The Fluctuating Workweek Alternative to the FLSA’s Increased Salary Threshold
New Fair Labor Standards Act (FLSA) rules go into effect on December 1, 2016, expanding overtime eligibility to 5 million workers including nearly all salaried employees who earn up to $47,476. That’s right, currently exempt salaried employees who make less than $47,476 are likely to be entitled to overtime under the new rules. One alternative for employers seeking to avoid across-the-board salary increases for exempt employees is the fluctuating workweek method of pay.
The FLSA generally requires employers to keep track of the hours worked by an employee and pay the employee one and one-half times the employee’s regular hourly rate for each hour worked over 40 in a workweek. Some employees are exempt from overtime pay with the most common exemptions being “white collar” exemptions for executive, administrative and professional employees. “White collar” employees must meet both the “duties” and “salary” tests. The biggest change going into effect is the new minimum salary threshold required for exempt employees. Today, the threshold is $23,660, which is relatively low and easily met.
The new regulations raise the threshold to $47,476 ($913 per week). And, in an unprecedented step, that amount will be adjusted every three years beginning January 1, 2020, based on future wage growth. This means employers need to regularly review their exempt employees’ salaries for compliance.
As to positions currently classified as exempt and paid less than $47,476, what’s an employer to do? The most obvious options are to increase the employee’s salary to $47,476 or to reclassify the employee as hourly nonexempt and pay overtime when worked. A less known alternative is the fluctuating workweek method which gives employees the security of a regular salary and allows employers to avoid the increased salary threshold and limit overtime costs.
Under the fluctuating workweek method, the employee’s hours must fluctuate from week to week. The employer pays a fixed weekly salary for all hours worked, whether few or many, and the salary must be high enough to insure that the employee receives at least minimum wage for all hours worked each week. In addition to the fixed salary, the employee receives a 50% overtime premium for all hours worked in excess of 40 per workweek. And, there must be a clear mutual understanding that this is the employee’s method of pay.
Here is how the fluctuating workweek method works to control overtime costs. Assume the employee regularly works between 30 and 60 hours and receives a fixed salary of $600 per week. When the employee works more than 40 hours in a workweek, the hourly rate for that week is determined by dividing the salary by the number of hours worked. This means the hourly rate will fluctuate from week to week based on the number of hours worked. When the employee works 50 hours, the $600 salary is divided by 50 to equal $12 per hour straight time, and an additional halftime rate, here $6, is due for each of the 10 overtime hours, or $60. When the employee works 60 hours, the hourly rate is $10 per hour, and an additional halftime rate of $5 is due for each of the 20 overtime hours, or $100.
While the fluctuating workweek method is perfectly legal and recognized by the US Department of Labor and courts, it is imperative that employers seeking to take advantage of this method are in complete compliance with its requirements. The fixed salary must be fixed. The hours of work must fluctuate. And, any additional bonuses paid aside from the fixed salary and overtime must not be based on extra hours worked. Employers affected by the new salary threshold should thoughtfully consider this option now and implement any new practice by Thanksgiving, rather than waiting until the new rules take effect.