The impending change to the salary threshold for the “white collar” overtime exemptions under the Fair Labor Standards Act (“FLSA”) (from $23,660 to $47,476) has employers making tough decisions—“Should we raise an employee’s salary above the threshold?” “Do our employees still qualify for the exemption, even with a raise?” “Can we keep our employees’ pay the same?”
Some employers, unable to make significant salary increases or concerned that an employee may not meet the exemption requirements, are increasingly considering the “fixed salary for fluctuating hours” method of compensation for non-exempt employees. This so-called fluctuating workweek method allows a previously exempt employee to continue to receive a regular salary, but does not require the employer to raise the once-exempt employee’s salary to the new threshold.
Under this method, the employee will receive a fixed salary as straight-time pay for whatever number of hours he or she works in a workweek (whether 30 or 50 hours). The employee must receive extra compensation (½ times the regular rate for that workweek) for any hours worked over 40 in the workweek. In most cases, bonus or incentive compensation must be included in overtime calculations. This typically requires employers to allocate bonus or incentive compensation to the workweek(s) to which it relates, and then recalculate and pay the employee additional amounts.
The fluctuating workweek method is permissible only if:
- The salary is sufficiently large to ensure that no workweek will be worked in which the employee’s earnings from the salary will fall below minimum wage (no matter how many hours are worked in a workweek); and
- The employee clearly understands that the salary covers whatever hours the job may demand in a particular workweek and that the employer pays the salary even if the workweek is one in which only a small number of hours is worked. To meet this requirement, it is always helpful to have this understanding in a memorandum or letter that the employee signs.
If your company is considering its options as the December 1, 2016 change to the salary threshold looms, the fixed salary for fluctuating hours is worth a look. But, employers should be aware that it is not without its drawbacks. As with all other non-exempt employees, employers compensating employees on the fixed salary for fluctuating hours method must require employees to accurately track their time. For employees who have historically been treated as exempt, this is not as easy as it sounds. Moreover, it is crucial to have an estimation of the amount of overtime the employees in question work. If the employees often work more than 40 hours in a workweek, it may make more financial sense to increase their salary (assuming they also meet the requirements of an exemption). While it may not be a panacea, the fixed salary for fluctuating hours could be a possible solution for some recent and future FLSA headaches.