Fluctuating Workweek

June 11, 2012, 9:37 AM

Like many employment litigation attorneys, more and more of my practice involves federal wage and hour issues. One potent but, in my experience, underutilized tool in an employer's wage and hour arsenal is the fluctuating workweek (half-time) method of overtime compensation. The fluctuating workweek method of overtime compensation requires an employer to pay an employee a fixed salary that is subject to the FLSAs salary basis rules.[1] This salary is intended to cover all straight time hours of work during a workweek. Thus, when an employee works more than forty (40) hours in a workweek, all of his or her straight time hours have been paid and the employer only owes the additional one-half overtime premium. It is generally good practice to have a written understanding with employees who are being paid pursuant to the fluctuating workweek method.

This method of overtime compensation is useful to: i) minimize overtime liability for non-exempt employees, ii) transition employees classified as salaried, exempt to salaried, non-exempt when there is a concern about the propriety of an employees' exempt classification and iii) to help settle misclassification claims brought by the Department of Labor or private plaintiffs.

i) With the fluctuating workweek method, as an employee works more hours, his or her effective overtime rate decreases. Here are a couple of illustrations:

Normal OT Fluctuating Workweek OT
1. Hourly Rate = $12.50 Hours Worked = 35 Overtime Hours = 0 Overtime Pay Due = $0

Total Compensation = 35 hrs x $12.50 = $437.50

1. Salary = $500 per week Hours Worked = 35 Overtime Hours = 0 Overtime Pay Due = $0

Total Compensation = $500

g2. Hourly Rate = $12.50 Hours Worked = 42 Overtime Hours = 2 Overtime Pay Due = 40 hrs. x $12.50 = $500

$12.50 x 1.5 = $18.75 (ot rate)

$18.75 x 2 hours = $37.50

Total Compensation = $500 + $37.50 = $537.50

2. Salary = $500 per week Hours Worked = 42 Overtime Hours = 2 Overtime Pay Due = $500/42 hrs = $11.90/hr

$11.90/2 = $5.95/hr 2 hrs ot

x $5.95 = $11.90 ot pay due

Total Compensation = $500 + $11.90 = $511.90

3. Hourly Rate = $12.50 Hours Worked = 52 Overtime Hours = 12 Overtime Pay Due = 40 hrs. x $12.50 = $500

$12.50 x 1.5 = $18.75 (ot rate)

$18.75 x 12 hours = $225

Total Compensation = $500 + $225 = $725

3.Salary = $500 per week Hours Worked = 52 Overtime Hours = 12 Overtime Pay Due = $500/52 hrs = $9.62/hr
  1. 62/2 = $4.81/hr 12 hrs ot

x $4.81 = $57.72 ot pay due

Total Compensation = $500 + $57.72 = $557.72

4. Hourly Rate = $12.50 Hours Worked = 62 Overtime Hours = 22 Overtime Pay Due = 40 hrs. x $12.50 = $500

$12.50 x 1.5 = $18.75 (ot rate)

$18.75 x 22 hours = $412.50

Total Compensation = $500 + $412.50 = $912.50

4. Salary = $500 per week Hours Worked = 62 Overtime Hours = 22 Overtime Pay Due = $500/62 hrs = $8.06/hr
  1. 06/2 = $4.03/hr 22 hrs ot

x $4.03 = $88.66 ot pay due

Total Compensation = $500 + $88.66 = $588.66

5. Hourly Rate = $12.50 Hours Worked = 72 Overtime Hours = 32 Overtime Pay Due = 40 hrs. x $12.50 = $500

$12.50 x 1.5 = $18.75 (ot rate)

$18.75 x 32 hours = $600

Total Compensation = $500 + $600 = $1,100

5. Salary = $500 per week Hours Worked = 72 Overtime Hours = 32 Overtime Pay Due = $500/72 hrs = $6.94/hr

Problem! Cannot drop below minimum wage for

straight time hours.

Resolution Must increase salary to$522/week so that employee is paid at least $7.25/hour for each straight time hour.

So $522/72 = $7.25/hr

$7.25/2 = $3.63 hr

  1. hours ot x $3.63/hr = $116.16

Total Compensation = $522 + $116.16 = $638.16

When using the fluctuating workweek method of overtime compensation, an employees effective hourly rate will change each week based on the number of hours worked that week; correspondingly, up to the point of hitting minimum wage, the employees effective overtime (i.e. half-time) rate decreases as more hours are worked. Thus, while, as demonstrated above, substantial savings can be achieved by using the fluctuating workweek method of overtime compensation where employees regularly work significant amounts of overtime, it remains underutilized because it is not as easily calculated as traditional time and one-half overtime.
ii) The fluctuating workweek is a good "transition" from salaried, exempt to salaried, non-exempt. At one point or another, all employers are faced with re-evaluating exemption decisions. Whether it be because of changes in job duties, personnel or an incorrect original classification decision, it is often difficult to tell a "salaried" employee that they need to punch a clock and will be paid hourly. Converting a salaried, exempt employee to hourly, non-exempt could lead to a DOL complaint or litigation seeking back overtime. Often, even though these employees will earn more if being paid hourly and earning overtime, many employees view a salary as equating to status--and no one likes to see their status decreased
which can cause morale issues. Using the fluctuating workweek to transition these employees allows them to maintain their salaried "status" and be rewarded for all the extra hard work they do for their employer-- which is a much more positive--and less likely to lead to litigation-- state of mind for the converted employees.

iii) The fluctuating workweek is increasingly coming to the rescue of employers facing costly misclassification suits seeking large amounts of back overtime. Five United States Courts of Appeal and the Department of Labor have permitted employers to calculate back overtime to improperly classified employees using half-time rather than time and a half. One key to having this remedy available is that the salaried exempt employee understand that his or her salary is intended to cover all hours worked by the employee; so adding a sentence to that effect to your company's standard offer letter to salaried exempt employees can become quite important down the road if there is a misclassification suit.

When addressing your company's wage and hour issues, keep the fluctuating workweek at the ready-- you never know when it may be able to prevent-- or extricate--your company from a delicate wage and hour issue. --Scott W. Kezman


[1] The salary basis rules require that the salary: i) be at least $455 per week and paid on regular pay periods; and ii)not reduced because of variations in the quality or quantity of the employees work. This typically means that if an employee performs any work in a workweek, the employee must be paid the full salary. There are exceptions to this rule when, for example, an employee is absent for one or more full days for personal reasons other than sickness or accident.