John is an EMS dispatcher whose hours vary unpredictably from week to week. John always works at least 40 hours per week, but some weeks John works 42 hours, some weeks he works 48 hours and occasionally he works close to 60. Ellen is a water plant operator who weekly hours vary as well, but they vary on a scheduled basis. Ellen works 32 hours every first and third week of the month and 48 hours every second and fourth week. Both John and Ellen are nonexempt employees. The city for which John and Ellen work pays cash overtime instead of using compensatory time off. Yet neither John nor Ellen earns overtime at the rate of time-and-one-half. Without violating the FLSA, the city pays both John and Ellen at just one-half their regular rate of pay for each hour over 40 that they work in a given work week. How can that be?
The Fair Labor Standards Act (FLSA) requires employers to pay time-and-one-half the regular rate of pay for all hours over 40 that an employee works in a given week, unless the employee is “exempt.” That is, unless the employee meets either the executive, administrative or professional duties tests (for how to determine whether an employee is exempt or nonexempt under the FLSA, see my previous blog posts here, here, here, here and here).
But for some employees, there is another way to go about it.
The Fluctuating Workweek Alternative
The text of the Fair Labor Standards Act itself says nothing about fluctuating workweeks, but the U.S. Department of Labor’s regulations implementing the FLSA set out an entire section—29 CFR § 778.114—explaining the circumstances under which employers may use an alternate method of calculating overtime when employees work hours that fluctuate from week to week. This method is called the “fluctuating workweek method.” It provides for a) the payment of an unchanging salary that compensates the employee for all hours worked that week regardless of whether the employee works fewer or greater than 40 hours a week, and b) payment for overtime hours at a rate of one-half the employee’s regular rate of pay.
To use the fluctuating workweek method of payment, five requirements must be met:
- the employee must work hours that fluctuate from week to week;
- the employee must be paid a fixed salary that serves as compensation for all hours worked;
- 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 employee must be paid an additional one-half of the regular rate for all overtime hours worked; and
- 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.
Let’s look at each of the requirements in turn.
1. The Employee Must Work Fluctuating Hours.
The regulation says that this method of payment may be used for employees with “hours of work which fluctuate from week to week,” and that it is “typically” used to pay “employees who do not customarily work a regular schedule of hours.” Nevertheless, nothing in the regulation requires that the employee’s hours be unpredictable or unknowable in advance. Two federal Fourth Circuit Court of Appeals decisions make that clear. In both Flood v. New Hanover County and Griffin v. Wake County, the court found that a work schedule in which the employee’s hours varied on a regular, predictable basis satisfied the requirement that the employee’s hour fluctuate from week to week.
In addition, nothing requires that the fluctuation include some weeks where the hours worked are fewer than 40 and some where the hours worked are greater than 40. All the regulation requires is that the employee’s hours fluctuate from week to week. In the Flood case, the Fourth Circuit held that the employer could the fluctuating workweek method to compensate employees working a rotating schedule of 48.3, 56.3, 64.45 and 72.45 hours per week. The Seventh Circuit Court of Appeals reached a similar conclusion in the case Condo v. Sysco Corp.
Thus, in the example above, both John (who works unpredictable hours, but always more than 40 hours per week) and Ellen (whose schedule varies on a regular basis) may be compensated using the fluctuating workweek method of payment.
2. The Employee Must Be Paid a Fixed Salary.
The fluctuating workweek method of payment requires that the employer pay the employee a fixed salary for each week. The amount cannot vary based on the number of hours worked. In the example above, John, the EMS dispatcher, is paid $675.00 week, while Ellen, the water plant operator, is paid $800 per week. John is paid $675.00 whether his work week is 42, 48 or 57 hours in any given week. Ellen is paid $800.00 whether she is working one of the 32-hour weeks or one of the 48-hour weeks on her schedule. And, it should be noted, Johna’s salary for a week would still be $675.00 if, during that particular week, he worked only 30 hours for some reason.
3. The Rate Must Be At Least That of the Minimum Wage.
The salary used to compensate an employee under the fluctuating workweek method can be of any amount with only one proviso: the salary must be large enough that the regular rate—the amount found by dividing the fixed salary by the total number of hours worked in any week—is at least equal to the minimum wage. The regular rate of pay will vary due from week to week because the hours that the employee works fluctuate from week to week. Even in a week where John the dispatcher works 57 hours, his regular rate of pay remains above the minimum wage ($675.00 ¸ 57 = $11.85/hour).
4. Overtime Hours Are Compensated at One-Half the Regular Rate.
Under the fluctuating workweek method, the fixed salary is defined as compensation for all hours that an employee has worked in any workweek. That is, the payment of the salary is compensation at the regular rate of pay for all of the hours the employee works in that week, including overtime hours. In other words, for the hours below 40, the employee is compensated by the fixed salary and for hours over forty, the employee is compensated for the “time” in “time-and-one-half” the regular rate by the fixed salary. Since employer has already paid the employee the regular rate for all of the hours he or she has worked by payment of the salary, the employer owes the employee only one-half of the regular rate for the hours over 40.
Thus, if John, the EMS dispatcher, works 49.5 hours one week, his employer must pay him his fixed salary of $675.00 and 9.5 hours of overtime pay at one-half his regular rate of pay for that week. On weeks during which Ellen, the water plant operator, works 32 hours, she receives her fixed salary of $800.00 – no more and no less. On weeks in during which Ellen works 48 hours, her employer must pay her fixed salary of $800.00 and 8 hours of overtime pay at one-half her regular rate of pay.
5. Employer and Employee Must Have a “Clear, Mutual Understanding” That the Salary Is for All Hours Worked, Not for a Specified Number of Hours.
Usually, when an employer pays a nonexempt employee on a salaried basis (for a discussion of what “salary basis” means, see here), employer and employee understand that the salary is meant to compensate the employee for a regular schedule with a fixed set of hours. An employer may only use the fluctuating workweek method only if it has been made clear to the employee—before he or she works any hours under this payment method—that a) the fixed salary will be compensation for however many hours the employee works in a week and that the salary will not increase in weeks in which the employee works a greater number of hours; and b) any hours over 40 will be compensated at one-half the regular rate for that week.
The Fourth Circuit has made clear that employees do not have to “agree”—in the sense of “consent”—to the use of the fluctuating workweek method. They merely have to be told about its use.
Why Use the Fluctuating Workweek Method?
For most employers, the primary reason for using the fluctuating workweek method is to reduce overtime costs. The U.S. Department of Labor and the federal courts take pains to emphasize that the fluctuating workweek method is not an exception to the overtime rule, but is merely an alternative method of paying overtime. Theoretically, an employer using the fluctuating workweek method is already paying some of the costs of overtime upfront in the fixed salary and neither employer nor employee is receiving a break or being cheated.
In reality, however, employers pay only a third (one-half of the regular rate) of the additional amount that must be paid to a nonexempt employee working more than 40 hours a week. Where overtime hours are unpredictable, this reduces the amount of potentially unbudgeted overtime liability. Because the regular rate is calculated anew each week based on the total number of straight and overtime hours worked that week, the cost of overtime to the employer goes down the greater the number of overtime hours an employee works.
From an employee’s perspective, on the other hand, it looks like the greater the number of hours worked, the less the employee is paid. Not surprisingly, the fluctuating workweek is not popular for employees who work a substantial amount of overtime. For those employees who work fewer than 40 hours a week on a recurring basis, however, the fluctuating workweek can provide a more predictable income.
Local government employers who have employees whose hours vary from week to week may choose to use the fluctuating workweek method of payment, but they do not have to. This method may be used to compensate dispatchers, emergency medical services personnel, law enforcement officers and firefighters, water and wastewater plant operators and any other positions where operating needs require scheduling that results in workweeks in which the number of hours worked changes from week to week. It may not be used for employees (law enforcement officers and firefighters) who are being compensated under the section 207(k) exemption.