The U.S. Department of Labor's Wage and Hour Division (WHD) has issued an opinion letter that addresses the fluctuating workweek method of calculating overtime.
Note: An opinion letter is an official written opinion by the WHD of how a particular law applies in specific circumstances presented by an employer. Any employer may request an opinion letter, but the WHD determines to which requests it will respond. While opinion letters generally don't carry the same force as a law or regulation and apply only to the specific circumstances presented by the employer, they can offer insight about how the WHD may enforce certain laws.
To use the fluctuating workweek method of calculating overtime under the Fair Labor Standards Act (FLSA):
- The employee's hours must fluctuate from week to week;
- The employee must receive a fixed salary for whatever hours they are called upon to work in a workweek, regardless of how few or how many;
- The employee and employer must have a clear mutual understanding (which should be in writing) that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek;
- The salary must be sufficient enough to meet the applicable minimum wage for each hour worked in the workweeks in which the number of hours worked is greatest; and
- The employee must receive extra pay for overtime hours worked at a rate no less than one-half times their regular rate of pay. Since the salary is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the employee's regular rate will vary from week to week. To obtain an employee's regular rate for a particular workweek, divide the number of hours they worked into their salary.
In a recent opinion letter, the WHD addressed whether an employee's hours need to fluctuate both above and below 40 hours to qualify for the fluctuating workweek method. The opinion letter states that an employee's hours need only fluctuate from week to week and that there is no requirement that the employee's hours dip below 40 hours. The opinion letter also clarifies that if employers use the fluctuating workweek method, they're prohibited from making deductions from the employee's salary for absences occasioned by the employee, such as an employee who exhausted all of their sick leave or hasn't accrued sick leave to cover the absence. The one exception is for willful absences or tardiness or for infractions of major work rules, provided that the deductions don't cut into the minimum wage or overtime pay required by the FLSA, according to the opinion letter.
Employers that are contemplating the use of the fluctuating workweek method should review the opinion letter in full as well as applicable regulations, which were recently amended. Additionally, while the fluctuating workweek method can seem like an attractive option for reducing overtime costs when compared with the standard overtime calculation, there are some things to consider. For example, some states, including California, expressly prohibit employers from using the fluctuating workweek method for paying overtime. Additionally, this method is also a common source of employee lawsuits. Employers should check their state (and local) law and consult legal counsel as necessary before using it. Please contact your dedicated service professional with any questions.