In the COVID-19 era it is more important than ever for employers to understand the workplace and the rules and guidelines that govern it. Employees are working a varied number of hours from week-to-week, and in some cases, workweek hours are based on immediate demand. A recent regulatory decision from the Department of Labor highlights a rule, newly named the Fluctuating Workweek Method of Computing Overtime, that may benefit employers dealing with these circumstances by offering savings on employee overtime payments. Fluctuating Workweek Method of Computing Overtime, 85 Fed. Reg. 34970 (June 8, 2020) (to be codified at 29 C.F.R. pt. 778).
Generally, when a full-time employee works over 40 hours per week, the employer must pay that employee “time and a half” for every additional hour worked, i.e., the employee is paid 1.5 times his or her regular hourly rate. The “regular rate” is dependent on employment terms and is determined based on, among other forms of compensation, the employee’s:
- hourly wage;
- day or job rate, totaled for that week and divided by number of hours worked;
- fixed salary for a fixed number of hours worked; and
- fixed salary for a variable number of hours worked.
The regular rate for employees with a fixed salary and fixed hours is calculated by dividing the fixed weekly salary by the fixed working hours per week. For example, an employee who works a fixed 40–hour week and is paid a $1000.00 weekly salary would have a regular rate of $25.00 per hour ($1000.00/40 hours). This employee will be paid $37.50 per overtime hour worked ($25.00 x 1.5). The employee’s regular rate does not change regardless of the number of hours the employee works in any given week.
The method of calculation differs for an employee who is paid a fixed weekly salary for a variable number of hours worked per week. For example, if an employee is paid $1000.00 per week, but for a variable number of hours worked, the regular rate is calculated by dividing the fixed weekly salary by the number of hours worked in a particular week. If the employee worked 50 hours in one week, the employee’s regular rate is $20.00 per hour ($1000.00/50 hours). If this employee works double that time and puts in 100 hours in a week, the regular rate decreases to just $10.00 per hour ($1000.00/100 hours). This method of calculation for the “fluctuating workweek” creates an inverse relationship between the number of hours worked and the regular rate at which the employee will be paid for overtime. Overtime pay decreases as the hours worked increases.
In addition, fluctuating workweek agreements cover straight-time pay by providing for payment of a fixed salary regardless of whether the number of hours worked per week totals more or less than 40. On the contrary, under a fixed workweek agreement, overtime hours are not covered by the fixed salary. For example:
Fixed Salary/Fixed Hours
Employee receives $1000.00 fixed weekly salary for a fixed 40–hour workweek, creating a regular rate of $25.00 per hour, regardless of the number of hours the employee works in a week. If that employee works 50 hours in a week, he or she will receive straight-time pay ($25.00/hour) plus 50% of straight-time pay ($12.50/hour) for the extra 10 hours worked and not covered by the agreement, for a total of $37.50/hour. The employee would receive his or her $1000.00 fixed weekly salary plus $375.00 in overtime pay ($37.50 x 10 hours).
Total amount paid to employee = $1375.00 for 50 hours of work.
Fixed Salary/Variable Hours
Employee receives $1000.00 fixed weekly salary for a fluctuating workweek, meaning the regular rate is based on number of hours worked that week. If that employee works 50 hours in a week, the regular rate would be $20.00 per hour. However, because the fluctuating workweek covers all 50 hours worked, the employee will not receive straight-time pay for the “extra” 10 hours. Instead, the employee receives 50% of straight-time pay ($10.00/hour) for those 10 hours. The employee would receive his or her $1000.00 fixed weekly salary plus $100.00 in overtime pay ($10.00 x 10 hours).
Total amount paid to employee = $1100 for 50 hours of work.
Where employees are carrying a larger workload, employers can benefit greatly from fluctuating workweek agreements. Employers should be sure to review existing employment agreements and the current demands on each employee and where appropriate, consider amending agreements to account for fluctuating workweeks. Any such amendments must be negotiated and agreed to by the employee. When hiring new employees, employers should consider the demands of the position they are filling and use a fluctuating workweek agreement if the employee will work varied and possibly additional hours from week to week.
If you have questions regarding employment agreements and how the fluctuating workweek could benefit your company, do not hesitate to contact Kuiper Law Firm PLLC to discuss how we may be able to assist you.