New DOL Rule Permits Bonuses and Enhanced Pay with Fluctuating Workweek

May 26, 2020

The DOL has issued a final rule that allows employers greater flexibility in paying bonuses and other enhanced pay to employees paid on the “fluctuating workweek” basis. According to the DOL’s announcement, the new rule provides that incentive-based payments like bonuses, hazard pay and commissions, paid to employees in addition to their fixed weekly salaries are intended to cover fluctuating work hours and therefore “are compatible” with the fluctuating workweek overtime calculation method. As a result, the payment of these enhanced amounts above and beyond the salary do not disqualify an employer from continuing to pay overtime to an employee on a fluctuating workweek basis, according to the new DOL rule.

As a bit of background, Section 7(a) of the Fair Labor Standards Act (“FLSA”) requires employers to pay non-exempt employees overtime at the rate of 1.5 times the regular rate for all hours worked in excess of 40 in a workweek. See 29 U.S.C. §207(a). In some circumstances, when an employee’s working hours genuinely fluctuate from week to week and the employer and employee have a clear and mutual understanding that the employee will be paid a fixed salary as straight time compensation for whatever hours the employee is called upon to work in a workweek, whether few or many, an employer is allowed to use the “fluctuating workweek method” to compute overtime compensation. 29 CFR 778.114(a). In such cases, the regular rate must be determined separately each week “by dividing the number of hours worked in the workweek into the amount of the salary,” and an employer satisfies the overtime pay requirement if it compensates the employee, in addition to the salary amount, at a rate of at least .5 times the regular rate of pay for the hours worked each overtime hour. 29 CFR 778.114(a).

The DOL’s new final rule clarifies that the payment of additional bonus and premium payments to employees paid on a fluctuating workweek basis are consistent with the use of the fluctuating workweek method of compensation, and will not disqualify the employer from using the fluctuating workweek method of pay so long as all other conditions are met. The new final rule also clarifies that the additional bonus or premium payments will be considered part of the straight-time compensation for all hours worked of the employee in any given week, and that any such additional bonuses or premium payments paid to the employee must be included in the calculation of the regular rate unless they may be excluded under FLSA sections 7(e)(1)-(8). See 29 U.S.C. 207(e)(1)-(8).

Most believe that the new rule will allow employers and employees to better utilize flexible work schedules. The substance of the rule was under consideration as far back as 2008, but for a variety of reasons was not finalized. But the DOL believed it was particularly important to finalize the rule now, as workers return to work following the COVID-19 pandemic. As the DOL noted “Some employers are likely to promote social distancing in the workplace by having their employees adopt variable work schedules, possibly staggering their 5 start and end times for the day. This rule will make it easier for employers and employees to agree to unique scheduling arrangements while allowing employees to retain access to the bonuses and premiums they would otherwise earn.”