The FLSA can be broken down into two key principles: (1) that employees are to be paid at least the applicable minimum wage for all hours worked, and (2) that an overtime premium equal to one and one-half the “regular rate” must be paid for all hours worked over 40 hours in a workweek. The minimum wage principle is fairly straight forward. The overtime principle, however, is decidedly more complex.
The definition of the term “regular rate” often creates confusion. The regular rate is calculated by adding together the employee’s pay for the workweek and all other earnings and dividing the total by the number of hours the employee worked in that week. There is a common misconception that all hourly employees are entitled to overtime while all salaried employees are exempt from the overtime requirements. This is not true. Unless an employee meets a specific FLSA exemption, he or she is entitled to overtime regardless of whether or not the employee is paid on a salary or hourly basis.
There are more than 60 exemptions to the FLSA. I have tried to count them all, and depending on the subparts, your count may be different. Many of these exemptions are obscure. Maple sap processors are exempt from overtime. If you make maple syrup, you probably know that already.
Most other employers will rely on tried and true “white-collar” overtime exemptions. The term “white-collar employee” is recognized shorthand for the general class of executive, administrative, professional, computer-related and outside sales employees who are exempt from the FLSA’s minimum wage and overtime requirements. Each white-collar exemption category has specific requirements. Payment on a “salary basis” alone does not make a white-collar exemption.
The “fluctuating workweek” compensation model may be of particular interest to employers who want to pay non-exempt employees on a salary basis and reduce overtime costs. This method allows employers to pay employees a fixed salary as straight-time pay for all hours worked in the workweek, and then compensate employees for their overtime hours on an additional half-time basis. Because the salary is intended to compensate the employee at straight time for all hours worked, including any overtime hours, only one-half of the regular rate remains owed for the overtime hours.
Employers often find a fluctuating workweek to be the best of both worlds. To qualify for the “FWW,” the employee must be paid a fixed salary that does not vary with the number of hours worked during the workweek. The employee must also work hours that will fluctuate from week to week. An employee can have a long week and a short week or truly variable hours from week to week. Next, the salary must be sufficiently large enough to ensure that the employee will never work enough that he or she will make the equivalent of less than minimum wage. Last, and perhaps most importantly, the employer and employee must share a “clear mutual understanding” that the salary covers all hours worked during the workweek, regardless of the number.
The fluctuating workweek requirement is not a difficult thing to set up. There is also benefit for employees as well, because in short workweeks they still receive their fixed salary.
The FWW is an option for compliance with the FLSA’s overtime requirements and it allows you to reduce overtime liability and increase stability in your workforce.
Paul L. Bittner
Ice Miller LLP