Many employees believe that a hard line exists for determining if an employee is entitled to overtime compensation or is exempt from overtime requirements. Hourly rate employees are always non-exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”).

illustration copyMany employers believe that any employee paid a salary is exempt from being paid overtime compensation. This belief is incorrect. Exempt status depends on the amount of the salary AND the duties performed by the employee. In many instances, the exempt status of a salaried employee is unclear. For example, the exempt status of assistant managers in the food industry and large box stores almost always is an open question. Applying the exemption incorrectly can result in extremely expensive liability for overtime compensation.

The FLSA provides an employer with a pay-reduced overtime method for salaried positions that do not satisfy the requirements for exempt status. Under the “fluctuating workweek,” an employer only pays ½ times the regular rate of pay for hours worked in excess of 40 in a workweek, as opposed to 1½ times the regular rate of pay under the regular formula. As long as the fixed salary is paid in full (subject to certain allowed deductions), the fluctuating workweek method can be applied whether the employee works 45 hours or 65 hours in a workweek. Paying half-time rate rather than time-and-a-half results in substantial savings to an employer. Thus, if a salaried position falls in a gray area of FLSA exemptions, we recommend our clients consider placing the employee under the “fluctuating workweek” method of paying overtime.

To use the fluctuating workweek method of payment, five requirements must be met:

1.  The employee must work hours that fluctuate from week to week.

2.  The employee must be paid a fixed salary that serves as compensation for all hours worked. Stated differently, the employee gets the fixed salary even if the employee works fewer than 40 hours in a week.[1]

3.  The fixed salary must be large enough to compensate the employee for all hours worked at a rate not less than the minimum wage. The employers will want to use the maximum number of hours possible to work within a week and then divide those hours with the salary to make sure the minimum wage level is being met. For example, a fixed salary of $600 a week satisfies this requirement if the employee will not work anymore than 60 hours in a week because $600 ÷ 60 = $10 an hour, which is above the minimum wage amount.

4.  The employee must be paid an additional one-half of the regular rate for all overtime hours worked. The half rate is determined on a week-by-week basis. To derive the overtime amount, an employer should take the fixed salary and divide it by the number of hours worked that week. Once that amount is determined it can be divided in half in order to reach the “one-half of the regular rate.”

5.  Lastly, there must be a “clear mutual understanding” that the fixed salary is compensation for however many hours the employee may work in a particular week, rather than for a fixed number of hours per week.

Here is how the fluctuating workweek would work for an employee who had a fixed salary of $800 with no other commissions or incentives:

Fluctuating workweek table

 


[1]  Some deductions from and/or additions to the fixed salary are allowed. Any deductions or additions such as bonuses or incentive payments must be examined closely to ensure that the fluctuating workweek method remains applicable.

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