Overtime Pay Rules for Fluctuating Workweeks

If you pay employees who are nonexempt and who have fluctuating workweeks, there's a formula you can use to calculate their overtime pay. The formula is laid out in newly revised U.S. Department of Labor (DOL) regulations, and it adheres to the Fair Labor Standards Act (FLSA) overtime pay framework. However, you don't need to dig into the legalese to understand the basic principles.

Determining Who's Eligible

The upshot of using this pay method may be a reduction in the overtime pay rate for employees who fit the criteria. When deciding which employees are eligible for this formula, the following conditions apply, according to a DOL summary:

• The employee's hours of work fluctuate from week to week.
• The employee receives a fixed salary that doesn't vary based on the number of hours worked (except for overtime pay, when earned).
• The amount of the fixed salary satisfies the requirement that in a week where the employee works the highest number of hours, the per-hour pay is not less than the applicable minimum rate.
• You and the employee have a clear understanding that the fixed salary is compensation (apart from overtime premiums and any bonuses, commissions or other additional pay that may not be excluded from the regular rate) for the number of hours worked each workweek regardless of the total.
• The employee receives, in addition to the fixed salary and any bonuses, premium payments, commissions, and additional pay of any kind, compensation for all overtime hours worked at a rate at least one-half of the regular rate of pay for that workweek.

Performing the Calculation

With these stipulations, an employee who works fewer than 40 hours in a week would receive the same pay as in a week when 40 hours were worked. But, when a salaried nonexempt employee works more than 40 hours, here's a hypothetical example of how the overtime pay should be calculated under the newly revised guidelines.

Jill is a salaried nonexempt employee who earns a $400 weekly salary. That equates to $10 per hour in a 40-hour workweek ($400/40). She works 30 hours Week 1 and 50 in Week 2. You might think you could just average the two weeks and keep her weekly salary at $400 for both weeks. That's not how it works.

Instead, for Week 1, her pay is $400. To determine the amount of overtime pay Jill has earned for the second week, the revised DOL guidance says to follow these steps:

1. Her equivalent straight-time pay rate for Week 2 is $8 ($400/50).
2. Her overtime pay rate (time-and-a-half rate) for Week 2 is $12 ($8 × 1.5). That's the pay rate for the 10 hours that Jill worked above 40 hours in Week 2.

Using these figures, Jill's total pay for Week 2 would be $520 [$400 +($12 x 10)].

That's $30 less than the $550 she would have earned if her overtime pay rate didn't include the 10 overtime hours in the straight-time pay rate calculation. If the 10 overtime hours hadn't been used, the math would have been:

1. Her equivalent straight-time pay rate for Week 2 is $10 ($400/40).
2. Her overtime pay rate for Week 2 is $15 ($10 × 1.5). That's the pay rate for the 10 hours that Jill worked above 40 hours in Week 2.

Using these figures, Jill's total pay for the second week would be $550 [$400 +($15 x 10)]. Clearly, employers can save money by applying the fluctuating workweek formula.

Impact of Bonuses

The calculations can get slightly more complicated when employees with fluctuating workweeks earn incentive pay like bonuses, premium pay (such as hazardous duty pay) and commissions. Those amounts are added to the basic salary, to calculate the straight-time pay equivalent.

Continuing with the previous example, if Jill worked 50 hours and earned a $100 bonus in Week 3, her straight-time pay would be $10 [($400 + $100)/50]. And her overtime pay rate for the extra 10 hours of work would be $15 ($10 × 1.5). As a result, her total earnings for Week 3 would be $650 [$400 + $100 + ($15 ×10)].

Prior to the recent revisions to DOL regulations, it wasn't clear that the fluctuating workweek overtime pay method could be used when bonuses and commissions are paid.

There are scenarios in which Jill's earnings could move in the opposite direction. For example, even though Jill's normal weekly wage is $400 a week regardless of hours worked, that amount could be reduced "for disciplinary reasons such as willful absences and tardiness or for infractions of major work rules," according to the DOL. However, it's unlikely that an employer would assign overtime to a worker who is violating work rules, so the calculation of overtime pay probably won't be necessary.

In another recent clarification, the head of the DOL's Wage and Hour Division explained that "there is no requirement that an employee's hours vary both above and below 40 hours per week to come within the rule; it requires only that the employee's hours fluctuate week to week." In other words, Jill could work 40 hours one week, 50 the next, 40 the next, 45 the next, and so on, without ever dipping below 40, and the newly revised guidance would apply when calculating her pay.

Final Thoughts

Though the fluctuating workweek formula could result in payroll savings, employers with workers that satisfy the parameters are under no obligation to use it. If the opportunity crops up only occasionally, you might decide that the potential savings in overtime pay doesn't justify the time spent using the formula and explaining the calculations to employees who are affected by it. Contact your HR or payroll advisor to determine what's right for your business.