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Complexities of paying a salary to a non-exempt employee – part 2

June 27, 2016

Article courtesy of SBAM Approved Partner ASE
Author: Kristen Cifolelli

Last week, we identified three different methods you can use to pay a non-exempt employee a salary plus overtime: Fixed Salary for a Set Number of Hours, Fluctuating Work Week (FWW), or a Belo Contract.  In that article we focused on the most commonly used method, the fixed salary for a set amount of hours. This week’s article, we will focus on the Fluctuating Work Week method, and we will wrap the series up next week with the Belo Contract.  

Fixed Salary for a Fluctuating Work Week (FWW)
Generally the FLSA regulations require that non-exempt employees earn time-and-one-half for all hours worked over 40 in a work week.  Under certain fairly narrow circumstances, the FLSA regulations allow an employer to compensate a non-exempt employee on a salary basis by providing straight-time pay for all hours worked in a week, and then paying only 0.5 times (rather than 1.5 times) the regular rate for all hours worked in excess of 40 for that week. This is called the Fluctuating Work Week (FWW) method of calculation 29 C.F.R. § 778.114.

In order to be eligible to use the FWW method, employers must satisfy all of the following requirements. 

  1. A clear mutual understanding between the parties – this is best put in writing.
  2. Fluctuating hours worked from week to week.
  3. Payment of a fixed salary irrespective of the number of hours worked during a particular week, rather than a salary for a fixed number of hours.
  4. Payment of a salary equal to or greater than minimum wage.  The salary can be any amount as long as the amount divided by the number of hours worked is equal to or greater than the federal (and applicable state and/or local) minimum wage.  
  5. Payment of a half-time overtime rate in addition to the salary for hours worked over 40 in a week.  The combination of the two meets the overtime requirements under the FLSA.

Since the number of hours worked will fluctuate from week to week, the regular rate of pay will also fluctuate.  In order to calculate the regular rate of pay, the weekly salary is divided by the number of hours worked per week. Once the regular rate is determined, it should be divided in half in order to calculate the “half-time” rate.  

One additional key requirement of the FWW is that the fixed salary must be guaranteed as long as the employee works any time that week.  Employers cannot make deductions from an employee’s salary for absences due to sickness, holiday, lack of work during the week, or “absences occasioned by the employee.” This means that the employer must pay the full salary even if the employee doesn’t work his or her regular schedule of hours  DOL Opinion Letter, FLSA 2006-15 (May 12, 2006). 

Employers may take a disciplinary deduction from an employee’s salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions do not end up reducing the employee’s  pay to a level below the required minimum wage or overtime compensation.  Employers are also allowed to substitute paid time off under an employer’s PTO policy for absences.

Here is an example of how the FWW is applied: 

Sarah is paid on a fluctuating workweek at a weekly salary of $800:

Week One:
Sarah works 40 hours this week and is paid her regular weekly salary of $800.  Her regular rate of pay is $20 per hour ($800/40 hours).  No overtime is due for this week so her total compensation is $800.

Week Two:
This week Sarah works 45 hours and is paid her regular weekly salary of $800.  Her regular rate of pay is $17.78 per hour ($800/45 hours). The employer must pay her for the 5 hours of overtime at the half-time overtime rate of $8.89 ($17.78 divided in half) for a total of $44.45.  Her total compensation this week is $844.45.

Week Three: 
This week Sarah works 50 hours and is paid her regular weekly salary of $800.  Her regular rate of pay is $16 per hour ($800/50 hours). The employer must pay her for the 10 hours of overtime at the half time overtime rate of $8.00 ($16.00 divided in half) for a total of $160.00.  Her total compensation this week is $960.00

Week Four:
This week Sarah only works 30 hours and is paid her regular weekly salary of $800.  Her regular rate of pay is $26.67 per hour ($800/30 hours).  No overtime is due this week so her total compensation is $800.

The benefit of this method is that the higher the number of overtime hours worked, the lower the employee’s overtime rate is.  This can result in a potential cost saving to the employer vs. any other method. But with the FWW approach that advantage is offset during weeks that the employee works fewer than 40 hours. In those weeks the employee’s regular rate is higher. That is why, from the employer’s perspective, FWW is not a good approach if the employee frequently  works fewer than 40 hours.

The challenge in the FWW is that calculating the half-time overtime rate can get complicated since the regular rate of pay will typically change every week as a result of the fluctuating hours worked.  Not only can it be complicated for employers, it can be confusing to employees. Note, too, that the FWW method cannot be used in some states, such as California. (The FWW method is legal in Michigan.) 

Employers considering the FWW method should be cautious of its pitfalls. While it can alleviate some morale problems by maintaining someone’s status as a salaried employee, it can result in a number of accidental FLSA violations. Employers considering using this method need to work closely with their legal counsel to make sure their practice of the method complies strictly with applicable state and local laws.

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