Fluctuating Workweek Method of Computing Overtime

Citation84 FR 59590
Record Number2019-23860
Published date05 November 2019
CourtWage And Hour Division
Federal Register, Volume 84 Issue 214 (Tuesday, November 5, 2019)
[Federal Register Volume 84, Number 214 (Tuesday, November 5, 2019)]
                [Proposed Rules]
                [Pages 59590-59602]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2019-23860]
                ========================================================================
                Proposed Rules
                 Federal Register
                ________________________________________________________________________
                This section of the FEDERAL REGISTER contains notices to the public of
                the proposed issuance of rules and regulations. The purpose of these
                notices is to give interested persons an opportunity to participate in
                the rule making prior to the adoption of the final rules.
                ========================================================================
                Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 /
                Proposed Rules
                [[Page 59590]]
                DEPARTMENT OF LABOR
                Wage and Hour Division
                29 CFR Part 778
                RIN 1235-AA31
                Fluctuating Workweek Method of Computing Overtime
                AGENCY: Wage and Hour Division, Department of Labor.
                ACTION: Notice of proposed rulemaking; request for comments.
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                SUMMARY: This proposed rulemaking would revise the Department of
                Labor's (Department) regulation for computing overtime compensation for
                salaried nonexempt employees who work hours that vary each week
                (fluctuating workweek) under the Fair Labor Standards Act (FLSA or the
                Act). The proposal will clarify that payments in addition to the fixed
                salary are compatible with the use of the fluctuating workweek method
                of compensation, and that such payments must be included in the
                calculation of the regular rate as appropriate under the Act. The
                proposal would also add examples and make minor revisions to make the
                rule easier to understand.
                DATES: Submit written comments on or before December 5, 2019.
                ADDRESSES: You may submit comments, identified by Regulatory
                Information Number (RIN) 1235-AA31, by either of the following methods:
                Electronic Comments: Submit comments through the Federal eRulemaking
                Portal at https://www.regulations.gov. Follow the instructions for
                submitting comments. Mail: Address written submissions to Division of
                Regulations, Legislation, and Interpretation, Wage and Hour Division
                (WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
                NW, Washington, DC 20210. Instructions: Please submit only one copy of
                your comments by only one method. All submissions must include the
                agency name and RIN, identified above, for this rulemaking. Anyone who
                submits a comment (including duplicate comments) should understand and
                expect that the comment will become a matter of public record and will
                be posted without change to http://www.regulations.gov, including any
                personal information provided. All comments must be received by 11:59
                p.m. on the date indicated for consideration in this rulemaking.
                Commenters should transmit comments early to ensure timely receipt
                prior to the close of the comment period, as the Department continues
                to experience delays in the receipt of mail. For additional information
                on submitting comments and the rulemaking process, see the ``Electronic
                Access and Filing Comments'' heading below. Docket: For access to the
                docket to read background documents or comments, go to the Federal
                eRulemaking Portal at https://www.regulations.gov.
                FOR FURTHER INFORMATION CONTACT: Amy DeBisschop. Director, Division of
                Regulations, Legislation, and Interpretation, Office of Policy, Wage
                and Hour Division, U.S. Department of Labor, Room S-3502, 200
                Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406
                (this is not a toll-free number). Copies of this proposed rule may be
                obtained in alternative formats (Large Print, Braille, Audio Tape or
                Disc), upon request, by calling (202) 693-0675 (this is not a toll-free
                number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain
                information or request materials in alternative formats.
                 Questions of interpretation and/or enforcement of the agency's
                regulations may be directed to the nearest WHD district office. Locate
                the nearest office by calling WHD's toll-free help line at (866) 4US-
                WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
                zone, or visit WHD's website for a nationwide listing of WHD district
                and area offices at https://www.dol.gov/whd/america2.htm. Electronic
                Access and Filing Comments: This proposed rule and supporting documents
                are available through the Federal Register and the https://www.regulations.gov website. You may also access this document via
                WHD's website at https://www.dol.gov/whd/. To comment electronically on
                Federal rulemakings, go to the Federal eRulemaking Portal at https://www.regulations.gov, which will allow you to find, review, and submit
                comments on Federal documents that are open for comment and published
                in the Federal Register. You must identify all comments submitted by
                including ``RIN 1235-AA31'' in your submission. Commenters should
                transmit comments early to ensure timely receipt prior to the close of
                the comment period (11:59 p.m. on the date identified above in the
                DATES section); comments received after the comment period closes will
                not be considered. Submit only one copy of your comments by only one
                method. Anyone who submits a comment (including duplicate comments)
                should understand and expect that the comment will become a matter of
                public record and will be posted without change to https://www.regulations.gov, including any personal information provided.
                SUPPLEMENTARY INFORMATION:
                I. Executive Summary
                 The FLSA guarantees a minimum wage for all hours worked and limits
                to 40 the number of hours per week a covered nonexempt employee can
                work without additional compensation. See 29 U.S.C. 206, 207. Payment
                of a fixed salary for fluctuating hours, also called the ``fluctuating
                workweek method,'' is one way employers may meet their overtime pay
                obligations to nonexempt employees, if certain conditions are met.
                Under 29 CFR 778.114, an employer may use the fluctuating workweek
                method for computing overtime compensation for a nonexempt employee if
                the employee works fluctuating hours from week to week and receives,
                pursuant to an understanding with the employer, a fixed salary as
                straight time ``compensation (apart from overtime premiums)'' for
                whatever hours the employee is called upon to work in a workweek,
                whether few or many. 29 CFR 778.114(a). In such cases, because the
                salary ``compensate[s] the employee at straight time rates for whatever
                hours are worked in the workweek,'' an employer satisfies the overtime
                pay requirement of section 7(a) of the FLSA if it compensates the
                employee, in addition to the salary amount, at a rate of at least one-
                half of the regular rate of pay for the hours worked each workweek in
                excess of 40. 29 CFR 778.114(a). Because the employee's hours of work
                fluctuate from week to week, the regular rate must be
                [[Page 59591]]
                determined separately each week based on the number of hours actually
                worked each week. Id.
                 The payment of additional bonus and premium payments to employees
                compensated under the fluctuating workweek method has presented
                challenges to employers and the courts alike, as set forth in more
                detail below. The proposed regulation would clarify that bonus
                payments, premium payments, and other additional pay are consistent
                with using the fluctuating workweek method of compensation, and that
                such payments must be included in the calculation of the regular rate
                unless they may be excluded under FLSA sections 7(e)(1)-(8). See 29
                U.S.C. 207(e)(1)-(8).
                 The Department proposed a similar clarification through a Notice of
                Proposed Rulemaking (NPRM) in 2008. See 73 FR 43654, 43662, 43669-70
                (July 28, 2008). However, the Final Rule issued in 2011 did not adopt
                this proposal because the Department, at the time, believed that courts
                had ``not been unduly challenged'' in applying the current regulatory
                text, that the proposed clarification ``would have been inconsistent''
                with the Supreme Court's decision in Overnight Motor Transportation Co.
                v. Missel, 316 U.S. 572 (1942), and that the proposed clarifying
                language ``may create an incentive'' for employers ``to require
                employees to work long hours.'' 76 FR 18832, 18848-50 (Apr. 5, 2011).
                However, since 2011, courts have reached inconsistent holdings based on
                a judicially crafted distinction between certain types of bonuses that
                the Department has never recognized. As explained below, the Department
                has reconsidered the need for a clarification, particularly in light of
                the 2011 Final Rule and its interpretation by courts, now finds these
                reasons articulated in 2011 to be unpersuasive, and is therefore re-
                proposing substantially similar revisions to those initially proposed
                in 2008.
                 Specifically, the Department proposes to add language to Sec.
                778.114(a) clarifying that bonuses, premium payments, and other
                additional pay of any kind are compatible with the use of the
                fluctuating workweek method of compensation. The Department also
                proposes to add examples to Sec. 778.114(b) to illustrate the
                fluctuating workweek method of calculating overtime where an employee
                is paid (1) a nightshift differential and (2) a productivity bonus in
                addition to a fixed salary. The Department further proposes minor
                revisions to Sec. 778.114(a) and (c) that were not proposed in the
                2008 NPRM to improve comprehensibility. Specifically, revised Sec.
                778.114(a) would list each of the requirements for using the
                fluctuating workweek method, and duplicative text would be removed from
                revised Sec. 778.114(c). Finally, the Department proposes to change
                the title of the regulation from ``Fixed salary for fluctuating hours''
                to ``Fluctuating Workweek Method of Computing Overtime.''
                 This proposed rule is expected to be an Executive Order (E.O.)
                13771 deregulatory action. Details on the estimated reduced burdens and
                cost savings of this proposed rule can be found in the rule's economic
                analysis and supplemental illustrative analysis in Appendix A.
                II. Background
                 The Department introduced the fluctuating workweek method of
                calculating overtime pay in its 1940 Interpretive Bulletin No. 4. See
                Interpretative Bulletin No. 4 ] ] 10, 12 (Nov. 1940). In 1942, the U.S.
                Supreme Court upheld the fluctuating workweek method in Missel, 316
                U.S. at 580. In that case, the Court held that where a nonexempt
                employee had received only a fixed weekly salary (with no additional
                overtime pay) for working irregular hours that frequently exceeded 40
                per week and fluctuated from week to week, the employer was required to
                retroactively pay an additional 50 percent of the employee's regular
                rate of pay multiplied by the overtime hours worked to satisfy the
                FLSA's time and a half overtime pay requirement. Id. at 573-74, 580-
                81.\1\ The quotient of the weekly salary divided by the number of hours
                actually worked each week, including the overtime hours, determined the
                ``regular rate at which [the] employee [was] employed'' under the fixed
                salary arrangement. Id. at 580.
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                 \1\ Half-time, rather than time-and-a-half pay, for overtime is
                appropriate where the employee's weekly earnings constitute
                compensation for all hours worked that week, including overtime
                hours. Such a pay system already compensates the employee for
                overtime hours at the regular rate, and so the employee is entitled
                under the FLSA to an additional half-time the regular rate for those
                hours. See 29 U.S.C. 207(a).
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                 In 1968, informed by the Supreme Court's holding in Missel, the
                Department issued 29 CFR 778.114, which explains how to perform the
                regular rate calculation under the FLSA for salaried employees who work
                fluctuating hours. See 29 CFR 778.1, 778.109, 778.114. The Supreme
                Court has ``interpreted the [FLSA] statute in a manner that would
                `afford the fullest possible scope to agreements' that are designed to
                address `the special problems confronting employer and employee in
                businesses where the work hours fluctuate from week to week and from
                day to day . . . .' '' Hunter v. Sprint Corp., 453 F. Supp. 2d 44, 56-
                57 (D.D.C. 2006) (quoting Walling v. A.H. Belo Corp., 316 U.S. 624, 635
                (1942)).\2\ Indeed, ``[t]he [fluctuating workweek] method was developed
                to permit FLSA-covered employees who work irregular hours to negotiate
                a consistent minimum salary with their employers.'' Hunter, 453 F.
                Supp. 2d at 61 (emphasis in original).
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                 \2\ Note that Belo concerned a different type of flexible pay
                agreement, now codified under Section 7(f) of the FLSA, in which an
                employee was paid on an hourly basis with a guaranteed weekly sum.
                The Department only cites Belo here for the limited purpose of
                recognizing the manner in which the Court generally interprets work
                arrangements under the FLSA when work hours vary from week to week.
                In Hunter, the district court similarly referenced Belo in analyzing
                the regular rate, and found notable that the Court decided Belo and
                Missel on the same day and that both cases ultimately informed the
                promulgation of the fluctuating workweek regulatory scheme. See
                Hunter, 453 F. Supp. 2d at 56, 58 (``With the companion decisions of
                Missel and Belo as a backdrop, the Department of Labor promulgated
                regulations that provide `examples of the proper method of
                determining the regular rate of pay in particular instances,' ''
                including the fluctuating workweek method.) (quoting Sec. 778.109).
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                 Consistent with this manner of interpretation and purpose, the
                Department, until 2011, had never explicitly forbidden in rulemaking
                the payment of bonuses and premiums beyond the minimum salary to
                employees compensated under the fluctuating workweek method. As
                explained more fully below, to the contrary, in both a 2008 NPRM and in
                a 2009 opinion letter, the Department stated that such bonuses were
                consistent with using the fluctuating workweek method. However, in the
                Preamble to the 2011 Final Rule, the Department stated a different
                position. The Department now seeks to add clarifying language to 29 CFR
                778.114 affirming its current position that employers using the
                fluctuating workweek method to calculate overtime compensation may pay
                bonuses and premiums in addition to the minimum salary.
                 Early examples of Department guidance and court decisions exemplify
                interpretations of the FLSA that ``afford the fullest scope possible''
                to fluctuating workweek arrangements. For example, a 1999 Wage and Hour
                Division (WHD) opinion letter explained that an employer using the
                fluctuating workweek method may pay bonuses for working holidays or
                vacations, broadly instructing that ``[w]here all the legal
                prerequisites for the use of the fluctuating workweek method of
                overtime payment are present, the
                [[Page 59592]]
                FLSA, in requiring that `not less than' the prescribed premium of 50
                percent for overtime hours worked be paid, does not prohibit paying
                more.'' \3\ As another example, courts have applied and endorsed the
                fluctuating workweek method when employees received additional bonus
                payments beyond what was statutorily required. See, e.g., Cash v. Conn
                Appliances, Inc., 2 F. Supp. 2d 884, 908 (E.D. Tex. 1997) (applying
                fluctuating workweek method where employee received incentive bonuses
                in addition to fixed salary); see id. at 893 n.17 (citing Parisi v.
                Town of Salem, No. 95-67-JD, 1997 WL 228509, at *3 (D.N.H. Feb. 20,
                1997) (``The rules promulgated by the Secretary do not change when base
                compensation includes not only a salary but a bonus payment; the bonus
                payment is simply included in calculating the regular rate.'')).
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                 \3\ WHD Opinion Letter, 1999 WL 1002399, at *2 (May 10, 1999)
                (emphasis added).
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                 However, in 2003, the First Circuit held that certain types of
                additional pay were incompatible with the fluctuating workweek method.
                See O'Brien v. Town of Agawam, 350 F.3d 279 (1st Cir. 2003). In
                O'Brien, the First Circuit held that police officers' receipt of
                ``bonus'' pay for working nights and long hours, was contrary to the
                fluctuating workweek method. Id. at 288. The O'Brien court reasoned
                that an employer using the method must pay a `` `fixed amount as
                straight time pay for whatever hours . . . work[ed],' '' and any extra
                compensation would violate this `` `fixed amount' '' requirement. Id.
                (quoting 29 CFR 778.114(a)).
                 The Department filed an amicus brief in support of the ultimate
                overtime-back-pay result in O'Brien, reasoning that the ``base salary
                covered only 1950 hours of work annually'' under the specific officers'
                agreement at issue, and therefore, this ``base salary was not intended
                to compensate them for an unlimited number of hours,'' as required by
                29 CFR 778.114. Brief for the Sec'y of Labor as Amicus Curiae, O'Brien,
                350 F.3d 279, 2004 WL 5660200, at *11, 13 (Feb. 20, 2004). In other
                words, the Department reasoned that the fluctuating workweek method
                could not be used because the officers' fixed salary was intended to
                compensate them for a specific--rather than fluctuating--number of
                hours each week. Id.\4\ However, the Department's brief did not address
                whether bonus pay beyond the ``fixed amount'' required was incompatible
                with the fluctuating workweek method.\5\
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                 \4\ Id. at *16-18 (citing Valerio v. Putnam Assocs. Inc., 173
                F.3d 35, 39 (1st Cir. 1999) (holding that fluctuating workweek
                method was inappropriate where an employee was informed that her
                daily hours were ``8:30 to whenever,'' she understood that her
                salary would compensate her for fluctuating hours, but she
                ``routinely worked without complaint more than 40 hours per week
                without extra pay''); Martin v. Tango's Restaurant, Inc., 969 F.2d
                1319, 1324 (1st Cir. 1992) (approving use of fluctuating workweek
                method where employee was paid a certain fixed salary each week,
                regardless of the number of hours worked)).
                 \5\ In reflecting on Valerio and Tango's Restaurant, the
                Department stated that ``[n]othing in either of those decisions
                suggests that 29 CFR 778.114 extends, contrary to its terms, to a
                pay system in which an employee, while receiving a fixed salary for
                a certain minimum number of hours, is paid more for additional
                straight time worked beyond a regular schedule.'' O'Brien Amicus Br.
                at *18 (citing Valerio., 173 F.3d at 39; Tango's Restaurant, 969
                F.2d at 1324). While the brief did not address the precise issue of
                whether bonus pay beyond the ``fixed amount'' required was
                incompatible with the fluctuating workweek method, to the extent
                that the brief could be read to suggest that this may have been the
                Department's position at the time, the Department is making clear
                that this is not the Department's current position. The Department
                instead seeks to clarify that bonus pay for extra straight time work
                is compatible with the fluctuating work week method. See, e.g.,
                Black v. Comdial Corp., Civ. A. No. 92-O81-C, 1994 WL 70113, at *2
                (W.D. Va. Feb. 15, 1994) (``The provision of [straight time] bonus
                pay for hours 45-61 changes neither the salary basis of [an
                employee's] pay, nor the applicability of the fluctuating workweek
                method of 29 CFR 778.114.'').
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                 Some courts followed O'Brien to hold that certain types of bonuses
                were incompatible with the fluctuating workweek method,\6\ while others
                continued to hold that bonuses were compatible with that method.\7\
                These inconsistent decisions appear to have created practical confusion
                for employers.
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                 \6\ See, e.g., Ayers v. SGS Control Servs., Inc., No. 03 CIV.
                9077 RMB, 2007 WL 646326, at *10 (S.D.N.Y. Feb. 27, 2007)
                (``Plaintiff who received sea pay or day-off pay did not have
                `fixed' weekly straight time pay, in violation of 29 CFR
                778.114(a).''); Dooley v. Liberty Mut. Ins. Co., 369 F. Supp. 2d 81,
                87 (D. Mass. 2005) (bonus pay arrangement for weekend work violated
                requirement that ``the employee must receive a fixed salary that
                does not vary with the number of hours worked during the week'')
                (internal quotation marks and citation omitted).
                 \7\ See, e.g., Clements v. Serco, Inc., 530 F.3d 1224, 1230
                (10th Cir. 2008) (applying fluctuating workweek method where
                employee received recruitment bonus in addition to fixed salary);
                Perez v. RadioShack Corp., No. 02 C 7884, 2005 WL 3750320, at *1
                (N.D. Ill. Dec. 14, 2005) (applying fluctuating workweek method
                where employee received tenure pay, commissions, and other bonuses
                in addition to fixed salary).
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                 The Department's 2008 NPRM, in an effort to ``eliminate confusion
                over the effect of paying bonus supplements and premium payments to
                affected employees,'' proposed to add a sentence to the end of Sec.
                778.114(a) providing that payment of overtime premiums and other bonus
                and non-overtime premium payments will not invalidate the ``fluctuating
                workweek'' method of overtime payment, but such payments must be
                included in the calculation of the regular rate unless excluded under
                section 7(e)(1) through (8) of the FLSA. 73 FR at 43670. The Department
                also proposed to add ``an example to Sec. 778.114(b) to illustrate
                these principles where an employer pays an employee a nightshift
                differential in addition to a fixed salary.'' Id. at 43662; see also
                id. at 43670. The proposed clarifying language in the 2008 NPRM
                reflected the Department's position that bonus and premium payments are
                compatible with the fluctuating workweek method.
                 On January 16, 2009, WHD reaffirmed this same position when it
                issued an opinion letter explaining that ``[r]eceipt of additional
                bonus payments does not negate the fact that an employee receives
                straight-time compensation through the fixed salary for all hours
                worked whether few or many, which is all that is required under Sec.
                778.114(a).'' WHD Opinion Letter FLSA2009-24 (Jan. 16, 2009) (withdrawn
                Mar. 2, 2009).
                 On May 5, 2011, the Department issued a Final Rule, which did not
                adopt the proposed clarifying language to Sec. 778.114. See 76 FR
                18832. Instead, in the Preamble, the Department stated it would leave
                the text of Sec. 778.114 unchanged except for minor revisions. The
                Department expressly stated that the decision not to implement the
                proposed changes would avoid ``expand[ing] the use of [the fluctuating
                workweek] method of computing overtime pay beyond the scope of the
                current regulation,'' and would ``restore the current rule.'' 76 FR at
                18850. The same 2011 Preamble, however, interpreted the ``current
                rule'' to mean that bonus and premium payments ``are incompatible with
                the fluctuating workweek method of computing overtime under section
                778.114.'' 76 FR at 18850.
                 The 2011 Preamble's reference to the ``current rule'' appears to
                have generated further confusion among courts, as the ``record
                indicate[d] that in 2008 and 2009, . . . DOL construed the [fluctuating
                workweek] regulation to permit bonus payments,'' then ``shifted
                course'' in 2011 in a manner ``contrary to its publicly-disseminated
                prior position.'' Switzer v. Wachovia Corp., No. CIV.A. H-11-1604, 2012
                WL 3685978, at *4 (S.D. Tex. Aug. 24, 2012). For example, one court
                stated that the 2011 Preamble ``presents an about-face'' that ``alters
                the DOL's interpretation'' so as to prohibit employers from using the
                fluctuating workweek method for workers who receive bonuses. Sisson v.
                RadioShack Corp., No. 1:12CV958, 2013 WL 945372, at *6 (N.D. Ohio Mar.
                11, 2013). Another court presented with identical facts as Sisson
                reached an
                [[Page 59593]]
                opposite conclusion because it interpreted the 2011 Preamble as ``a
                decision to maintain the status quo'' that ``does not[ ] disturb the
                law permitting employers to use the [fluctuating workweek] method to
                calculate the overtime pay of workers who receive performance
                bonuses.'' Wills v. RadioShack Corp., 981 F. Supp. 2d 245, 259
                (S.D.N.Y. 2013). As another example, a third court declined to give any
                weight to the 2011 Preamble because it rested on an ``unconvincing''
                interpretation of Missel. Smith v. Frac Tech Servs., LLC, No.
                4:09CV00679 JLH, 2011 WL 11528539, at *2 (E.D. Ark. June 15, 2011).
                 A growing number of courts, since 2011, have developed a dichotomy
                between ``productivity-based'' supplemental payments, such as
                commissions, and ``hours-based'' supplemental payments, such as night-
                shift premiums. Such courts hold that productivity-based supplemental
                payments are compatible with the fluctuating workweek method, but not
                hours-based supplemental payments. See, e.g., Dacar v. Saybolt, L.P.,
                914 F.3d 917, 926 (5th Cir. 2018), as amended on denial of rehearing
                (Feb. 1, 2019) (``Time-based bonuses, unlike performance-based
                commissions, run afoul of the [fluctuating workweek] regulations'');
                Lalli v. Gen. Nutrition Ctrs., Inc., 814 F.3d 1, 10 (1st Cir. 2016)
                (``a compensation structure employing a fixed salary still complies
                with section 778.114 when it includes additional, variable performance-
                based commissions''). However, the Department has never drawn this
                distinction, and this distinction is in tension with all of the
                Department's prior written guidance and statements on the issue, such
                as the 2004 O'Brien amicus brief (declining to support application of
                fluctuating workweek method to payment of additional straight-time
                hours), the 2008 NPRM and the 2009 opinion letter (permitting bonuses
                as compatible with the fluctuating workweek), and even the 2011 Final
                Rule (declining to implement the 2008 NPRM and stating that the current
                rule prohibits all bonuses as compatible with the fluctuating
                workweek).
                 As a result, the Department is increasingly concerned that it may
                be confusing and administratively burdensome for employers to
                distinguish between productivity- and hours-based bonuses and premium
                payments, particularly because the Department itself does not
                distinguish between such types of payment in determining the regular
                rate. See 29 CFR 778.208-778.215. The Department is further concerned
                that the ``productivity'' versus ``hours'' based distinction fails to
                provide adequate guidance to employers because it has not been adopted
                by all jurisdictions.\8\ The Department also believes that this
                distinction is unhelpful for supplemental pay that does not fall neatly
                into either category, such as retention bonuses, safety bonuses, and
                referral bonuses.
                ---------------------------------------------------------------------------
                 \8\ Decisions holding that all bonus and supplemental payments,
                including productivity based commissions, are incompatible with the
                fluctuating workweek remain good law in some heavily populated
                jurisdictions, including the Federal judicial districts for the
                Northern District of Ohio and the Middle District of Florida. See
                Sisson, 2013 WL 945372, at *2-7; West v. Verizon Servs. Corp., No.
                8:08-CV-1325-T-33MAP, 2011 WL 208314, at *11 (M.D. Fla. Jan. 21,
                2011) (fluctuating workweek method invalid where employee ``received
                various bonus payments and commissions'').
                ---------------------------------------------------------------------------
                 The divergent views of the Department and courts--and indeed, even
                among courts--have created considerable uncertainty for employers
                regarding the compatibility of various types of supplemental pay with
                the fluctuating workweek method. As such, the need for the Department
                to clarify its fluctuating workweek rule is even stronger now than in
                2008, when it proposed a substantially similar clarification.
                III. Discussion
                 As an initial matter, the Department is making clear that employers
                and courts should not rely on the statement in the 2011 Preamble that
                ``bonus and premium payments . . . are incompatible with the
                fluctuating workweek method of computing overtime under section
                778.114.'' 76 FR at 18850. The Department did not modify the regulatory
                text in 2011 to align with this statement. Further, the Preamble
                affirmatively denied it was making a change by insisting that the
                Department was ``restor[ing] the current rule.'' 76 FR at 18850. As the
                Supreme Court has explained, ``[w]hen an agency changes its existing
                position . . . the agency must at least display awareness that it is
                changing position.'' Encino Motorcars, LLC v. Navarro, 136 S Ct. 2117,
                2125-26 (2016) (internal quotation marks and citations omitted).
                Because, for example, the Switzer court viewed the 2011 Preamble
                language as ``shifting course'' in a manner ``contrary'' to its prior
                position,\9\ it is worth making clear that the Preamble does not
                reflect a change from the Department's position that the 2008 NPRM
                sought to clarify.
                ---------------------------------------------------------------------------
                 \9\ 2012 WL 3685978, at *4.
                ---------------------------------------------------------------------------
                 The 2011 Preamble reaffirmed that ``the Department continues to
                believe that the payment of bonus and premium payments can be
                beneficial for employees.'' 76 FR at 18850. Yet it declined to permit
                bonus and premium payments under the fluctuating workweek method
                because, in 2011, the Department believed that the receipt of premium
                and bonus payments ``would have been inconsistent with the requirement
                of a fixed salary payment set forth by the Supreme Court in [Missel].''
                76 FR at 18850. However, the 2011 Final Rule did not explain any basis
                for the perceived inconsistency, and at least one court has found that
                belief to be ``unconvincing'' because ``[n]othing in Missel prohibits
                the use of the fluctuating work week method . . . whenever an employer
                gives a bonus to an employee.'' Smith, 2011 WL 11528539, at *2.
                 Upon further review, the Department is now similarly unconvinced of
                its 2011 position. The pre-2011 position was not inconsistent with
                Missel; Missel did not even address the issue of bonus or incentive
                payments beyond the fixed salary, let alone preclude certain types of
                payments. The plaintiff in Missel had a fixed weekly salary regardless
                of hours worked, and the Court explained how to compute overtime
                compensation under those facts. As one court has explained, ``[T]he
                message from the Supreme Court in Missel . . . was that the employment
                contracts of FLSA-covered workers must guarantee that the regular rate
                of compensation in any given week will not fall below the statutory
                minimum wage.'' Hunter, 453 F. Supp. 2d at 57.\10\
                ---------------------------------------------------------------------------
                 \10\ See also Smith, 2011 WL 11528539, at *2 (``Nothing in
                Missel prohibits the use of the fluctuating work week method for
                calculating damages whenever an employer gives a bonus to an
                employee. A bonus given wholly at the discretion of the employer
                cannot be said to affect the mutual understanding between the
                employer and the employee that the employee's fixed salary comprises
                his entire compensation.'').
                ---------------------------------------------------------------------------
                 The 2011 Final Rule also reflected the Department's concern, at the
                time, that permitting employers that offer bonus and premium payments
                to use the fluctuating workweek method of overtime payment could
                ``shift a large portion of employees' compensation into bonus and
                premium payments, potentially resulting in wide disparities in
                employees' weekly pay depending on the particular hours worked.'' 76 FR
                at 18850. Upon reconsideration, the Department is no longer concerned
                that employers would shift large portions of pay into bonus and premium
                payments and is not aware of any evidence of problematic pay shifting.
                To the contrary, the Bureau of Labor Statistics
                [[Page 59594]]
                finds that in situations where employers are permitted to pay bonuses
                and premiums, such supplemental pay constitutes a relatively small
                portion of employees' overall compensation--no more than 5% for any
                occupation.\11\ Accordingly, the Department finds no reason to believe
                that permitting employers using the fluctuating workweek method to pay
                bonuses would result in large-scale pay shifting. In fact, the
                Department now believes the proposal would encourage employers to pay
                these bonuses, premiums, and additional pay to salaried nonexempt
                employees who work fluctuating hours, and the Department does not
                believe that employers will shift large portions of salaries into such
                supplemental payments. Moreover, the Department's earlier concern that
                permitting employers who offer bonus and premium payments to use the
                fluctuating workweek would permit employers to pay a reduced fixed
                salary would be addressed by retaining the requirement that the fixed
                salary amount must be sufficient to provide compensation at a rate not
                less than the minimum wage.
                ---------------------------------------------------------------------------
                 \11\ Supplemental pay's portion of total compensation for any
                occupation ranges from 0.3% (teachers) to 4.8% (production). See
                Bureau of Labor Statistics, Employer Costs for Employee
                Compensation, March 2019, Table 2, https://www.bls.gov/news.release/pdf/ecec.pdf.
                ---------------------------------------------------------------------------
                 Finally, the 2011 Final Rule was based on the Department's view
                that ``the courts have not been unduly challenged in applying the
                current regulation to additional bonus and premium payments.'' 76 FR at
                18850. However, as discussed in the background section, courts applying
                the language from the 2011 Preamble have reached inconsistent holdings,
                even in cases concerning the same types of bonus and premium payments.
                Compare Wills, 981 F. Supp. 2d at 256 (holding that RadioShack's
                payment of quarterly and annual performance based bonuses is compatible
                with the fluctuating workweek method) with Sisson, 2013 WL 945372, at
                *1 (holding that RadioShack's payment of quarterly and annual
                performance based bonuses is not compatible with the fluctuating
                workweek method). Moreover, a growing number of courts, only through
                the lens of a wholly judicially developed distinction, now interpret
                the current regulation, as interpreted in the 2011 Preamble, to
                distinguish between productivity- and hours-based bonus and premium
                payments, even though the Department has never drawn that distinction.
                See Dacar, 914 F.3d at 926; Lalli, 814 F.3d at 10. Inconsistent
                decisions and the development of case law not reflecting any previous
                position of the Department convinces the Department that courts have
                been unduly challenged in applying the current regulation.
                 Accordingly, the Department is proposing to clarify the current
                regulation to allow employers who offer both productivity and hours
                based bonuses and premium payments to use the fluctuating workweek
                method of compensation; the proposed consistent treatment of all
                bonuses and premium payments that are included in the regular rate will
                eliminate any such confusion for employers. To further eliminate
                confusion, the Department is proposing to clarify that additional pay
                of any kind on top of the fixed salary is compatible with the
                fluctuating workweek method. The proposed inclusion of ``additional pay
                of any kind'' is intended to prevent disagreements over whether a
                payment is a ``bonus'' or ``premium.'' Examples of ``additional pay of
                any kind'' may include commissions, compensation falling within the
                FLSA's section 3(m), supplemental hourly or lump sum payments, and
                incentive-related sums.
                 In summary, the Department no longer finds persuasive the 2011
                Final Rule's rationale for stating in the Preamble that bonus and
                premium payments are incompatible with the fluctuating workweek method.
                Paying employees bonus or premium payments for certain activities, such
                as working undesirable hours, is common \12\ and, as the 2011 Final
                Rule recognized, ``can be beneficial for employees.'' 76 FR at 18850.
                The Department therefore proposes to clarify that all bonus and premium
                payments are compatible with the fluctuating workweek method, thereby
                eliminating any disincentives for employers to make such payments.
                Thus, employers that would meet the conditions of Sec. 778.114 would
                be able to use the fluctuating workweek method when paying nonexempt
                employees bonuses and premiums as long as they include such payments in
                the calculation of the regular rate, unless they may be otherwise
                excluded under FLSA sections 7(e)(1)-(8).
                ---------------------------------------------------------------------------
                 \12\ The Bureau of Labor Statistics estimated in 2009 that 42.35
                percent of workers receive bonuses and 19.75 percent receive shift
                differentials. Bureau of Labor Statistics, A Look at Supplemental
                Pay: Overtime Pay, Bonuses, and Shift Differentials, Table 2, Mar.
                25, 2009, https://www.bls.gov/opub/mlr/cwc/a-look-at-supplemental-pay-overtime-pay-bonuses-and-shift-differentials.pdf.
                ---------------------------------------------------------------------------
                IV. Proposed Regulatory Changes
                 The Department proposes to revise its existing fluctuating workweek
                regulation at Sec. 778.114 to address these issues. First, the
                proposed rulemaking clarifies the regulation to expressly state that
                any bonuses, premium payments, or other additional pay of any kind are
                compatible with the fluctuating workweek method of compensation, and
                that such payments must be included in the calculation of the regular
                rate unless they are excludable under FLSA sections 7(e)(1)-(8).
                Second, the proposal adds examples to Sec. 778.114(b) to illustrate
                these principles where an employer pays an employee, in addition to a
                fixed salary, (1) a nightshift differential and (2) a productivity
                bonus. Third, the proposed regulation revises the rule in a minor way
                to make it easier to read and understand. Revised Sec. 778.114(a)
                would list each of the requirements for using the fluctuating workweek
                method, and duplicative text would be removed from revised Sec.
                778.114(c). Finally, the Department proposes to change the title of the
                regulation from ``Fixed salary for fluctuating hours'' to ``Fluctuating
                Workweek Method of Computing Overtime'' to better reflect the purpose
                of the subsection and to improve the ability of employers to locate the
                applicable rules.
                V. Paperwork Reduction Act
                 The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
                and its attendant regulations, 5 CFR part 1320, require the Department
                to consider the agency's need for its information collections and their
                practical utility, the impact of paperwork and other information
                collection burdens imposed on the public, and how to minimize those
                burdens. This NPRM does not require a collection of information subject
                to approval by the Office of Management and Budget (OMB) under the PRA,
                or affect any existing collections of information. The Department
                welcomes comments on this determination.
                VI. Executive Order 12866; Regulatory Planning and Review; and
                Executive Order 13563, Improved Regulation and Regulatory Review; and
                Executive Order 13771, Reducing Regulation and Controlling Regulatory
                Costs
                A. Introduction
                 Under E.O. 12866, OMB's Office of Information and Regulatory
                Affairs (OIRA) determines whether a regulatory action is significant
                and therefore, subject to the requirements of the E.O. and OMB review.
                Section 3(f) of E.O. 12866 defines a ``significant regulatory action''
                as an action that is likely to result in a rule that: (1) Has an annual
                effect on the economy of $100 million
                [[Page 59595]]
                or more, or adversely affects in a material way a sector of the
                economy, productivity, competition, jobs, the environment, public
                health or safety, or state, local, or tribal governments or communities
                (also referred to as economically significant); (2) creates serious
                inconsistency or otherwise interferes with an action taken or planned
                by another agency; (3) materially alters the budgetary impacts of
                entitlement grants, user fees, or loan programs, or the rights and
                obligations of recipients thereof; or (4) raises novel legal or policy
                issues arising out of legal mandates, the President's priorities, or
                the principles set forth in the E.O. As described below, this proposed
                rule is not economically significant. The Department has prepared a
                Preliminary Regulatory Impact Analysis (PRIA) in connection with this
                NPRM, as required under section 6(a)(3) of Executive Order 12866, and
                OMB has reviewed the rule.
                 Executive Order 13563 directs agencies to propose or adopt a
                regulation only upon a reasoned determination that its benefits justify
                its costs; the regulation is tailored to impose the least burden on
                society, consistent with achieving the regulatory objectives; and in
                choosing among alternative regulatory approaches, the agency has
                selected those approaches that maximize net benefits. Executive Order
                13563 recognizes that some benefits are difficult to quantify and
                provides that, where appropriate and permitted by law, agencies may
                consider and discuss qualitatively values that are difficult or
                impossible to quantify, including equity, human dignity, fairness, and
                distributive impacts.
                B. Overview of the Proposed Rule and Potential Affected Employees
                 This rule, if finalized as proposed, clarifies that bonus, premium,
                and any other supplemental payments are compatible with the fluctuating
                workweek method of calculating overtime pay. Current legal uncertainty
                regarding the compatibility of supplemental pay with the fluctuating
                workweek method deters employers from making such payments to employees
                paid under the fluctuating workweek method. The proposed rule would
                eliminate this deterrent effect, and thereby permit employers who
                compensate their employees under the fluctuating workweek method to pay
                employees a wider range of supplemental pay.
                 If the proposed rule were finalized, it would be clear to employers
                that employees paid under the fluctuating workweek method are eligible
                for all supplemental payments. The Department relied on data from the
                Current Population Survey (CPS) to estimate the total pool of employees
                who could possibly be affected.\13\ In particular, the Department
                focused on full-time, nonexempt workers who report earning a fixed
                salary. The Department's regulations recognize only two ways that an
                FLSA-covered employer may pay a nonexempt employee a fixed salary.\14\
                First, under 29 CFR 778.113, the employer may pay a salary for a
                specific number of hours each week. For the purpose of this analysis,
                the Department assumes that a nonexempt worker paid under 29 CFR
                778.113 would likely report having a ``usual'' number of hours worked
                in the CPS. Second, under 29 CFR 778.114, the employer pays a salary
                for whatever number of hours are worked--this is the fluctuating
                workweek method. For the purpose of this analysis, the Department
                assumes that a nonexempt worker paid under the fluctuating workweek
                method generally would not report having a ``usual'' number of hours
                worked each week, but rather would report working hours that ``vary''
                from week to week. The Department estimated the number of such workers
                who could be compensated using the fluctuating workweek method by
                counting CPS respondents who: (1) Are employed at a FLSA-covered
                establishment; (2) are nonexempt from FLSA overtime obligations; (3)
                work full time at a single job; (4) reside in the District of Columbia
                or a state that permits the use of the fluctuating workweek method;
                \15\ (5) are paid on a salary basis; and (6) work hours that ``vary''
                from week to week. The Department calculated that 721,656 workers
                satisfy all these criteria based on 2018 CPS data. These workers are
                generally eligible to be paid under the fluctuating workweek method,
                but the Department lacks specific data as to how many are actually paid
                that way.
                ---------------------------------------------------------------------------
                 \13\ The CPS is a monthly survey of about 60,000 households that
                is jointly sponsored by the U.S. Census Bureau and BLS. Households
                are surveyed for four months, excluded from the survey for eight
                months, surveyed for an additional four months, and then permanently
                dropped from the sample. During the last month of each rotation in
                the sample (month 4 and month 16), employed respondents complete a
                supplementary questionnaire in addition to the regular survey.
                 \14\ Under either method of salary payment the employee is
                entitled to overtime premium pay of at least one and one-half times
                the regular rate. However, the method of calculating the overtime
                due differs because of the difference in what the salary payment is
                intended to cover.
                 \15\ Currently four states generally prohibit the use of the
                fluctuating workweek method under state law: Alaska, California,
                Pennsylvania, and New Mexico. See 8 Alaska Admin. Code section
                15.100(d)(3); Cal. Labor Code section 515(d); Chevalier v. Gen.
                Nutrition Ctrs., Inc., 2017 PA Super 407, 177 A.3d 280 (Pa. Super.
                Ct. 2017), appeal granted, 189 A.3d 386 (Pa. 2018); N.M. Dep't of
                Labor v. Echostar Commc'ns Corp., 134 P.3d 780, 783 (N.M. Ct. App.
                2006).
                ---------------------------------------------------------------------------
                 Using this group of workers to estimate the fluctuating workweek
                population may overstate the number of employees paid under the
                fluctuating workweek method because not all nonexempt and full-time CPS
                respondents who report earning a salary for working hours that ``vary''
                from week to week are paid under the fluctuating workweek method. Some
                such respondents may actually be paid a salary for a specific number of
                hours under Sec. 778.113, despite working fluctuating hours, and so
                classifying them as employees paid under the fluctuating workweek
                method would result in over-counting. Such an estimate may also
                undercount the number of employees paid under the fluctuating workweek
                method because the Department's methodology excludes all CPS
                respondents with ``usual'' hours from counting as an employee paid
                under the fluctuating workweek method. But an employee who works a
                ``usual'' number of hours may still be paid under the fluctuating
                workweek method if there is some weekly variation in the number of
                hours worked. Indeed, relying on 2018 CPS data, the Department
                estimates that an additional 675,130 nonexempt, full-time, and salaried
                workers report having a ``usual'' number of hours but routinely work
                hours that differ from that ``usual'' number. These additional workers
                are also eligible to be paid under the fluctuating workweek method, but
                the Department lacks data as to how many are actually paid that way.
                 Altogether, the total number of workers the Department estimates
                who may currently be paid under the fluctuating workweek method is
                about 1.4 million (721,656 workers who report their hours vary plus
                675,130 workers who report having a ``usual'' number of hours but who
                work hours that differ from that number). For the purpose of this PRIA,
                the Department lacks data to determine how prevalent this compensation
                method actually is. Without data on the precise number, and for
                purposes of this illustrative analysis, the Department assumes that
                half of these workers are currently being paid using the fluctuating
                workweek method, meaning 698,393 workers could become eligible for a
                wider range of supplemental payments if the proposed rule were
                finalized.
                 The actual number may be higher or lower. The Department invites
                comment on this illustrative analysis, including any relevant data or
                information that may further inform the estimated
                [[Page 59596]]
                number of employees paid under the fluctuating workweek method. The
                Department especially welcomes information from employers, employer
                organizations, employee organizations, or payroll processors who may
                have unique insight into the number of employees paid under this
                method.
                 The proposed clarification may also encourage some employers to
                switch their employees who are currently paid on an hourly basis to the
                fluctuating workweek method. The Department believes legal confusion
                over the last fifteen years, exacerbated by the 2011 Final Rule, likely
                caused some employers to stop using the fluctuating workweek method to
                compensate employees, and instead pay them on an hourly basis.\16\ The
                Department applied the same estimation methodology it used to
                approximate the current number of employees paid under the fluctuating
                workweek method to approximate the number of such employees in previous
                years--going back to 2004--using CPS data from those years.\17\
                ---------------------------------------------------------------------------
                 \16\ The Department believes that few employers would have
                switched employees from the fluctuating workweek method to a fixed
                salary for a specific number of hours under Sec. 778.113 because
                those employees would have, by definition, worked hours that varied
                from week to week.
                 \17\ The Department lacks the required CPS data from before
                2004.
                ---------------------------------------------------------------------------
                 The estimated percentage of U.S. workers compensated under the
                fluctuating workweek method has declined from 0.83 percent in 2004 to
                0.45 percent in 2018. At least some portion of this decline likely may
                be attributed to the legal uncertainty discussed in greater detail
                above, but some may be attributable to unrelated causes.\18\ For
                example, the Department recognizes that the total number of nonexempt
                FLSA full-time salaried workers decreased both in total number and also
                as a share of the employee population over this same period.\19\ The
                Department further assumes that some employers who switched their
                employees away from the fluctuating workweek method due to legal
                uncertainty would be likely to switch those employees back to the
                fluctuating workweek. However, the Department lacks sufficient
                information to estimate the precise number of ``switchers'' due to
                elimination of legal uncertainty. The Department invites commenters to
                provide data or information on the number of employees who could have
                their compensation methods switched, or on the impact of this switch on
                their hours, roles, or responsibilities. The Department especially
                welcomes information from employers, employer organizations, employee
                organizations, or payroll processors who may have unique insight into
                the number of employees paid under this method.
                ---------------------------------------------------------------------------
                 \18\ Compare, e.g., Wills, 981 F. Supp. 2d at 256, with Sisson,
                2013 WL 945372, at *1.
                 \19\ From approximately 27.0 million in 2004 to 19.2 million in
                2018.
                ---------------------------------------------------------------------------
                C. Costs
                 The Department believes that the only likely costs attributable to
                this rulemaking are regulatory familiarization costs, which represent
                direct costs to businesses associated with reviewing changes to
                regulatory requirements caused by a final rule. Familiarization costs
                do not include recurring compliance costs that regulated entities would
                incur with or without a rulemaking. The Department calculated
                regulatory familiarization costs by multiplying the estimated number of
                establishments likely to review the proposed rule by the estimated time
                to review the rule and the average hourly compensation of a
                Compensation, Benefits, and Job Analysis Specialist.
                 To calculate costs associated with reviewing the rule, the
                Department first estimated the number of establishments likely to
                review the proposed rule, when finalized. The most recent data on
                private sector establishments at the time this NPRM was drafted are
                from the 2016 Statistics of U.S. Businesses (SUSB), which reports 7.8
                million establishments with paid employees.\20\
                ---------------------------------------------------------------------------
                 \20\ U.S. Census Bureau, 2016 Statistics of U.S. Businesses
                (SUSB) Annual Data Tables by Establishment Industry, https://www.census.gov/data/tables/2016/econ/susb/2016-susb-annual.html.
                ---------------------------------------------------------------------------
                 The Department believes that each of the 7.8 million establishments
                will review the rule. All employers will give the proposed rule a
                cursory review, lasting no more than five minutes, to determine if they
                need to comply with the rule. Most employers will not spend any more
                time on the rule, because they do not have any employees compensated
                under the fluctuating workweek method. Additionally, the Department
                believes that employers currently using or interested in using the
                fluctuating workweek method to pay workers will give the proposed rule
                a more detailed review. The Department estimates that 698,393 workers
                are paid under the fluctuating workweek method, based on the 2018 CPS
                data. The Department uses this number to help estimate the number of
                establishments who will spend more time reviewing the rule. As
                previously discussed, the Department lacks data to identify the
                specific employers or employees who may switch to the fluctuating
                workweek given the new legal clarity, but estimates, for purposes of
                this cost analysis, that employers will switch additional employees to
                being paid under the fluctuating workweek method. This entire pool is
                approximately 0.45 percent of the 155.8 million workers in the United
                States. By assuming these workers are proportionally distributed among
                the 7.8 million establishments, the Department estimates approximately
                35,100 establishments pay or are interested in paying employees using
                the fluctuating workweek method, and therefore, would review the
                proposed rule in greater detail. Because the proposed rule is a
                clarification that simplifies the interaction between the fluctuating
                workweek method and supplemental payments, the Department estimates it
                would take an average of 30 additional minutes (on top of the five
                minutes spent on an initial review) for each of these employers to
                review and understand the rule. Some might spend more than 30
                additional minutes reviewing the proposed rule, while others might take
                less time; the Department believes that 30 minutes is a reasonable
                estimated average for all interested employers in light of the rule's
                simplicity.
                 Next, the Department estimated the hourly compensation of the
                employees who would likely review the proposed rule. The Department
                assumes that a Compensation, Benefits, and Job Analysis Specialist
                (Standard Occupation Classification 13-1141), or an employee of similar
                status and comparable pay, would review the rule at each establishment.
                The median hourly wage of a Compensation, Benefits, and Job Analysis
                Specialist is $30.29.\21\ The Department adjusted this base wage rate
                to reflect fringe benefits such as health insurance and retirement
                benefits, as well as overhead costs such as rent, utilities, and office
                equipment. The Department used a fringe benefits rate of 46 percent of
                the base rate \22\ and an overhead rate of 17 percent of the base rate,
                resulting in a fully loaded hourly compensation rate for Compensation,
                Benefits, and Job Analysis Specialists of $49.37 = ($30.29 + ($30.29 x
                46%) + ($30.29 x 17%)).
                ---------------------------------------------------------------------------
                 \21\ Bureau of Labor Statistics, May 2018 National Occupational
                Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm.
                 \22\ The benefits-earnings ratio is derived from BLS's Employer
                Costs for Employee Compensation data using variables
                CMU1020000000000D and CMU1030000000000D.
                ---------------------------------------------------------------------------
                 The Department estimates one-time regulatory familiarization costs
                in Year 1 of $32.8 million (= 35,100 establishments x 0.5 hours of
                review
                [[Page 59597]]
                time x $49.37 per hour + 7.8 million establishments x 0.083 hours of
                review time x $49.37 per hour), which amounts to a 10-year annualized
                cost of $3.73 million at a discount rate of 3 percent or $4.36 million
                at a discount rate of 7 percent. This proposed rule would not impose
                any new requirements on employers or require any affirmative measures
                for regulated entities to come into compliance; therefore, there are no
                other costs attributable to this proposed rule. The Department
                acknowledges that employers who do switch to the fluctuating workweek
                method may encounter adjustment costs as they make changes to their
                payroll systems. These costs were not captured here; however, because
                employers are not required to change their payment method (i.e., their
                choice to switch is voluntary), and the Department assumes employers
                will make economically rational decisions, then such costs would
                reasonably be expected to be less than employers' combined cost savings
                and salary reductions. The Department invites comment on this analysis,
                including any relevant data or information that may further inform this
                cost estimate.
                D. Cost Savings
                 The Department believes that this proposed rule could lead to three
                categories of potential cost savings: (1) The opportunity costs of
                previously forgone activities; (2) reduced management costs for non-
                hourly employees; and (3) reduced legal costs for employers. The
                Department uses the assumptions previously discussed in this PRIA to
                develop illustrative estimated cost savings. Based on these estimates,
                the Department believes total cost savings are likely to exceed
                regulatory familiarization costs.
                 First, the proposed rule would eliminate some of the opportunity
                costs in lost productivity resulting from employers' current inability
                to offer supplemental incentive pay to employees compensated under the
                fluctuating workweek method.\23\ Legal uncertainty regarding the
                compatibility of such pay with the fluctuating workweek method prevents
                employers and employees from entering into certain mutually beneficial
                exchanges. For instance, an employer using the fluctuating workweek
                method could not offer supplemental incentive pay in exchange for
                performing undesirable duties. See Dacar, 914 F.3d at 926 (extra pay
                for ``offshore'' inspections invalidates fluctuating workweek method).
                The prohibition against such beneficial exchanges imposes economic
                costs, and the proposed rule, if finalized, would eliminate such costs.
                ---------------------------------------------------------------------------
                 \23\ ``[C]ost savings should include the full opportunity costs
                of the previously forgone activities.'' Office of Management and
                Budget, ``Guidance Implementing Executive Order 13771, Titled
                `Reducing Regulation and Controlling Regulatory Costs,' '' Apr. 5,
                2017, https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf. Some economists refer to this amount
                as deadweight loss or ``the sum of consumer and producer surplus.''
                Id.
                ---------------------------------------------------------------------------
                 The Department evaluates the potential scope of opportunity costs
                imposed by current legal uncertainty as the economic value of
                supplemental incentive pay prevented by current legal uncertainty. The
                Department assumes that employers currently follow the holdings of an
                increasing number of courts on the compatibility between supplemental
                payments and the fluctuating workweek method. These courts have held
                that productivity based payments, such as commissions, are compatible
                with the fluctuating workweek method. See Lalli, 814 F.3d at 8. The
                Department therefore assumes employers are not currently deterred from
                paying productivity based bonuses and premiums to employees under the
                fluctuating workweek method.\24\ On the other hand, courts have held,
                and the 2011 Preamble may have led employers to believe, that shift
                differentials and hours-based payments--such as payments for holiday
                hours and hours spent working offshore--are not compatible with the
                fluctuating workweek method. See Dacar, 914 F.3d at 926. The Department
                believes that employers are currently deterred from making these types
                of payments to employees paid under the fluctuating workweek method.
                Finally, the Department believes legal uncertainty further deters
                employers from making supplemental payments that are neither
                productivity-based nor hours-based. This includes, for example,
                retention bonuses, referral bonuses, and safety bonuses that the Bureau
                of Labor Statistics categorize as ``nonproduction bonuses.'' \25\
                ---------------------------------------------------------------------------
                 \24\ The Department understands that this assumption may not
                perfectly reflect reality because many employers using the
                fluctuating workweek method may presently be deterred from paying
                production based bonuses and premiums, especially outside of
                jurisdictions in which such supplemental pay have been expressly
                held to be compatible with the fluctuating workweek method. By
                assuming all employers are paying production bonuses despite this
                concern, the Department's illustrative estimate may be understating
                the economic cost of current legal uncertainty. The Department
                welcomes comments providing data or information regarding whether
                employers using the fluctuating workweek are currently paying
                production based bonuses and premiums, such as commissions.
                 \25\ Bureau of Labor Statistics, Fact Sheet for the June 2000
                Employment Cost Index Release (2000), at 1, https://www.bls.gov/ncs/ect/sp/ecrp0003.pdf. As the name implies, nonproduction bonuses do
                not include productivity based pay, such as commissions, that courts
                generally find to be compatible with the fluctuating workweek
                method.
                ---------------------------------------------------------------------------
                 The Department lacks sufficient data to predict the precise
                deadweight loss attributable to the present legal uncertainty including
                the economic value of work that fluctuating workweek employees do not
                perform because their employers cannot provide certain supplemental
                pay. However, after the rule change, if 70,000 workers who presently
                are compensated under the fluctuating workweek method--i.e., one-tenth
                of the Department's estimate of 698,393--receive supplemental pay equal
                to approximately one-third the national average shift differential and
                nonproduction bonuses for work not presently performed, the full annual
                opportunity cost of lost productivity that the proposed rule would
                eliminate could exceed $60 million.\26\ Appendix A contains a detailed
                illustrative analysis regarding possible ranges of potential
                opportunity cost eliminated and the critical variables upon which these
                estimates depend.
                ---------------------------------------------------------------------------
                 \26\ BLS estimates that average hourly shift differential and
                nonproduction bonuses are 3.4% of hourly pay and the 698,393 workers
                that the Department estimates are paid under the fluctuating
                workweek method earn an average annual salary of $49,282.
                ---------------------------------------------------------------------------
                 Ultimately, the Department lacks data to precisely measure the
                extent of overstating or understating its estimate of opportunity costs
                eliminated from the proposed rule. The Department welcomes comments
                providing data or information regarding the magnitude of possible
                opportunity costs avoided by this proposed rule, which may help the
                Department further quantify these effects in a Final Rule analysis. The
                Department especially welcomes information from employers, employer
                organizations, employee organizations, or payroll processors who may
                have unique insight into employees paid under the fluctuating workweek
                method.
                 Second, the proposed rule would reduce management costs for any
                employers that switch employees from hourly pay to the fluctuating
                workweek method. As explained above, the Department believes legal
                uncertainty caused some employers to stop paying employees using the
                fluctuating workweek method, and instead to pay them on an hourly
                basis. Since overtime pay premiums for hourly employees are constant
                (i.e., their regular rate does not decrease as more overtime hours are
                worked), these employers may incur increased managerial costs because
                they may spend more time developing work
                [[Page 59598]]
                schedules and closely monitoring an employee's hours to minimize or
                avoid overtime pay. For example, the manager of an hourly worker may
                have to assess whether the marginal benefit of scheduling the worker
                for more than 40 hours exceeds the marginal cost of paying the overtime
                based on the higher hourly rate. But such assessment is less necessary
                for an employee paid under the fluctuating workweek method because the
                employee's regular rate decreases with each additional overtime hour,
                reducing the overtime premium as a share of compensation.
                 There was little precedent or data to aid in evaluating these
                managerial costs. With the exception of the 2016 and 2019 overtime
                rulemaking efforts, the Department has not estimated managerial costs
                of avoiding overtime pay. See 81 FR 32391, 32477 (May 23, 2016); 84 FR
                10900, 10932 (Mar. 29, 2019). Nor has the Department found such
                estimates after reviewing the literature. The Department therefore
                refers to the methodology used in the 2019 overtime rulemaking to
                produce a qualitative analysis of potential additional cost savings.
                 Under the overtime rulemaking methodology, the Department assumed a
                manager spends ten minutes per week scheduling and monitoring a newly
                exempt employee to avoid or minimize overtime pay. And employers may be
                able to avoid at least some of this effort if the employee were instead
                paid under the fluctuating workweek method because the marginal cost of
                paying overtime would be lower. While, the Department does not estimate
                the precise number of hourly workers who would switch from hourly pay
                to the fluctuating workweek method if the proposed rule were finalized,
                the Department believes that management costs may be reduced for every
                worker who is switched because their managers may spend less time
                managing their schedules. If, hypothetically, 150,000 workers were
                switched, employers might reduce their annual managerial costs by over
                $ 66 million.\27\
                ---------------------------------------------------------------------------
                 \27\ This illustrative analysis assumes: Ten minutes per week
                per worker, fifty-two weeks per year, multiplied by a hypothetical
                number of new employees paid under the fluctuating workweek method,
                multiplied by the full-loaded median hourly wage for a manager
                ($31.18 + $31.18(0.46) + $31.18(0.17) = $50.92). This wage is
                calculated as the median hourly wage in the pooled 2018/19 CPS MORG
                data for workers in management occupations (excluding chief
                executives).
                ---------------------------------------------------------------------------
                 The Department welcomes data or information regarding the number of
                employees who could have their compensation method switched, how
                employers would manage their hours after switching, or other relevant
                factors that would help the Department further quantify cost savings.
                The Department especially welcomes information from employers, employer
                organizations, or payroll processors who may have unique insight into
                employees paid under the fluctuating workweek method.
                 Third, the clarifying language and updated examples included in
                this NPRM may reduce the amount of time employers spend attempting to
                understand their obligations under the law, after an initial one-time
                rule familiarization. For example, employers interested in offering
                supplemental payments to employees compensated under the fluctuating
                workweek method would know immediately from the language proposed for
                inclusion in Sec. 778.114 that such payments will be compatible with
                the fluctuating workweek method, thereby obviating further legal
                research and analysis on the issue. The Department does not have data
                to estimate the precise amount of cost savings attributable to reduced
                need for legal research and analysis, and instead provides an example
                to illustrate the potential for such savings.
                 If the additional legal clarity reduces the annual amount of legal
                review by just one hour for each employer that pays or is interested in
                paying employees using the fluctuating workweek method, the Department
                calculates potential cost savings of up to $4.7 million. The Department
                obtained this illustrative estimate by first calculating the hourly
                cost of a lawyer (Standard Occupation Classification 23-1011). The
                median wage of a lawyer is $58.13,\28\ and the Department adjusted this
                to $94.75 per hour to account for fringe benefits and overhead.\29\ The
                fully loaded hourly compensation rate of $94.75 is then multiplied by
                the 35,100 establishments that the Department estimates pay or may be
                interested in paying employees using the fluctuating workweek method,
                resulting in a product of $ 3.3 million per year.\30\ As noted above,
                this figure is an illustrative example of potential annual cost savings
                due to reducing legal-review burdens, and the Department welcomes
                comments providing data or information on this topic so that the
                Department accurately quantify these effects in a Final Rule analysis.
                ---------------------------------------------------------------------------
                 \28\ Bureau of Labor Statistics, May 2018 National Occupational
                Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm.
                 \29\ The Department used a fringe benefits rate of 46 percent of
                the base rate and an overhead rate of 17 percent of the base rate,
                resulting in a fully loaded hourly compensation rate of $94.75 =
                ($58.13 + ($58.13 x 0.46) + ($58.13 x 0.17)).
                 \30\ This number is discussed in greater detail in the Costs
                section, above.
                ---------------------------------------------------------------------------
                 Even though the Department cannot quantify the precise amount of
                total cost savings, it expects cost savings to outweigh regulatory
                familiarization costs. Unlike one-time familiarization costs, the
                potential cost savings described in this section would continue into
                the future, saving employers valuable time and resources. This proposal
                also offers increased flexibility to employers in the way that they
                compensate their employees. However, the Department is unable to
                precisely quantify cost savings and other potential effects of the
                proposed rule due to a lack of data. The Department welcomes comments
                providing data or information regarding possible cost savings
                attributable to this proposed rule, which may help the Department
                further quantify these effects in a Final Rule analysis. The Department
                especially welcomes information from employers, employer organizations,
                employee organizations, or payroll processors who may have unique
                insight into employees paid under the fluctuating workweek method.
                E. Transfers
                 Transfer payments occur when income is redistributed from one party
                to another. The Department believes the proposed rule, if finalized,
                may cause transfer payments to flow from employers to employees and may
                also cause transfer payments to flow from employees to employers. The
                incidence, magnitude, and ultimate beneficiaries of such transfers is
                unknown.
                 The Department lacks data to estimate the precise amount and
                composition of the supplemental incentive pay that employers may now
                offer, the extent to which employers may restructure compensation
                packages, the method by which employers who switch employees to a
                fluctuating workweek may allocate additional compensation, and the
                allocation of economic gains between employees and employers. The
                Department welcomes comments providing data or information regarding
                how employers will structure employment compensation following this
                rulemaking, as well as how employers may change employees' hours or
                responsibilities. The Department especially welcomes information from
                employers, employer organizations, employee organizations, employees,
                or payroll processors who may have unique insight into employees paid
                under the fluctuating workweek method and the management practices
                [[Page 59599]]
                employed by companies using the fluctuating workweek method.
                F. Benefits
                 The Department believes the proposed clarification would reduce
                avoidable disputes and litigation regarding the compatibility between
                supplemental pay and the fluctuating workweek method. As noted above,
                there is no uniform consensus among Federal courts as to whether and
                what types of supplemental pay is permitted. The Department believes
                this uncertain legal environment generates a substantial amount of
                avoidable disputes and litigation. The proposed rule would provide a
                simple standard that permits all supplemental pay under the fluctuating
                workweek method, and therefore should reduce unnecessary disputes and
                litigation.\31\ The Department lacks data to quantify this benefit, and
                welcomes data and information on the amount of unnecessary disputes and
                litigation that would be avoided if the proposed rule were finalized.
                The Department especially welcomes information from employers, employer
                organizations, or payroll processors who may have unique insight into
                employees paid under the fluctuating workweek method.
                ---------------------------------------------------------------------------
                 \31\ The costs of such disputes and litigation are not
                insignificant, but are not estimated here nor included in the
                projected regulatory cost savings.
                ---------------------------------------------------------------------------
                VII. Regulatory Flexibility Analysis
                 The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
                as amended by the Small Business Regulatory Enforcement Fairness Act of
                1996, Public Law 104-121 (March 29, 1996), requires Federal agencies
                engaged in rulemaking to consider the impact of their proposals on
                small entities, consider alternatives to minimize that impact, and
                solicit public comment on their analyses. The RFA requires the
                assessment of the impact of a regulation on a wide range of small
                entities, including small businesses, not-for-profit organizations, and
                small governmental jurisdictions. Agencies must perform a review to
                determine whether a proposed or final rule would have a significant
                economic impact on a substantial number of small entities. 5 U.S.C. 603
                and 604.
                 This proposed rule would not impose any new requirements on
                employers or require any affirmative measures for regulated entities to
                come into compliance. Therefore, there are no other costs attributable
                to this deregulatory proposed rule other than regulatory
                familiarization costs. As discussed above, the Department calculated
                the familiarization costs for both the estimated 7.8 million private
                establishments in the United States and for the estimated 50,064
                establishments that pay or are interested in paying employees using the
                fluctuating workweek method. The Department estimated the one-time
                familiarization cost for each of the 7.8 million establishments--which
                would give the proposed rule a cursory review--is $4.11. And the one-
                time familiarization cost for each of the 35,100 establishments that
                employ or are interested in employing employees paid under the
                fluctuating workweek method--which would closely review the proposed
                rule--is $24.69. Estimated familiarization costs would be trivial for
                small business entities, and would be well below one percent of their
                gross annual revenues, which is typically at least $100,000 per year
                for the smallest businesses.
                 The Department believes that this proposed rule would achieve long-
                term cost savings that outweigh initial regulatory familiarization
                costs. For example, the Department believes that clarifying the
                confusing fluctuating workweek regulation and adding updated examples
                should reduce compliance costs and litigation risks that small business
                entities would otherwise continue to bear. The proposed rule would also
                reduce administrative costs of small businesses that respond by
                switching hourly employees to the fluctuating workweek method. The
                proposed rule further enables a small business to offer employees paid
                under the fluctuating workweek method supplemental incentive pay in
                exchange for certain productive behavior, such as working nightshifts
                or performing undesirable duties. The business would offer such
                supplemental pay only if the benefits of the incentivized behavior
                exceed the cost of payments. Because the vast majority of businesses,
                including small businesses, do not pay workers using the fluctuating
                workweek method,\32\ the Department believes such benefits will be
                limited to few small businesses. Based on this determination, the
                Department certifies that the proposed rule would not have a
                significant economic impact on a substantial number of small entities.
                ---------------------------------------------------------------------------
                 \32\ The Department of Labor estimates that only 0.45% of U.S.
                workers are compensated using fluctuating workweek method.
                ---------------------------------------------------------------------------
                VIII. Unfunded Mandates Reform Act Analysis
                 The Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1532,
                requires that agencies prepare a written statement, which includes an
                assessment of anticipated costs and benefits, before proposing any
                Federal mandate that may result in excess of $100 million (adjusted
                annually for inflation) in expenditures in any one year by state,
                local, and tribal governments in the aggregate, or by the private
                sector. While this rulemaking would affect employers in the private
                sector, it is not expected to result in expenditures greater than $100
                million in any one year. Please see Section VI for an assessment of
                anticipated costs and benefits to the private sector.
                IX. Executive Order 13132, Federalism
                 The Department has reviewed this proposed rule in accordance with
                Executive Order 13132 regarding federalism and determined that it does
                not have federalism implications. The proposed rule would not have
                substantial direct effects on the States, on the relationship between
                the national Government and the States, or on the distribution of power
                and responsibilities among the various levels of government.
                X. Executive Order 13175, Indian Tribal Governments
                 This proposed rule would not have substantial direct effects on one
                or more Indian tribes, on the relationship between the Federal
                Government and Indian tribes, or on the distribution of power and
                responsibilities between the Federal Government and Indian tribes.
                Appendix A
                 This appendix presents the Department's illustrative analysis of
                the opportunity cost of work that is not performed because employers
                are not permitted to provide certain types of supplemental incentive
                pay to fluctuating workweek employees. The proposed rule would reduce
                such opportunity costs. What follows is discussion of two approaches to
                estimating these effects.
                I. Method One: Using Supplemental Pay Data
                 The Department's first methodology consists of three steps. First,
                the Department estimates the amount of additional supplemental pay that
                the average fluctuating workweek employee could receive if employers
                believed all supplemental payments were compatible with the fluctuating
                workweek method. Second, the
                [[Page 59600]]
                Department estimates the economic value of the work that such
                supplemental pay could have incentivized--this represents the
                opportunity cost per workers resulting from legal uncertainty. Third,
                the Department multiplies the opportunity cost per worker by the
                estimated number of workers who are potentially compensated under the
                fluctuating workweek method.\33\
                ---------------------------------------------------------------------------
                 \33\ This analysis does not attempt to evaluate whether and to
                what extent some employees not presently compensated under the
                fluctuating workweek method might be shifted to the fluctuating
                workweek method from their present method of compensation.
                ---------------------------------------------------------------------------
                1. Average Supplemental Pay Being Prevented
                 As discussed in the Preamble, the Department assumes that employers
                currently use production-based supplemental pay--such as commissions--
                to incentivize employees, but they presently are deterred from using
                other types of supplemental pay. If this NPRM were finalized as
                proposed, the Department expects some employers may begin to use other
                types of supplemental pay, including nonproduction bonuses and shift
                differentials, to incentivize employees to perform economically
                valuable tasks.
                 The Bureau of Labor Statistics (BLS) provides estimates on
                nonproduction bonuses, which include, e.g., safety bonuses, holiday
                pay, attendance pay, and referral bonuses.\34\ BLS also provides
                separate estimates of shift differentials that employees receive
                nationwide. Shift differentials and nonproduction bonuses comprise
                approximately 3.4 percent of the salaries and wages of workers
                nationwide.\35\ The Department believes this 3.4 percent national
                average may be a useful starting point to estimate the amount of
                supplemental incentive pay that current legal uncertainty could
                prevent.
                ---------------------------------------------------------------------------
                 \34\ Bureau of Labor Statistics, Fact Sheet for the June 2000
                Employment Cost Index Release (2000), at 1, https://www.bls.gov/ncs/ect/sp/ecrp0003.pdf; see also BLS, Employee Benefits Survey, March
                2017, https://www.bls.gov/ncs/ebs/benefits/2017/ownership/govt/table43a.htm. As the name implies, nonproduction bonuses do not
                include productivity based pay, such as commissions, that some
                courts have found to be compatible with the fluctuating workweek
                method. Approximately one-third of U.S. workers have access to
                nonproduction bonuses in 2017. Id.
                 \35\ BLS estimates average wages and salaries of private
                industry workers to be $24.17. And their average hourly shift
                differential and nonproduction bonus adds up to $0.81, which
                represents 3.4% of hourly pay. Bureau of Labor Statistics, Employer
                Costs for Employee Compensation, March 2019, Table 1, https://www.bls.gov/news.release/archives/ecec_06182019.pdf. This figure
                represents the national average of all workers: Some workers may
                receive little or no shift differentials and nonproduction bonuses
                while other may receive substantially higher shift differentials and
                nonproduction bonuses than the national average.
                ---------------------------------------------------------------------------
                 The Department recognizes that 3.4 percent of salary may overstate
                or understate the average supplemental pay that legal uncertainty
                prevents fluctuating workweek employees from receiving. For example,
                the Department assumes employers using the fluctuating workweek method
                currently are unable to directly incentivize certain productive tasks
                with supplemental pay. But some employers may be indirectly (and less
                efficiently) incentivizing such behavior, e.g., encouraging holiday
                work by increasing the base salary of all employees and requiring
                employees to work a holiday as needed rather than paying a lower salary
                to all employees and paying a premium only to employees who work that
                particular holiday. If so, the amount of incentive pay prevented by
                current legal uncertainty may be less than the 3.4 percent of salary.
                Conversely, the amount of lost incentive pay may be higher than 3.4
                percent of salary because that percentage does not include production-
                based incentive pay. The Department assumes employers using the
                fluctuating workweek method currently pay production-based bonuses,
                such as commissions, to incentivize productive behavior. But case law
                permitting this practice extends only to two circuits and some district
                courts,\36\ and some employers outside those jurisdictions may be
                deterred from paying production based incentive pay due to legal
                uncertainty.\37\ If so, the amount of lost incentive pay for productive
                behavior due to legal uncertainty may be higher than 3.4 percent of
                salary.
                ---------------------------------------------------------------------------
                 \36\ See, e.g., Lalli, 814 F.3d at 8; Dacar, 914 F.3d at 926;
                Wills, 981 F. Supp. 2d at 256.
                 \37\ For instance, the 2011 Preamble's statement that ``bonus
                and premium payments . . . are incompatible with the fluctuating
                workweek method of computing overtime under section 778.114'' does
                not, on its face, permit employers to pay commissions and other
                production-based bonuses under the fluctuating workweek method. See
                also Sisson, 2013 WL 945372, at *6 (commissions not permitted under
                fluctuating workweek method).
                ---------------------------------------------------------------------------
                 Ultimately, the Department lacks sufficient data to precisely
                measure the extent of overstatement or understatement. In the
                presentation that follows, the Department assumes that the average
                fluctuating workweek employee would receive less than the national
                average of 3.4 percent of salary if employers were assured that such
                payments were compatible with the fluctuating workweek method. This
                appendix presents two scenarios regarding the average supplemental pay
                that that current legal uncertainty may prevent fluctuating workweek
                employees from receiving:
                 Scenario 1 assumes supplemental pay being prevented equals
                1 percent of salary; and
                 Scenario 2 assumes supplemental pay being prevented equals
                2 percent of salary.
                 As discussed in the preamble, the Department uses CPS data to
                identify approximately 1.4 million workers who may currently be paid
                under the fluctuating workweek method. CPS data indicate that these 1.4
                million workers earn an average annual salary of $49,282. Under
                Scenario 1, the average amount of supplemental pay per employee that
                legal uncertainty prevents is $492.82 (= $49,282 x 1%) per year. Under
                Scenario 2, the average amount per employee is $985.64 (= $49,282 x 2%)
                per year. On a weekly basis, these scenarios would result in an
                employee receiving approximately $9.48 or $18.95 in supplemental pay.
                2. Average Opportunity Cost
                 The above estimates for Scenarios 1 and 2 represent potential
                supplemental incentive payments that employers were deterred from
                paying an average employee compensated under the fluctuating workweek
                method. And since the employee did not receive this amount, the
                Department assumes he or she completed fewer productive tasks that such
                pay would have incentivized, such as working nights or weekends or
                performing other undesirable duties.
                 The estimates under Scenarios 1 and 2 represent the worker's share
                of the total economic cost of lost productivity. The Department assumes
                the worker's share of this cost is the same as labor's share of
                national income, which BLS estimates was 56.4 percent in 2018 (the most
                recent year of data available at publication).\38\ The full, economy-
                wide annual opportunity cost of lost productivity that the proposed
                rule would eliminate is therefore equal to the lost supplemented pay
                under Scenarios 1 and 2 divided by 56.4 percent. Under Scenario 1, this
                amounts to $873.79 (= 492.82 / 56.4%) per employee compensated under
                the fluctuating workweek method. Annual opportunity cost eliminated
                under Scenario 2 is $1,747.59 (= 985.64 / 56.4%) per such employee.
                ---------------------------------------------------------------------------
                 \38\ Bureau of Labor Statistics, Labor Productivity and Costs,
                https://www.bls.gov/lpc/special_requests/msp_dataset.zip.
                ---------------------------------------------------------------------------
                3. Total Opportunity Cost Eliminated
                 The Department multiplied the opportunity cost per employee by the
                estimated number of fluctuating
                [[Page 59601]]
                workweek employees to estimate the potential total reduction in
                opportunity cost from the proposed rule. As discussed in the Preamble,
                the Department estimated there are up to 1.4 million workers who may
                currently be paid under the fluctuating workweek method and further
                assumed that half--698,383 workers--are actually being paid under that
                method. But, as the Preamble noted, the actual number may be higher or
                lower. To account for the uncertainty in the actual number of
                fluctuating workweek employees who would receive supplemental pay under
                the proposed rule, the Department estimated the total reduction in
                opportunity cost under three different scenarios:
                 Scenario A uses half of the Department's estimate of
                fluctuating workweek employees, or 349,192 employees;
                 Scenario B uses one quarter of the Department's estimate,
                or 174,596 employees; and
                 Scenario C uses one tenth of the Department's estimate, or
                69,838 employees.
                 Scenarios A-C reflect different assumptions regarding the number of
                fluctuating workweek employees who may receive supplemental pay, while
                Scenarios 1 and 2 reflect different assumptions regarding the amount of
                supplemental pay--and by extension productive activity--prevented by
                current legal uncertainty. These create six different combinations, A1
                thorough C2, each presenting a different estimate for the total
                opportunity cost that the proposed rule would eliminate. The table
                below summarizes these possibilities:
                 Table 1--Opportunity Cost Eliminated
                ----------------------------------------------------------------------------------------------------------------
                 Scenario 1 Scenario 2
                 ---------------------------------------
                 1% Suppl. Pay 2% Suppl. Pay
                ----------------------------------------------------------------------------------------------------------------
                Scenario A................................ 349,192 Workers............. $305,121,551 $610,243,103
                Scenario B................................ 174,596 Workers............. 152,560,776 305,121,551
                Scenario C................................ 69,838 Workers.............. 61,024,310 122,048,621
                ----------------------------------------------------------------------------------------------------------------
                 As Table 1 shows, the estimated opportunity cost that the proposed
                rule could eliminate depends upon the number of workers being
                compensated under the fluctuating workweek method and the amount of
                supplemental pay that current legal uncertainty prevents such workers
                from receiving. At the low end is Scenario C1--representing the lowest
                calculated number of fluctuating workweek employees and the lowest
                calculated amount of supplemental pay--which indicates that opportunity
                cost that could be eliminated is approximately $61 million.\39\ And at
                the high end is Scenario A2--representing the highest estimate of
                affected fluctuating workweek employees and the highest amount of
                supplemental pay--which indicates the opportunity cost that could be
                eliminated by the proposed rule is approximately $610 million.
                ---------------------------------------------------------------------------
                 \39\ The $61 million estimate should not be interpreted as a
                true lower bound. Indeed, a review of public comments on related
                rulemakings yields only a few muted requests for the fluctuating
                workweek policy to be revised--potentially indicating that the
                associated current deadweight loss is of limited magnitude.
                ---------------------------------------------------------------------------
                 The Department lacks sufficient data and information necessary to
                precisely predict which scenario is most plausible and thus to estimate
                the potential reduction in opportunity cost. Accordingly, the
                Department invites comment on this analysis, including any relevant
                data or information on the Department's assumptions regarding: (1) The
                estimated number of employees paid under the fluctuating workweek
                method; and (2) the amount of supplemental pay that current legal
                uncertainty prevents such employees from receiving. The Department
                especially welcomes information from employers, employer organizations,
                employee organizations, or payroll processors who may have unique
                insight into employees paid under the fluctuating workweek method.
                II. Method Two: Comparison With Managerial Costs
                 In the absence of the fluctuating workweek NPRM, employers whose
                employees work irregular hours each week have different compensation
                options. One option is to pay workers an hourly wage with premiums (for
                hazard duty, graveyard shifts, and so forth), another option is to pay
                a salary without such premiums (another is to pay using the fluctuating
                workweek method, but without such premiums). Comparing these two
                options indicates a tradeoff between employer surplus--associated with
                the ability to enhance productivity by paying premiums--and reduced
                managerial costs--associated with paying salaries, per the Preamble's
                portion of this RIA. Hence, the managerial cost savings can provide a
                bound on the employer surplus effects that can be achieved by
                eliminating this tradeoff. Multiplying managerial costs for waged
                workers of $441.31 per year (=$50.92 x 52 weeks x \1/6\ hour per week)
                by the estimated 698,393 fluctuating workweek employees yields an
                estimate of $308 million as the upper bound on the proposed rule's
                employer surplus effects.\40\ Worker surplus would likely be of similar
                magnitude, thus putting the overall upper bound on rule-induced
                deadweight loss reduction at approximately $0.6 billion. If there were
                productivity gains from switching employees into the fluctuating
                workweek method, this bound could rise. As with Method One, the
                Department invites comment on this analysis.
                ---------------------------------------------------------------------------
                 \40\ The estimate is an upper bound both due to diminishing
                returns and because it does not account for other potential employer
                choices (e.g., paying salaries with premiums, while enduring
                uncertainty as to the arrangement's legality) that they would only
                pursue if less costly than the two options previously discussed.
                 Signed at Washington, DC, this 28th day of October, 2019.
                Cheryl M. Stanton,
                Administrator, Wage and Hour Division.
                List of Subjects in 29 CFR Part 778
                 Wages.
                 For the reasons set forth above, the Department proposes to amend
                title 29, part 778, of the Code of Federal Regulations as follows:
                PART 778--OVERTIME COMPENSATION
                0
                1. The authority citation for part 778 continues to read as follows:
                 Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq.
                Section 778.200 also issued under Pub. L. 106-202, 114 Stat. 308 (29
                U.S.C. 207(e) and (h)).
                0
                2. Revise Sec. 778.114 to read as follows:
                [[Page 59602]]
                Sec. 778.114 Fluctuating workweek method of computing overtime.
                 (a) The fluctuating workweek may be used to calculate overtime
                compensation for a nonexempt employee if the following conditions are
                met:
                 (1) The employee works hours that fluctuate from week to week;
                 (2) The employee receives a fixed salary that does not vary with
                the number of hours worked in the workweek, whether few or many;
                 (3) The amount of employee's fixed salary is sufficient to provide
                compensation to the employee at a rate not less than the applicable
                minimum wage rate for every hour worked in those workweeks in which the
                number of hours the employee works is greatest;
                 (4) The employee and the employer have a clear and mutual
                understanding that the fixed salary is compensation (apart from
                overtime premiums and any bonuses, premium payments, or other
                additional pay of any kind not excludable from the regular rate under
                section 7(e)(1) through (8) of the Act) for the total hours worked each
                workweek regardless of the number of hours; and
                 (5) The employee receives overtime compensation, in addition to
                such fixed salary and any bonuses, premium payments, and additional pay
                of any kind, for all overtime hours worked at a rate of not less than
                one-half the employee's regular rate of pay for that workweek. Since
                the salary is fixed, the regular rate of the employee will vary from
                week to week and is determined by dividing the amount of the salary and
                any non-excludable additional pay received each workweek by the number
                of hours worked in the workweek. Payment for overtime hours at not less
                than one-half such rate satisfies the overtime pay requirement because
                such hours have already been compensated at the straight time rate by
                payment of the fixed salary and non-excludable additional pay. Payment
                of any bonuses, premium payments, and additional pay of any kind is not
                incompatible with the fluctuating workweek method of overtime payment,
                and such payments must be included in the calculation of the regular
                rate unless excludable under section 7(e)(1) through (8) of the Act.
                 (b) The application of the principles in paragraph (a) of this
                section may be illustrated by the case of an employee whose hours of
                work do not customarily follow a regular schedule but vary from week to
                week, whose work hours never exceed 50 hours in a workweek, and whose
                salary of $600 a week is paid with the understanding that it
                constitutes the employee's compensation (apart from overtime premiums
                and any bonuses, premium payments, or other additional pay of any kind
                not excludable from the regular rate under section 7(e)(1) through (8))
                for all hours worked in the workweek.
                 (1) Example. If during the course of 4 weeks this employee works
                37.5, 44, 50, and 48 hours, the regular rate of pay in each of these
                weeks is $16, $13.64, $12, and $12.50, respectively. Since the employee
                has already received straight time compensation for all hours worked in
                these examples, only additional half-time pay is due. For the first
                week the employee is owed $600 (fixed salary of $600, with no overtime
                hours); for the second week $627.28 (fixed salary of $600, and 4 hours
                of overtime pay at half times the regular rate of $13.64 for a total
                overtime payment of $27.28); for the third week $660 (salary
                compensation of $600, and 10 hours of overtime pay at half times the
                regular rate of $12 for a total overtime payment of $60); for the
                fourth week $650 (fixed salary of $600, and 8 overtime hours at half
                times the regular rate of $12.50 for a total overtime payment of $50).
                 (2) Example. If during the course of 4 weeks this employee works
                37.5, 44, 50, and 48 hours and 4 of the hours the employee worked each
                week were nightshift hours compensated at a premium rate of an extra $5
                per hour, the employee's total straight time earnings would be $620
                (fixed salary of $600 plus $20 of non-overtime premium pay for the 4
                nightshift hours). In this case, the regular rates of pay in each of
                these weeks is $16.53, $14.09, $12.40, and $12.92, respectively, and
                the employee's total compensation would be calculated as follows: For
                the first week the employee is owed $620 (fixed salary of $600 plus $20
                of non-overtime premium pay, with no overtime hours); for the second
                week $648.20 (fixed salary of $600 plus $20 of non-overtime premium
                pay, and 4 hours of overtime at half times the regular rate of $14.09
                for a total overtime payment of $28.20); for the third week $682 (fixed
                salary of $600 plus $20 of non-overtime premium pay, and 10 hours of
                overtime at half times the regular rate of $12.40 for a total overtime
                payment of $62); for the fourth week $671.68 (fixed salary of $600 plus
                $20 of non-overtime premium pay, and 8 hours of overtime at half times
                the regular rate of $12.92 for a total overtime payment of $51.68).
                 (3) Example. If during the course of 4 weeks this employee works
                37.5, 44, 50, and 48 hours and the employee received a $100
                productivity bonus each week, the employee's total straight time
                earnings would be $700 (fixed salary of $600 plus $100 productivity
                bonus). In this case, the regular rate of pay in each of these weeks is
                $18.67, $15.91, $14, and $14.58, respectively, and the employee's total
                compensation would be calculated as follows: For the first week the
                employee is owed $700 (fixed salary of $600 plus $100 productivity
                bonus, with no overtime hours); for the second week $731.84 (fixed
                salary of $600 plus $100 productivity bonus, and 4 hours of overtime at
                half time the regular rate of $15.91 for a total overtime payment of
                $31.84); for the third week $770 (fixed salary of $600 plus $100
                productivity bonus, and 10 hours of overtime at half times the regular
                rate of $14, for a total overtime payment of $70); for the fourth week
                $758.32 (fixed salary of $600 plus $100 productivity bonus, and 8 hours
                of overtime at half times the regular rate of $14.58 for a total
                overtime payment of $58.32).
                 (c) Typically, the salaries described in paragraph (a) of this
                section are paid to employees who do not customarily work a regular
                schedule of hours and are in amounts agreed on by the parties as
                adequate compensation for long workweeks as well as short ones, under
                the circumstances of the employment as a whole. Where the conditions
                for the use of the fluctuating workweek method of overtime payment are
                present, the Act, in requiring that ``not less than'' the prescribed
                premium of 50 percent for overtime hours worked be paid, does not
                prohibit paying more. On the other hand, where all the facts indicate
                that an employee is being paid for overtime hours at a rate no greater
                than that which the employee receives for nonovertime hours, compliance
                with the Act cannot be rested on any application of the fluctuating
                workweek overtime formula.
                [FR Doc. 2019-23860 Filed 11-4-19; 8:45 am]
                BILLING CODE 4510-27-P
                

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