The U.S. Department of Labor (DOL) has issued a final rule under the Fair Labor Standards Act (FLSA) expressly authorizing employers to offer bonuses, hazard pay, and other premiums to employees whose hours, and regular rate of pay, vary from week to week.
The final rule revises 29 CFR §778.114, which is the DOL regulation that specifies how overtime is to be computed for salaried, non-exempt employees who work a fluctuating workweek. The new rule clarifies that bonuses, premium payments, commissions, and hazard pay on top of fixed salaries are compatible with the fluctuating workweek method of compensation and that employers must include such variable compensation when calculating an employee’s regular rate for overtime purposes. The final rule includes example calculations to illustrate how to factor in such payments.
Under a fluctuating workweek, a non-exempt employee receives a set salary for all hours worked in a week even though those hours may vary from week to week, the same as a salaried exempt does. However, unlike an employee who is paid at a specific hourly rate who must receive 1.5 times that hourly rate for overtime work, the fluctuating workweek method allows an employer to pay salaried, non-exempt employee overtime at a .5 multiplier. Under the fluctuating workweek method, because the employee’s hours of work vary from week to week, the regular rate must be calculated each week based on the number of hours actually worked that week.
The revisions made by the final rule now require that a fluctuating workweek arrangement satisfy the following conditions:
- The employee works hours that fluctuate from week to week;
- The employee receives a fixed salary that does not vary with the number of hours worked in the workweek, whether few or many;
- The amount of the employee’s fixed salary is sufficient to pay the employee at least the minimum wage for every hour worked in those workweeks where the number of hours the employee works is greatest;
- The employee and the employer have a clear and mutual understanding that the fixed salary is compensation (apart from overtime premiums and “any bonuses, premium payments, commissions, hazard pay, or other additional pay”) for the total hours worked each workweek regardless of the number of hours, although the parties’ understanding need not extend to the specific method used to calculate overtime pay; and
- The employee receives overtime compensation, in addition to the fixed salary and any bonuses, premium payments, commissions, hazard pay, and other additional pay, for all overtime hours worked at a rate of not less than .5 times the employee’s regular rate of pay for that workweek. Because the employee’s salary is fixed, “the regular rate of the employee will vary from week to week and is determined by dividing the amount of the salary and any non-excludable additional pay received each workweek by the number of hours worked in the workweek. Payment for overtime hours at not less than one-half such rate satisfies the overtime pay requirement because such hours have already been compensated at the straight time rate by payment of the fixed salary and non-excludable additional pay. 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, and such payments must be included in the calculation of the regular rate unless excludable under section 7(e)(1) through (8) of the Act”.
The DOL’s issuance of this new final rule resolves the ambiguity over whether the payment of additional bonus and premium payments to employees who work a fluctuating workweek is permissible under the FLSA. In 2011, the DOL added language to the preamble to 29 CFR §778.114 stating that any additional pay beyond salary was inconsistent with the fluctuating workweek Courts also entered the fray, with some holding that the FLSA permits bonus payments under the fluctuating workweek method and others holding that it does not.
In its press release announcing the final rule, the DOL opined, “Because of the clarity provided by this rule, employers will know they can pay workers’ bonuses in a broader range of circumstances. This rule comes at a time when millions of Americans are returning to work and will benefit from added flexibility in compensation.” Whether the DOL’s new rule will result in more employers paying bonuses remains to be seen. Many employers do not use the fluctuating workweek method because of the administrative burden of having to calculate an employee’s regular rate anew for every week that they work overtime. Moreover, given the economic uncertainty created by the COVID-19 public health crisis, many employers will not have the financial resources to pay bonuses.
It remains unclear whether the Illinois Department of Labor and the Illinois courts will honor the new rule. In December 2019, the Illinois Attorney General wrote to the DOL opposing the proposed change in the fluctuating workweek regulations because it would expand employers’ use of the fluctuating workweek method. Although an employee’s regular rate necessarily will increase with the inclusion of bonus and other incentive pay in the wage rate calculation, the Illinois Attorney General and others have argued that including any form of variable compensation in the calculation negates the requirement that the employee’s salary be “fixed”.
The new rule will take effect 60 days after it is published in the Federal Register. As of this writing, the new rule has been submitted to the Office of the Federal Register for publication but has not yet been published in the Federal Register.