ditmer provides support and consulting services in the areas of bookkeeping, accounting, payroll and human resources. With over 25 years of experience Mr. Ditmer has worked in a wide variety of industries, and he worked as a Controller in four different businesses including a land planning/landscape architecture firm in Philadelphia, PA, a private dining and catering facility in Wilmington, DE, an IT support company in Glastonbury, CT, and a commercial construction management firm in Columbia, MD. Mr. Ditmer has also spoken at conferences and provided training on various issues, and he has written a number of articles in the field of payroll and payroll taxation. He is a member of the American Institute of Professional Bookkeepers and the American Payroll Association, and qualified as a Certified Payroll Professional in 2000. He can be reached at rwdfinancial@yahoo.com.
