Bonuses, shift differentials, hazard pay, commissions and other add-ons do not preclude use of the fluctuating workweek method of computing overtime, according to a U.S. Department of Labor interpretive regulation issued May 20, 2020.
The fluctuating workweek (FWW) method of computing overtime is an alternative method of computing overtime for non-exempt salaried employees. If there is a clear and mutual understanding that the salary covers straight time pay for all hours worked, whether few or many, the additional overtime compensation is one-half the regular rate. For instance, if an employee’s salary is $800 per week, and the employee works 50 hours, the regular rate is $16 per hour ($800/50). One-half the regular rate is $8 per hour. For the overtime, the employer owes an additional $80 (10 x $8).
The revised regulation was prompted primarily by court decisions holding that additions to the fixed salary, such as bonuses and shift differential, precluded the FFW method. The new regulation rejects those decisions, “Payment of any bonuses, premium payments, commissions, hazard pay and additional pay of any kind is compatible with the fluctuating workweek method of overtime payment.” The additional payments must, however, be included in the calculation of the regular rate.
The revised regulation did not eliminate the requirement of a “clear and mutual” understanding that the salary is compensation for all hours worked regardless of number. To avoid claims that employees did not understand this, it is advisable to put it in a document, such as an offer letter, countersigned by the employee and retained in the personnel file.
The FWW method applies only to employees who are paid on a salary basis. In the past, the DOL has taken position that the salary basis test, for purposes of the FWW method, does not allow salary deductions that are permissible under the salary basis test for the executive, administrative and professional exemptions from overtime. Thus, if an employee takes off a full day for personal reasons, the employer can “dock” the salary under the test for the exemption, but it cannot “dock” the salary under the FWW method. The DOL rejected comments that the definition of “salary basis” should be the same under both tests. Instead, the new FWW regulation allows only “occasional disciplinary deductions” for “willful absences or tardiness or infractions of major work rules.”
California, Pennsylvania, Alaska, and New Mexico do not permit the FWW method of computing overtime. The Maryland Court of Special Appeals has approved it under Maryland state law.
When the revised rule was initially proposed, a Shawe Rosenthal partner, Eric Hemmendinger, wrote comments submitted on behalf of the Wage-Hour Defense Institute. The DOL’s explanation of the new rules repeatedly cites those comments.