Fluctuating Workweek Method of Computing Overtime
| Published date | 08 June 2020 |
| Citation | 85 FR 34610 |
| Record Number | 2020-10872 |
| Section | Rules and Regulations |
| Court | Labor Department,Wage And Hour Division |
Federal Register, Volume 85 Issue 110 (Monday, June 8, 2020)
[Federal Register Volume 85, Number 110 (Monday, June 8, 2020)]
[Rules and Regulations]
[Pages 34610-34633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10872]
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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: Final rule.
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SUMMARY: The Department of Labor (the Department) is revising its
regulation for computing overtime compensation of salaried nonexempt
employees who work hours that vary each week (fluctuating workweek)
under the Fair Labor Standards Act (FLSA or the Act). The final rule
clarifies 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 Department also adds examples
and makes minor revisions to make the rule easier to understand.
DATES: This final rule is effective on August 7, 2020.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director, 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; telephone: (202) 693-0406 (this is not a
toll-free number). Copies of this final 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 log onto WHD's website for a nationwide listing of WHD
district and area offices at http://www.dol.gov/whd/america2.htm.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
Section 7(a) of the FLSA requires employers to pay their nonexempt
employees overtime pay of at least ``one and one-half times the regular
rate at which [the employee] is employed'' for all hours worked in
excess of 40 in a workweek. 29 U.S.C. 207(a). In other words, for each
hour over 40 an employee works in a workweek, the employee is entitled
to straight-time compensation at the regular rate and an additional 50
percent of the regular rate for that hour. Where an employee receives a
fixed salary for fluctuating hours, an employer may use the
``fluctuating workweek method'' to compute overtime compensation owed,
if certain conditions are met. 29 CFR 778.114.
Under current 29 CFR 778.114, an employer may use the fluctuating
workweek method if the employee works fluctuating hours from week to
week and receives, pursuant to a clear and mutual understanding with
the employer, a fixed salary as straight time compensation 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,'' the regular rate ``is determined by
dividing the number of hours worked in the workweek into the amount of
the salary,'' and 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 overtime hour. 29 CFR 778.114(a).
Because the employee's hours of work fluctuate from week to week, the
regular rate must be determined separately each week based on the
number of hours actually worked each week. Id.
The payment of additional bonus and premium payments on top of the
fixed salary to employees compensated under the fluctuating workweek
method has presented challenges to employers and the courts alike, as
set forth in more detail below. In the Notice of Proposed Rulemaking
(NPRM), the Department proposed to clarify that bonus payments, premium
payments, and other additional pay are consistent with the use of the
fluctuating workweek method of compensation. See 84 FR 59590, 59591
(Nov. 5, 2019). Such supplemental payments and the fixed salary provide
straight-time compensation for all hours worked and the regular rate is
determined by dividing that amount by the hours worked in the workweek.
Additional bonuses or premium 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 an 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). The preamble to the 2011 final
rule further stated, for the first time in rulemaking by the
Department, that all straight-time bonus and premium payments were
incompatible with the fluctuating workweek method, while maintaining
that the preamble ``restore[d] the current rule.'' The decision in that
rulemaking not to make any substantive changes to the regulatory text,
however, caused courts to interpret the 2011 final rule in different
ways and to reach 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 considered anew the need for
a clarification, particularly in light of the 2011 final rule and its
interpretation by courts, now finds the reasons articulated in 2011 to
be unpersuasive, and is therefore finalizing revisions that are
substantially similar to those initially proposed in 2008.
Specifically, the Department is adding 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 is also adding examples to Sec.
778.114(b) to illustrate the fluctuating workweek method of calculating
overtime where an employee is paid (1) a nightshift differential, (2) a
productivity bonus in
[[Page 34611]]
addition to a fixed salary, and (3) premium pay for weekend work. The
Department is further making non-substantive revisions to Sec.
778.114(a) and (c) that were not proposed in the 2008 NPRM to enhance
clarity. Specifically, revised Sec. 778.114(a) will now list each of
the requirements for using the fluctuating workweek method, while
duplicative text is being removed from revised Sec. 778.114(c).
Finally, the Department is changing the title of the regulation from
``Fixed salary for fluctuating hours'' to ``Fluctuating Workweek Method
of Computing Overtime.''
The Department also believes that this rule will allow employers
and employees to better utilize flexible work schedules. This is
especially important as workers return to work following the COVID-19
pandemic. Some employers are likely to promote social distancing in the
workplace by having their employees adopt variable work schedules,
possibly staggering their start and end times for the day. This rule
will make it easier for employers and employees to agree to unique
scheduling arrangements while allowing employees to retain access to
the bonuses and premiums they would otherwise earn.
This final rule is an Executive Order (E.O.) 13771 deregulatory
action. Details on the estimated reduced burdens and cost savings of
this final rule can be found in the rule's economic analysis.
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs has designated this
rule as a ``major rule'' as defined by 5 U.S.C. 804(2).
II. Background
A. Principles of Computing Overtime Pay Based on the Regular Rate
Section 7(a) of the FLSA requires employers to pay their nonexempt
employees overtime premium pay of at least ``one and one-half times the
regular rate at which [the employee] is employed'' for all hours worked
in excess of 40 in a workweek. 29 U.S.C. 207(a). The regular rate is
computed for each workweek and is defined as ``all remuneration for
employment,'' save for eight statutory exclusions, divided by the
number of hours worked. 29 U.S.C. 207(e); see also Bay Ridge Operating
Co. v. Aaron, 334 U.S. 446, 458 (1948) (stating that the ``regular rate
must be computed by dividing the total number of hours worked into the
total compensation received'').\1\ For each hour over 40 an employee
works in a workweek, the employee is entitled to straight time
compensation at the regular rate and an additional 50 percent of the
regular rate for that hour. See, e.g., Walling v. Youngerman-Reynolds
Hardwood Co., 325 U.S. 419, 423-24 (1945). Dividing non-excludable
remuneration by hours worked is the only proper method to compute the
regular rate and the Department's regulations at Sec. Sec. 778.110-
778.115 ``give some examples of the proper method of determining the
regular rate of pay in particular instances.'' 29 CFR 778.109.\2\
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\1\ The preamble to the Department's 2019 rulemaking concerning
``Regular Rate under the Fair Labor Standards Act'' discusses in
greater detail the legislative and regulatory history of the regular
rate. See 84 FR 68736, 68737-39 (Dec. 16, 2019).
\2\ Total non-excludable remuneration is divided by all hours
worked to determine the regular rate where all hours worked have
been compensated. This will always be the case under the fluctuating
workweek method because the fixed salary covers all hours worked
and, when combined with non-excludable bonuses and premiums,
constitutes all straight time pay. When an employee is paid a salary
for fixed hours, however, the salary is divided by the hours that it
covers, not the total hours worked, and additional straight time is
due for any additional hours, as well as any overtime premium. 29
CFR 778.113. Similarly, if an employee who is paid hourly, for
example, has worked uncompensated hours, the uncompensated hours are
not included in determining the regular rate and the employee is
owed their regular rate for the uncompensated hours as well as any
overtime premium. See 29 CFR 778.109 (regular rate is non-excludable
remuneration divided ``by the total number of hours actually worked
by [the employee] in that workweek for which such compensation was
paid'') (emphasis added).
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One of the examples is Sec. 778.114, which concerns instances
where the employee is paid a fixed salary that is understood to be
compensation for a variable number of hours worked each week, whether
few or many, as opposed to a specific number of hours. The regular rate
equals the quotient of the weekly salary and the number of hours worked
and necessarily changes as the number of hours vary week to week. For
each overtime hour worked, the employee is entitled to straight-time
pay plus an additional 50 percent of the regular rate as an overtime
premium. Because the weekly salary is compensation for all hours worked
in a workweek, the employee would have already received straight-time
pay for any overtime hours worked, so he or she is entitled to
additional compensation at one-half of the regular rate for overtime
hours. This method of computing overtime pay is the subject of this
rulemaking and is known as the fluctuating workweek method.
The fluctuating workweek method is not the only such example where
additional overtime compensation is properly computed as one-half the
regular rate because the straight time portion of the required ``one
and one-half times the regular rate'' has already been paid. This
method of computation is also appropriate where an employee is
compensated through piece rate, job rate, or day rate arrangements.
Section 778.110 concerns instances where the employee is paid an
hourly wage. If an hourly wage were the sole component of compensation,
the regular rate would simply be the hourly wage. 29 CFR 778.110(a).
Compensation for each overtime hour would equal one times the hourly
rate as straight-time pay plus an additional one-half times the hourly
rate, for a total of ``one and one-half times the regular rate.'' 29
U.S.C. 207(a).
Section 778.111 concerns instances where the employee is paid on a
piece rate basis plus an hourly premium for time spent waiting. In
Sec. 778.111(a)'s scenario, the regular rate for each week is computed
by adding piece rate compensation to the total waiting premium and then
dividing that sum by the number of hours worked. This constitutes the
employee's straight time pay and ``[o]nly additional half-time pay is
required'' for overtime hours worked. 29 CFR 778.111.\3\
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\3\ Section 778.111(b) further provides that, for any workweek
in which a piece rate employee receives an hourly guarantee in lieu
of the piece rate compensation, the regular rate is equal to the
guaranteed hourly rate.
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Section 778.112 concerns instances where the employee is paid a
flat amount for a day's work or a specific job, regardless of how many
hours were actually worked on a particular day or for a particular job.
The regular rate is computed as the sum of all day rate or job rate
compensation in a workweek divided by the total number of hours worked.
As with piece rate pay, this constitutes straight-time pay for all
hours worked. Accordingly, the employee ``is then entitled to extra
half-time pay at this [regular] rate for all hours worked in excess of
40 in the workweek.'' 29 CFR 778.112.
Section 778.113 concerns instances where the employee is paid a
salary for a specific number of hours each week. In this scenario, the
salary can be expressed as a constant hourly rate equal to the salary
amount divided by the specific number of hours that the salary is
intended to compensate.\4\ Since the salary covers a specific number of
hours, and not all hours in a workweek, it would not cover straight-
time compensation for hours in excess of that specific number,
including any such
[[Page 34612]]
overtime hours. Accordingly, the employee must receive straight-time
pay at the regular rate in addition to one-half of the regular rate as
overtime premium for each such overtime hour.
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\4\ If the salary covers a period longer than a week, an hourly
rate can still be computed by dividing the salary by the number of
hours covered in the period, whether that is a month, a year, or
something else.
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Finally, Sec. 778.115 concerns instances where an employee
receives straight-time pay at multiple different rates in the same
workweek. In such cases, the ``regular rate for that week is the
weighted average of such rates'' and the employee is entitled to
additional half-time for overtime hours. 29 CFR 778.115.\5\
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\5\ Under certain circumstances, an employer may also pay
overtime to an employee who is employed at two different rates ``at
a rate not less than one and one-half times the hourly nonovertime
rate established for the type of work [the employee] is performing
during such overtime hours.'' 29 CFR 778.419(a); see 29 U.S.C.
207(g)(2).
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These examples all apply the same fundamental principle for
computing the regular rate: The regular rate for each workweek is
calculated by dividing non-excludable remuneration by the number of
hours worked. They also apply the same fundamental principle for
computing overtime pay: Overtime pay for each hour worked above 40 is
equal to straight-time pay for that hour plus an additional 50 percent
of the regular rate as overtime premium. With these examples and
principles in mind, the Department turns to the background specific to
the fluctuating workweek method of computing overtime pay under Sec.
778.114.
B. History of the Fluctuating Workweek Method
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 Overnight Motor
Transp. Co., v. Missel, 316 U.S. 572, 580 (1942). 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.\6\ 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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\6\ As discussed above, 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 nonexempt 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)).\7\ 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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\7\ Note that Belo concerned a different type of flexible pay
agreement, now codified under section 7(f) of the FLSA, under which
an employee was paid on an hourly basis with a guaranteed weekly
sum. The Department cites Belo here only 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. To the
contrary, as explained more fully below, in both the 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 adds 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 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 FLSA,
in requiring that `not less than' the prescribed premium of 50 percent
for overtime hours worked be paid, does not prohibit paying more.'' \8\
As another example, courts have applied and endorsed the fluctuating
workweek method when employees received additional bonus payments. 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.'')); Black v. Comdial Corp., Civ. A. No. 92-O81-C, 1994
WL 70113, at *5 (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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\8\ 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 therefore, any extra
compensation would violate this ``fixed amount'' requirement. Id.
(quoting 29 CFR 778.114(a)).
[[Page 34613]]
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 understood to
compensate them for a specific--rather than fluctuating--number of
hours each week. Id. However, the Department's brief did not address
whether bonus pay beyond the ``fixed amount'' required was incompatible
with the fluctuating workweek method.\9\
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\9\ 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 v. Putnam Assocs. Inc., 173 F.3d 35, 39 (1st
Cir. 1999); Martin v. Tango's Restaurant, 969 F.2d 1319, 1324 (1st
Cir. 1992)). Section 778.113 should be used to compute overtime owed
based on the regular rate where a fixed salary is understood to
cover a certain number of hours. 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 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, 1994 WL 70113, at *2 (``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,\10\ while
others continued to hold that bonuses were compatible with that
method.\11\ These inconsistent decisions appeared to have created
practical confusion for employers.
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\10\ 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).
\11\ 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 43656, 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. Id. at
18853. 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.'' Id. 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.'' Id.
The 2011 preamble's reference to the ``current rule'' appears to
have generated further confusion among the 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 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, as explained in the NPRM, 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
[[Page 34614]]
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 explained in the NPRM, the divergent views of the Department and
the courts--and even among courts--have created considerable
uncertainty for employers regarding the compatibility of various types
of supplemental pay with the fluctuating workweek method. As discussed
below, comments received from several commenters support this
assessment and document the confusion. 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. The Department is therefore issuing this final rule to
clarify that bonus and premium payments (whether hours-based,
production-based, or other) are compatible with the use of the
fluctuating workweek method of compensation.
C. The Department's Proposal
On November 5, 2019, the Department issued an NPRM proposing to
revise its existing regulation at Sec. 778.114(a) to clarify 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). See 84
FR at 59591. The NPRM further proposed to add 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. Id. The Department also proposed
simplifying revisions Sec. 778.114 by listing each required
circumstance for the fluctuating workweek method to correctly compute
overtime pay and removing duplicative text from revised Sec.
778.114(c). Id. Finally, the Department proposed 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. Id.
Approximately 36 individuals and organizations commented on the
NPRM during the 30-day comment period that ended on December 5, 2019.
The Department received comments from a diverse array of
constituencies, including individual employees, employer and industry
associations, employee advocacy groups, non-profit organizations, law
firms, professional associations, and other interested members of the
public. Many of the commenters supported the Department's efforts to
clarify the fluctuating workweek regulation, while other commenters
opposed the proposed rule. All timely comments received may be viewed
on www.regulations.gov, docket ID WHD-2019-0006. The Department has
carefully considered the timely-submitted comments on the proposed
changes.
The Department received a few comments that are beyond the scope of
this rulemaking, such as requests to raise the federal minimum wage.
The Department does not have authority to effectuate such a statutory
change and therefore did not consider doing so as part of the proposed
rule. This final rule does not address comments that are out of scope
of this rulemaking.
Significant issues raised in the comments on the Department's
proposal are discussed below, along with the Department's response to
those comments.
III. Final Regulatory Revisions
The Department is finalizing its proposal to revise and update the
regulation at Sec. 778.114 to 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 sections below discuss, in turn, the major issues raised by
commenters and the Department's responses.
A. Section 778.114 Is an Example of Computing Overtime Pay Based on the
Regular Rate
The NPRM proposed to revise Sec. 778.114(a) to state that ``[t]he
fluctuating workweek method may be used to calculate overtime
compensation for a nonexempt employee if the [listed] conditions are
met[.]'' 84 FR 59602. The purpose of the revision was to provide a list
of conditions which, if present, ensure that overtime pay is correctly
computed under the FLSA. But the proposed revision appears to have
created, or at least did not dispel, the misconception that the
fluctuating workweek method deviates from the standard ``one and one-
half times'' overtime payment obligation under the FLSA. Some
commenters, for instance, characterized the fluctuating workweek method
as an ``exception'' or ``alternative'' to the overtime premium
requirement. See, e.g., Center for Workplace Compliance (CWC), National
Employment Lawyers Association (NELA), National Employment Law Project
(NELP).
Other commenters observed that the fluctuating workweek method in
Sec. 778.114 is merely an example of how to compute the regular rate
and overtime compensation in certain circumstances. The U.S. Chamber of
Commerce (Chamber) requested that the Department ``make clear that
[Sec. ] 778.114 (like the other examples in the interpretive bulletin
of which it is a part) merely provides an example of how to calculate
overtime in the particular circumstances described in the example.''
Associated Builders and Contractors (ABC) similarly urged the
Department ``to clarify that examples given in the final rule are just
that: examples.'' The Chamber further requested that the Department
clarify that, because the fluctuating workweek method in Sec. 778.114
merely provides an example, it ``does not impose any restrictions,
conditions, or limitations on the `wages divided by hours' approach to
calculating the regular rate and the resulting overtime premium.'' See
also ABC at 3 (``The department should make clear that examples given
do not impose limitations, restrictions or other conditions on applying
the overtime calculation.'').
The Department agrees that Sec. 778.114 is an example of how to
properly compute overtime compensation based on the regular rate.
Section 778.109 states, ``The following sections give some examples of
the proper method of determining the regular rate of pay in particular
instances,'' and Sec. 778.114 is one of these examples. See Allen v.
Bd. of Pub. Educ. for Bibb Cty., 495 F.3d 1306, 1313 (11th Cir. 2007)
(``[R]eading section 778.115 in the context of section 778.109, it
becomes apparent that the former is one of the examples mentioned in
the latter as a way that the regular rate may be calculated in certain
cases.''). The Department briefly discussed these examples in the
background section of this preamble, to make clear that the fluctuating
workweek method under Sec. 778.114 is merely one of several examples
of how to properly compute the regular rate and overtime pay to satisfy
the FLSA's statutory pay requirements.
As an example of correct computation of overtime pay based on the
regular rate, Sec. 778.114 cannot impose
[[Page 34615]]
requirements that are inconsistent with overtime pay requirements under
the FLSA. See Allen, 495 F.3d at 1312. That said, Sec. 778.114 can
impose restrictions that are consistent with how overtime pay is
computed under the FLSA. When an employee is paid a fixed salary as
straight-time compensation for all hours worked and then receives a
bonus, the fluctuating workweek method described in Sec. 778.114
correctly computes the regular rate and overtime owed under the FLSA.
For the foregoing reasons, the Department is clarifying that the
fluctuating workweek method under Sec. 778.114 is just one example of
how to properly compute overtime pay owed under the FLSA in the
circumstances described therein. To make this point clearer, the
Department is revising Sec. 778.114(a) to state: ``An employer may use
the fluctuating workweek method to properly compute overtime
compensation based on the regular rate for a nonexempt employee under
the following circumstances: . . .''
B. Circumstances Where an Employer May Use the Fluctuating Workweek
Method To Compute Overtime Pay
Proposed Sec. 778.114(a)(1) through (5) lists five circumstances
which, if all are met, enable an employer to use the fluctuating
workweek method to properly compute the regular rate and overtime pay
owed under the FLSA. Each of these circumstances is discussed below.
1. Hours That Fluctuate From Week to Week
Current Sec. 778.114(a) states that the fluctuating workweek
method is appropriate where, inter alia, an employee ``ha[s] hours of
work which fluctuate from week to week.'' The NPRM proposed to retain
this requirement in Sec. 778.114(a)(1), which lists ``the employee
works hours that fluctuate from week to week'' as a condition that must
be met. 84 FR at 59602.
Some commenters, such as Jackson Lewis, expressed concern that the
NPRM did not specify whether the employee's fluctuation in hours worked
per week could involve any range of hours or whether the hours worked
must sometimes fluctuate below forty hours in the workweek. Although
neither the current nor the proposed regulatory language require an
employee's hours to sometimes fluctuate below forty hours per week,
commenters pointed out that there has been uncertainty about this
point. Commenters requested that the Department clarify that employers
are able to use the fluctuating workweek method even for employees
whose hours worked rarely, if ever, go below forty in the workweek.
The Department has long held the position that there is no
requirement that the employee's hours of work must fluctuate below
forty hours per week. The Department has consistently stated that the
fluctuating workweek method remains appropriate even when it is only
the number of overtime hours that fluctuate. See WHD Opinion Letter
FLSA (October 27, 1967) (``There is no requirement that the hours of
work of an employee compensated on the fluctuating workweek basis
fluctuate above and below 40 hours in a workweek as there is for
employees employed pursuant to section 7(f) (formerly section 7(e)) of
the Act.''); WHD Opinion Letter FLSA2009-3, 2009 WL 648995 (Jan. 14,
2009) (stating that the fluctuating workweek method can be used to
compute back wages for workers whose hours fluctuated, but who were
generally expected to work a minimum of fifty hours per week).
Moreover, although a few courts have held that an employee's hours
must fluctuate below forty hours per week before his or her overtime
can be computed using the fluctuating workweek method,\12\ courts have
more frequently found that the fluctuating workweek method does not
actually require that the employee's hours fluctuate below forty hours.
See, e.g., Aiken v. County of Hampton, 172 F.3d 43, 1998 WL 957458, at
*3 (4th Cir. 1998) (unpublished) (holding that an employer can use the
fluctuating workweek method when the employee reliably works a base
number of hours over forty per week, so long as the number of overtime
hours per week fluctuate); Condo v. Sysco Corp., 1 F.3d 599, 602 (7th
Cir. 1993) (stating that the employer may use the fluctuating workweek
method when an employee's hours fluctuate above but not below forty
hours per week); Mitchell v. Abercrombie & Fitch Co., 428 F. Supp. 2d
725, 735 (S.D. Ohio 2006), aff'd 225 F. App'x 362 (6th Cir. 2007) (per
curiam) (finding no support for the argument that an employee's hours
must fluctuate both above and below forty hours per week for the
fluctuating workweek method to be used); Ramos v. Telegian Corp., 176
F. Supp. 3d 181, 195 (E.D.N.Y. Mar. 31, 2016) (holding that the
fluctuating workweek regulation does not require or even suggest a
requirement that an employee's hours fluctuate both above and below
forty in the workweek).
---------------------------------------------------------------------------
\12\ See, e.g., Blotzer v. L-3 Comms. Corp., No. CV-11-274-TUC-
JGZ, 2012 WL 6086931, at *12 (D. Ariz. Dec. 6, 2012); Hasan v. GPM
Investments, LLC, 896 F. Supp. 2d 145, 150 (D. Conn. 2012); Costello
v. Home Depot USA, Inc., 944 F. Supp. 2d 199, 208 (D. Conn. 2013).
---------------------------------------------------------------------------
Having reviewed and considered the comments, the Department is
adopting its proposed regulatory language regarding the requirement
that an employee must receive a fixed salary that does not vary with
the number of hours worked in the workweek, whether few or many, for
the fluctuating workweek method to be applicable. To prevent any
further misunderstanding, however, the Department is also clarifying
that the regulation does not require that an employee's hours must
sometimes fluctuate below forty hours per week, so long as the
employee's hours worked do vary.
2. Fixed Salary That Does Not Vary With the Number of Hours Worked
Section 778.114(a) currently provides that, in order for an
employer to calculate overtime pay pursuant to the fluctuating workweek
method, the employee must be paid a ``fixed salary . . . for the hours
worked each workweek, whatever their number.'' 29 CFR 778.114(a). The
regulation also requires employers using the fluctuating workweek
method to pay the guaranteed salary even where ``the workweek is one in
which a full schedule of hours is not worked.'' 29 CFR 778.114(c). The
NPRM proposed to modify the current regulation to clarify that
employers may pay bonuses, premium payments, and other additional pay
of any kind in addition to the fixed salary. See 84 FR 59602. The NPRM
did not propose, however, to substantively change the current
requirement that an employee must be paid a ``fixed salary''
representing compensation for all of the hours worked in the workweek.
The proposed regulatory text in the NPRM stated that one of the
conditions that must be satisfied in order to use the fluctuating
workweek method is that the employee be paid ``a fixed salary that does
not vary with the number of hours worked in the workweek.'' Id.
A few commenters, including ABC and the Chamber, requested that the
Department state in the final rule that the fluctuating workweek method
may be used as long as the employee is paid on a salary basis as
defined in 29 CFR 541.602. They asked the Department to replace the
current ``fixed salary'' requirement with, or to define the ``fixed
salary'' requirement by, reference to the salary basis test that is
used for the minimum wage and overtime exemption for executive,
administrative, and professional employees in section 13(a)(1) of the
FLSA. 29 U.S.C. 213(a).
[[Page 34616]]
The Chamber urged the adoption of the salary basis test as defined in
29 CFR 541.602 in the fluctuating workweek context so that employers
could make deductions from the ``fixed salary'' under the fluctuating
workweek method on the same basis that deductions are permitted under
part 541. The Wage & Hour Defense Institute (WHDI) similarly requested
that the Department provide in the final rule that deductions from the
salary for full days not worked (e.g., due to illness) are permissible
while using the fluctuating workweek method.
The Department has carefully considered these commenters' requests
to incorporate the salary basis definition and to allow the same types
of deductions permissible under part 541 from the ``fixed salary'' in
Sec. 778.114 and has determined not to adopt such a change at this
time. The Department has consistently rejected the argument that the
executive, administrative, and professional exemption's salary basis
requirements and the permitted deductions from salary set forth in
Sec. 541.602 should apply to the fluctuating workweek method. See,
e.g., FLSA2006-15 Opinion Letter, 2006 WL 1488849, at *1 (May 12,
2006); FLSA Opinion Letter, 1999 WL 1002415, at *1-2 (May 28, 1999);
FLSA Opinion Letter, 1991 WL 11648489, at *1 (Aug. 20, 1991). Adoption
of the part 541 salary basis requirements and permitted pay deductions
would be contrary to the Department's longstanding interpretation that
salary deductions for days or hours not worked are generally
incompatible with the payment of a ``fixed'' salary under the
fluctuating workweek method. See, e.g., FLSA2006-15 Opinion Letter,
2006 WL 1488849, at *1 (May 12, 2006); FLSA Opinion Letter, 1991 WL
11648489, at *1 (Aug. 20, 1991); FLSA Opinion Letter, 1983 WL 802650,
at *1 (Nov. 30, 1983); FLSA Opinion Letter, 1978 WL 388412, at *1 (Dec.
29, 1978).
As the Department has explained, ``[I]t is the longstanding
position of the Wage and Hour Division that an employer utilizing the
fluctuating workweek method of payment may not make deductions from an
employee's salary for absences occasioned by the employee.'' FLSA2006-
15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006). For example,
an employer using the fluctuating workweek method may not make
deductions from an employee's salary when the employee has exhausted
his or her sick leave bank or has not yet earned sufficient sick leave
to cover an absence due to illness. Id.; see also FLSA Opinion Letter,
1978 WL 388412, at *1 (Dec. 29, 1978) (explaining that deductions made
for ``excused absences, even for personal reasons (such as time off to
visit a relative who is ill) would be inconsistent'' with the
requirement in Sec. 778.114 that an employee be paid a full, ``fixed''
salary for any week in which he or she performs work).
The Department has for many years advised, however, that an
employer using the fluctuating workweek method of computing overtime
pay ``may take a disciplinary deduction from an employee's salary for
willful absences or tardiness or for infractions of major work rules,
provided that the deductions do not cut into the required minimum wage
or overtime compensation.'' FLSA2006-15 Opinion Letter, 2006 WL
1488849, at *1 (May 12, 2006) (emphasis added); see also FLSA Opinion
Letter, 1983 WL 802650, at *1 (Nov. 30, 1983) (same); WHD Field
Operations Handbook 32b04b(b) (same); Samson v. Apollo Resources, Inc.,
242 F.3d 629, 639 (5th Cir. 2001) (concluding that occasional
deductions from pay for willful absences or tardiness ``do not run
afoul of the guidelines governing the [fluctuating workweek] method'').
If such deductions are consistently or frequently made, however, then
``the practice of making such deductions would raise questions as to
the validity of the compensation plan.'' FLSA2006-15 Opinion Letter,
2006 WL 1488849, at *1 (May 12, 2006) (citing 29 CFR 778.306(b)); FLSA
Opinion Letter, 1983 WL 802650, at *1 (Nov. 30, 1983) (same).
Replacing the ``fixed salary'' requirement of the fluctuating
workweek method with the salary basis definition in Sec. 541.602,
thereby expanding the types of pay deductions that would be permissible
under Sec. 778.114, could have a significant effect on the scope and
applicability of the fluctuating workweek method. Because the request
to adopt the salary basis test and to permit new deductions not
previously recognized as compatible with the ``fixed salary''
requirement in the fluctuating workweek context would constitute a
significant change to the current regulation and the Department's
longstanding interpretation of that regulation, the Department would
want to solicit and carefully consider public comment on the issue
before adopting such a revision.
Accordingly, the Department declines to grant the request to apply
the salary basis requirements of Sec. 541.602 to Sec. 778.114 at this
time. The Department has, however, determined that it would be helpful
to the public to expressly incorporate in the regulation itself its
longstanding interpretation that employers using the fluctuating
workweek method may take occasional disciplinary deductions from an
employee's salary for willful absences or tardiness or for infractions
of major work rules, provided that the deductions do not cut into the
required minimum wage or overtime compensation. The Department has
therefore decided to add such clarifying language to the regulatory
text in Sec. 778.114(d).
3. The Fixed Salary Satisfies the Minimum Wage
Current Sec. 778.114(a) states that the fluctuating workweek
method is appropriate where, inter alia, ``the amount of the 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.'' 29 CFR 778.114(a). The NPRM included nearly identical text
in proposed Sec. 778.114(a)(3) as one of the circumstances that must
be met for using the fluctuating workweek method.
A few commenters noted that, because the regular rate falls as
hours increase under the fluctuating workweek method, in occasional
workweeks in which an employee works extremely high hours, the regular
rate may fall below the minimum wage, even where employers have
endeavored to ensure that the payment system generally is compliant
with minimum wage requirements. See, e.g., Chamber; ABC. These
commenters acknowledge that, in such situations, the employer would
violate the FLSA unless it provides additional payments to satisfy the
minimum wage. The commenters request, however, that the Department
clarify that an employer's intermittent need to provide supplemental
payments to ensure the minimum wage is met would not retroactively
invalidate the fluctuating workweek method. They further request that
the Department add language providing that the fixed salary need only
be ``reasonably calculated'' to provide compensation at a rate not less
than the applicable minimum wage.
After careful consideration, the Department has decided to adopt
the language as proposed. As the commenters acknowledge, in any given
workweek where the employee's fixed salary does not at least meet the
applicable minimum wage, the employer must make an additional payment
to bring the employee up to the applicable minimum wage. See WHD
Opinion Letter FLSA 945 (Feb. 6, 1969); WHD Opinion Letter FLSA (June
12,
[[Page 34617]]
1969); Cash, 2 F. Supp. 2d at 894. Therefore, the proposed regulation
maintains the requirement for the use of the fluctuating workweek
method that the fixed salary be sufficient to compensate the employee
for all hours worked at a rate not less than the applicable minimum
wage.
In explaining that the fixed salary must be sufficient to
compensate the employee at a rate not less than the minimum wage for
the fluctuating workweek method to be used, however, the proposed
regulatory language does not indicate that an occasional failure to
meet this requirement retroactively invalidates the use of the
fluctuating workweek method in previous workweeks or prevents the
employer from continuing to use the fluctuating workweek method for
that employee in subsequent workweeks. On the contrary, the Department
has already determined that where an employer has reasonably calculated
the fixed salary to cover at least the minimum wage for all hours
worked, an occasional workweek where the fixed salary does not at least
equal the applicable minimum wage, due to unusual and unforeseeable
circumstances, does not invalidate the use of the fluctuating workweek
method in other workweeks in which the salary equals or exceeds the
applicable minimum wage as anticipated. See WHD Opinion Letter FLSA-883
(Aug. 30, 1966) (stating that the employer ``must not only in fact
assure that no workweek will be worked in which the salary fails to
provide at least the current statutory minimum hourly rate of $1.25,
but the salary must also be so arranged that it is reasonably
calculated to provide for such a statutory minimum''); WHD Opinion
Letter FLSA (Feb. 6, 1969) (finding that ``the bona fides of the pay
plan will not fail solely on the grounds that in five weeks in an
annual period, due to unforeseen circumstances beyond the control or
the anticipation of the employer and employee, the salary failed to
provide at least the applicable statutory minimum hourly rate of
pay'').
The courts have also consistently held that the employer is not
prohibited from using the fluctuating workweek method in other
workweeks merely due to infrequent workweeks where the fixed salary did
not at least equal the minimum wage for all hours worked due to
unforeseen circumstances. See, e.g., Cash, 2 F. Supp. 2d at 894
(finding that the employer's use of the fluctuating workweek method was
still appropriate in most workweeks despite ``infrequent occasions when
unforeseen events cause the employee to work so many hours that her
salary fails to support an average hourly rate at least equal to the
applicable minimum wage''); Perez v. Radio Shack Corp., 2005 WL
3750320, at *5 (N.D. Ill. Dec. 14, 2005) (declining to conclude that
the employer should have foreseen that employees' hours worked would be
so high that their fixed salary would not cover the applicable minimum
wage in all workweeks, when all employees in the potential class
received less than the minimum wage approximately forty-nine times in a
four-year time period); Aiken, 172 F.3d 43, 1998 WL 957458, at *5-6
(according substantial weight to the Department's opinion letters that
suggest that ``making a minimum wage adjustment on five occasions in a
two-year period does not defeat the validity of the fluctuating
workweek plan,'' and concluding that employees are not entitled to any
additional compensation beyond the minimum wage straight time and
overtime adjustments they had already received for those workweeks);
Davis v. Friendly Exp., Inc., 2003 WL 21488682, at *2 (11th Cir. 2003)
(finding that an employer does not have to adopt another method of
computing overtime where the fixed salary did not at least equal the
applicable minimum wage for all hours worked in a few, isolated
workweeks due to unforeseen events).
The overall use of the fluctuating workweek method is thus not
invalidated by occasional and unforeseeable workweeks in which the
employee's fixed salary did not provide compensation to the employee at
a rate not less than the applicable minimum wage, so long as the fixed
salary was reasonably calculated to compensate the employee at or above
the applicable minimum wage in the foreseeable circumstances of the
employee's work. It is important to note, however, that the employer
will not be able to use the fluctuating workweek method in
circumstances where the employer could have foreseen that the
employee's salary would not at least equal the applicable minimum wage
in all workweeks, or where the employee's salary in fact did not at
least equal the applicable minimum wage with some degree of frequency.
In such circumstances, the employer and the employee must reach a new
understanding, either as to the number of hours that the employee is to
work or the amount of fixed salary to be paid, or the employer must use
a different method to compute overtime. See WHD Opinion Letter FLSA
(Feb. 6, 1969) (stating that the fluctuating workweek method ``would be
inapplicable where the employer could have foreseen or anticipated that
the salary would be insufficient to yield the minimum wage even in a
nominal number of workweeks such as five in an annual period''); WHD
Opinion Letter FLSA (June 12, 1969) (finding that ``the fact that the
employee's salary failed to equal the statutory minimum wage in as many
as 27 workweeks[ ] in one year would render moot any consideration that
such a situation could not have been anticipated . . . [and] to ensure
that his fluctuating workweek plan will be valid in the future, the
employer must reach a new understanding with the employee''); Davis v.
Friendly Exp., Inc., No. 02-14111, 2003 WL 21488682, at *2 (11th Cir.
2003) (per curiam) (``If, however, the need for a minimum wage
supplement becomes common, the fluctuating workweek calculation may not
apply unless the employer and the employee reach a new
understanding.''); Aiken, 172 F.3d 43, 1998 WL 957458, at *5 (rejecting
an employee's argument that an employer and employee must reach a new
understanding regarding the use of the fluctuating workweek method if
there is even a single workweek in which the employee's fixed salary
falls below the minimum wage, stating instead that the validity of such
a pay plan is defeated only if such workweeks are foreseeable or
frequent); Perez v. Radio Shack Corp., No. 02 C 7884, 2005 WL 3750320,
at *3 (N.D. Ill. Dec. 14, 2005) (``If the breaches become too common,
however, the employer must cease using the fluctuating workweek method
and reach a new understanding with the employee.'').
4. Clear and Mutual Understanding
In its current form, Sec. 778.114(a) provides that, to use the
fluctuating workweek method of computing overtime, an employer and
employee must, inter alia, possess ``a clear mutual understanding . . .
that the fixed salary is compensation (apart from overtime premiums)
for the hours worked each workweek, whatever their number, rather than
for working 40 hours or some other fixed weekly work period.'' 29 CFR
778.114(a). The current regulation further explains that the
fluctuating workweek method may not be used ``unless the employee
clearly understands that the salary covers whatever hours the job may
demand in a particular workweek and the employer pays the salary even
though the workweek is one in which a full schedule of hours is not
worked.'' 29 CFR 778.114(c).
The NPRM proposed to modify the current language regarding the
clear and mutual understanding requirement for readability and to
clarify that employers may pay bonuses, premium payments,
[[Page 34618]]
and other additional pay of any kind in addition to the fixed salary.
See 84 FR 59602. The NPRM did not, however, propose to substantively
change the current requirement that an employee and employer must
clearly understand that the fixed salary represents compensation for
all of the hours worked in the workweek, whether many or few. See id.
(proposing that the employee and employer must ``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'').
A few commenters, including the WHDI and Fisher Phillips, requested
that this clear and mutual understanding requirement be removed or
modified in the final rule. WHDI stated that, as previously interpreted
by the Department and courts, an employer is not required to prove an
employee's state of mind in order to satisfy this requirement. In other
words, WHDI asserted that the fluctuating workweek method ``is
established via objective evidence, not state of mind evidence'' and
thus the reference to a clear and mutual understanding between the
employer and employee is misleading and should be deleted. Fisher
Phillips similarly argued that the NPRM's proposed ``clear and mutual
understanding'' language would erroneously create a heightened
``requirement'' for use of the fluctuating workweek method. Fisher
Phillips requested that WHD simply use the term ``understanding'' to
avoid future litigation over the meaning of this provision.
The ``clear mutual understanding'' language has appeared in Sec.
778.114 since 1968. See 33 FR 986, 991 (Jan. 26, 1968). The
Department's longstanding position is that the mutual understanding
that must exist between the employer and employee is that the fixed
salary paid to the employee represents compensation for all the hours
worked in that workweek, however many or few. See, e.g., FLSA2009-3
Opinion Letter, 2009 WL 648995, at *2 (Jan. 14, 2009); FLSA Opinion
Letter, 1999 WL 1002399, at *1 (May 10, 1999). The clear and mutual
understanding requirement does not, however, extend to the specific
method used to compute the overtime pay. See FLSA2009-3 Opinion Letter,
2009 WL 648995, at *2 (Jan. 14, 2009). In other words, the current
regulation does not impose a requirement that the employee needs to
fully understand the precise payroll method by which his or her
overtime compensation is calculated. Id. Numerous courts have reached
the same conclusion in analyzing the current regulation. See, e.g.,
Garcia v. Yachting Promotions, Inc., 662 F. App'x 795, 797 (11th Cir.
2016) (per curiam) (``An employee does not have to understand every
contour of how the fluctuating workweek method is used . . . so long as
the employee understands that his base salary is fixed regardless of
the hours worked.''); Clements v. Serco, Inc., 530 F.3d 1224, 1230-31
(10th Cir. 2008) (same); Valerio v. Putnam Assocs. Inc., 173 F.3d 35,
40 (1st Cir. 1999) (``The parties must only have reached a `clear
mutual understanding' that while the employee's hours may vary, his or
her base salary will not.''); Bailey v. Cnty. of Georgetown, 94 F.3d
152, 156 (4th Cir. 1996) (``Neither [section 778.114] nor the FLSA in
any way indicates that an employee must also understand the manner in
which his or her overtime pay is calculated.''). The NPRM did not
propose to substantively modify this longstanding interpretation or to
create a new heightened requirement with respect to the nature of the
understanding that must exist between the parties.
The Department believes that the clear and mutual understanding
requirement is an important condition placed upon the usage of the
fluctuating workweek method. The commenters requesting deletion of this
requirement did not present evidence that courts, employers, or
employees are unduly challenged in understanding or applying the
requirement. Accordingly, the Department declines to substantively
modify its proposal to incorporate the existing clear and mutual
understanding requirement in the regulatory text. The Department has
decided, however, to add clarifying text in Sec. 778.114(a) to
emphasize that, although the parties must have a clear and mutual
understanding that the fixed salary is compensation for all hours
worked in the workweek, they need not possess such an understanding as
to the specific method used to calculate overtime pay.
5. Computing Overtime Pay Owed Under the Fluctuating Workweek Method
Proposed Sec. 778.114(a)(5) requires that ``[t]he 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.'' It further
clarifies that ``[p]ayment 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.'' Proposed Sec. 778.114(a)(5) also
revises the current rule's explanation of how the regular rate and
overtime pay would be computed under the fluctuating workweek method to
account for cases where the employee receives non-excludable
supplemental payments. Specifically, ``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'' and ``[p]ayment 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.'' 84 FR at 59602.\13\
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\13\ By comparison, current Sec. 778.114(a) states that ``the
regular rate of the employee will vary from week to week and is
determined by dividing the number of hours worked in the workweek
into the amount of the salary to obtain the applicable hourly rate
for the week'' and ``[p]ayment for overtime hours at one-half such
rate in addition to the salary satisfies the overtime pay
requirement because such hours have already been compensated at the
straight time regular rate, under the salary arrangement.'' 29 CFR
778.114(a).
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As discussed above, the fluctuating workweek method computes
overtime pay where an employee receives a weekly salary that is
understood to be compensation for all hours worked. Accordingly, Sec.
778.114 is an example of a scenario where additional overtime
compensation is properly computed as one-half the regular rate because
the straight-time portion of the required ``one and one-half times the
regular rate'' has already been paid. Any pay arrangement that provides
compensation for all hours worked in a workweek would cover the
straight-time portion of required overtime pay, leaving the need to pay
only an additional half-time premium for each overtime hour. See 29 CFR
778.111, 778.112. The fact that an employee received a bonus or premium
payment as part of such an arrangement would not negate the fact that
he or she has already received the straight-time portion of required
overtime pay as long at the additional payment is appropriately
included in the regular rate. In other words, payment of bonuses,
premiums, and other
[[Page 34619]]
additional pay under the fluctuating workweek method will not change
the half-time overtime calculation, as long as those payments are
appropriately included in the regular rate, because the employees will
have already received the straight-time due to them for all hours
worked, and only additional half-time needs to be computed for overtime
hours to comply with the FLSA.
For example, suppose an employee were paid $491 in fixed weekly
salary plus an $8 per hour nightshift premium. In a week in which the
employee works 50 hours, including 4 hours for which the employee
receives the nightshift premium, the employee's straight time pay is
$523 ($491 salary plus $32 nightshift premium), and the regular rate is
$10.46. The employer need only pay an additional $5.23, half time the
regular rate, for each of the 10 overtime hours, for a total of $52.30.
The payment of the $8 nightshift premium is reflected in this
fluctuating workweek method computation. The fluctuating workweek
method therefore correctly computes overtime pay owed under the FLSA
when an employee receives a fixed salary and hours based premiums that
compensate him or her for all hours worked. This is the same result as
would occur if the employee were paid, for example, on a piece rate
basis but also received additional pay for specific hours. See 29 CFR
778.111(a) (providing a regulatory example of payment of waiting time
in addition to piece rate and explaining that only additional half time
is due for overtime hours).
Many commenters welcomed the proposed clarification in Sec.
778.114(a)(5). According to the Society for Human Resource Management
(SHRM), ``employees and employers are best served by a system that
promotes maximum flexibility in structuring employee pay and benefits
and clarity for employers when preparing total compensation packages''
and the proposed clarification ``will provide much-needed clarity to
the regulated community.'' The Society of Independent Gasoline
Marketers of America (SIGMA) stated that ``[t]reating all such bonus
payments consistently will reduce employer confusion and regulatory
burdens and facilitate compliance with overtime rules.'' See also CWC,
World Floor Covering Association (WFCA).
Some of the commenters supporting the clarification in proposed
Sec. 778.114(a)(5) requested that the Department further clarify the
types of ``additional pay of any kind'' that would be compatible with
the fluctuating workweek method. SHRM requested that the Department
``specifically referenc[e] `commissions' as a permissible form of
additional pay. . . to eliminate any confusion over whether such
commission payments are compatible with the fluctuating workweek
method.'' As noted in the NPRM, the Department agrees that commissions
constitute a type of ``additional pay of any kind'' that would be
compatible with the fluctuating workweek method. See 84 FR at 59594
(``[e]xamples of `additional pay of any kind' may include
commissions'').\14\ Additionally, the Department believes hazard pay
also would be compatible with the fluctuating workweek method. Id. at
59601 (listing additional pay ``for hazard duty, graveyard shifts, and
so forth'' as types of premiums that would be permitted under this
final rule). Accordingly, the Department is revising the phrase ``any
bonuses, premium payments, or other additional pay of any kind'' in
proposed Sec. 778.114 to ``any bonuses, premium payments, commissions,
hazard pay, or other additional pay of any kind.''
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\14\ 29 CFR 778.117 (``Commissions (whether based on a
percentage of total sales or of sales in excess of a specified
amount, or on some other formula) are payments for hours worked and
must be included in the regular rate. This is true regardless of
whether the commission is the sole source of the employee's
compensation or is paid in addition to a guaranteed salary or hourly
rate, or on some other basis, and regardless of the method,
frequency, or regularity of computing, allocating and paying the
commission.'').
---------------------------------------------------------------------------
The WFCA requested that the Department restrict ``additional pay of
any kind'' that would not invalidate the fluctuating workweek method
``to what is ultimately included in the definition of the regular
rate.'' Such a restriction would imply that supplemental payments that
are excludable from the regular rate under section 207(e)--such as
overtime premiums under section 207(e)(5)-(7), or ``payments in the
nature of gifts made at Christmas time'' under section 207(e)(1)--would
invalidate the fluctuating workweek method. Such supplemental pay,
however, does not impact the employee's straight time compensation
because it is excludable from the regular rate. The Department has
never interpreted such payments as being inconsistent with the use of
the fluctuating workweek method of compensation.
The requested restriction would also have the effect of
discouraging employers using the fluctuating workweek method from
offering excludable supplemental pay. But as explained more fully in
the Department's recent rulemaking regarding the regular rate, 84 FR
68736, excludable payments such as on-site medical care, wellness
programs, and contributions to health and retirement plans, benefit
workers immensely. See 29 CFR 778.215, 778.224. The Department believes
such excludable remuneration should be encouraged and not discouraged.
As such, the Department declines to restrict the types of additional
pay that would be compatible with the fluctuating workweek method.
Several commenters objected to the proposed clarification that
``[p]ayment of bonuses, premium payments, and additional pay of any
kind is not incompatible with the fluctuating workweek method of
overtime payment'' and requested that the Department rescind the
proposed revisions to Sec. 778.114(a)(5). These commenters raised a
number of arguments, which the Department addresses below.
a.) Whether Use of the Fluctuating Workweek Method Is Consistent With
the Purpose of the FLSA
Comments submitted by NELA, NELP, Economic Policy Institute (EPI),
and 18 State Attorneys General (State AGs) contend that, by making it
easier for employers to use the fluctuating workweek method, the
proposed clarification in Sec. 778.114(a)(5) is contrary to the FLSA's
remedial purpose. For instance, NELA asserts that the proposed rule
would undermine ``the primary purposes of the FLSA's overtime
provisions,'' which are ``to protect workers from long hours of work
and to spread employment.'' See also NELP, EPI, State AGs.
As an initial matter, the Department emphasizes, as previously
discussed, that the fluctuating workweek method does not deviate from
the standard method of computing overtime pay under the FLSA. As has
always been clear in the regulatory text, because the employee has
received straight time compensation for all hours in the workweek, the
overtime payment obligation is met by payment of an additional one-half
the regular rate for all hours over 40 in the workweek.
Far from being contrary to the purpose of the FLSA's overtime
requirement, half-time overtime under the fluctuating workweek method
furthers that purpose. As the Supreme Court has explained, ``[B]y
increasing the employer's labor costs by 50% at the end of the 40-hour
week and by giving the employees a 50% premium for all excess hours,
Section 7(a) achieves its dual purpose of inducing the employer to
reduce the hours of work and to employ more men and of compensating the
employees for the burden of a long
[[Page 34620]]
workweek.'' Youngerman-Reynolds Hardwood, 325 U.S. at 423-24. The
Supreme Court has further warned against the ``flawed premise that the
FLSA pursues its remedial purpose at all costs.'' Encino Motorcars, LLC
v. Navarro, 138 S. Ct. 1134, 1142 (2018) (internal quotation marks
omitted). In this case, the FLSA pursues its remedial purpose in its
overtime requirement at a clearly defined cost: ``increasing the
employer's labor costs by 50% . . . for all [overtime] hours.''
Youngerman-Reynolds Hardwood, 325 U.S. at 423. That is precisely what
the fluctuating workweek method achieves. As such, the fluctuating
workweek method is consistent with the FLSA, and the Department
believes that any increased use of the method by employers in response
to this final rule will not conflict with the purposes of the Act.
b.) Whether the Final Rule Is Consistent With Supreme Court Precedent
In its comment, NELA states that the final rule is inconsistent
with the Supreme Court's decision in Missel, 316 U.S. 572. According to
NELA, ``the [Missel] Court held that an employer may pay a diminishing
half-time overtime premium only if the employee receives a fixed weekly
wage amount that never varies based on work performed.'' In support of
this conclusion, NELA stated that ``[n]owhere in Missel did the Court
consider, let alone authorize, the scenario of an employer paying a
fixed salary [plus] other variable hours-based compensation under a
half-time pay scheme.'' NELA further contended that the Missel Court
``directly answered'' the question of ``whether an employer can ever
pay any amount other than base salary while still availing itself of
[the fluctuating workweek method].'' The plaintiff in Missel received a
$2.50 per week allowance for supper money in addition to the fixed
salary, which NELA argued is a type of supplemental pay that does not
vary with respect to hours worked.\15\ According to NELA, since the
Missel Court permitted non-hours-based additional compensation under
the fluctuating workweek method provided that the employee's total
compensation was fixed in advance and guaranteed, it must also have
prohibited all hours-based additional compensation under that method.
See NELA (arguing that Missel held that additional compensation is
permitted under the fluctuating workweek method ``if (and only if) the
additional compensation amounts--like the base salary--are fixed and do
not vary based on the number or type of hours worked'').
---------------------------------------------------------------------------
\15\ The Department notes that the Supreme Court's opinion in
Missel made no mention of the allowance for supper money, which was
noted in the lower court opinions. The fixed salary amount
referenced in the Court's opinion, however, included the weekly
allowance. The Department also notes that under certain
circumstances supper money can be excluded from the regular rate. 29
CFR 778.217(b)(4).
---------------------------------------------------------------------------
The Department agrees with NELA that the Missel Court did not
consider the scenario where an employee receives hours-based
supplemental pay on top of a fixed salary, and so could not have
expressly authorized such payments under the fluctuating workweek
method. But for that same reason, the Missel Court could not have
precluded such payments. 84 FR at 59593 (``Missel did not even address
the issue of bonus or incentive payments beyond the fixed salary, let
alone preclude certain types of payments.''); see also Smith, 2011 WL
11528539, at *2 (``Nothing in Missel prohibits the use of the
fluctuating work week method for calculating [overtime owed] whenever
an employer gives a bonus to an employee.'').
The Department does not agree that the Missel Court's decision
means that all hours-based compensation must be forbidden. As NELA
conceded, Missel did not address hours-based compensation. As such, the
Court could not have ``directly answered'' any question concerning
hours-based supplemental pay. Therefore, Missel does not support NELA's
contention that a half-time overtime premium is appropriate ``only if
the employee receives a fixed weekly wage amount that never varies
based on work performed.''
c.) Whether the Final Rule Is Inconsistent With Other Legal Precedent
Several commenters, including NELP, argued that ``since Missel,
courts have consistently been clear in their application of the
[fluctuating workweek] rule. Under the [fluctuating workweek method],
the employer's regular rate of pay can vary only with the number of
hours worked per week, not the type of work performed during those
hours or any premiums paid for those hours.'' See also State AGs. These
commenters list several court cases holding that the fluctuating
workweek method is not compatible with hours-based bonuses. See, e.g.,
NELP; State AGs.
However, since Missel, courts have taken a wide range of approaches
regarding the payment of bonuses and premium payments under the
fluctuating workweek method and have not been consistent in their
application of the fluctuating workweek rule. For example, some courts
held that bonus and premium payments were permitted under the
fluctuating workweek method, and did not make the distinction between
hours-based and production-based payments that some courts later
developed. See, e.g., Cash, 2 F. Supp. 2d at 908 (applying fluctuating
workweek method where employee received incentive bonuses in addition
to fixed salary); Black, 1994 WL 70113, at *5 (applying fluctuating
workweek method where employee received straight-time bonuses for long
hours in addition to fixed salary). Conversely, other courts have
categorically prohibited such pay. See 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 because employee ``received
various bonus payments and commissions'').
In 2003, the First Circuit held that the fluctuating workweek
method may be used only where an employee receives a `` `fixed amount
as straight time pay for whatever hours [the employee] is called upon
to work in a workweek.' '' O'Brien, 350 F.3d at 288 (quoting 29 CFR
778.114(a)). Following O'Brien, and citing the 2011 final rule preamble
in their reasoning, some courts have developed a dichotomy that permits
production-based bonuses but prohibits hours-based bonuses under the
fluctuating workweek method. See Dacar, 914 F.3d at 926; Lalli, 814
F.3d at 10. The Department notes, however, that neither the
Department's regulations nor the FLSA distinguish between production-
based and hours-based bonuses. Further, and perhaps most importantly,
this legal precedent was based on the wording of the regulation prior
to this rulemaking, and was exacerbated by the unclear preamble
discussion in the 2011 final rule, both of which the Department is
addressing in this rulemaking.\16\
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\16\ NELP states in a footnote that courts issuing case law that
is inconsistent with the final rule ``have been interpreting Supreme
Court precedent, not the regulation.'' But, as explained above,
Supreme Court precedent does not directly address the compatibility
of bonus and premium payments with the fluctuating workweek method.
And the courts cited by NELP ground their analysis in the
Department's fluctuating workweek regulation. For instance, the
O'Brien court explained that ``the parties limit their arguments to
whether the compensation scheme . . . comports with the regulation,
and we confine ourselves to the same question.'' 350 F.3d 287 n.15.
---------------------------------------------------------------------------
As these divergent approaches demonstrate, and contrary to the
assertions of some commenters, the case law is neither consistent nor
clear. These inconsistent interpretations by
[[Page 34621]]
courts have created practical confusion and challenges for employers.
Comments received in this rulemaking document the confusion caused by
the judicially-developed distinction between productivity-based and
hours-based bonuses. See CWC (``Some courts have permitted additional
payments, others have prohibited them. S[t]ill other courts have drawn
distinctions between permitted and prohibited additional payments based
on the purpose of the payments. This widely divergent case law has
created a greater disincentive for employers to consider the
fluctuating workweek [method].''). One of the reasons for this
rulemaking is to clear up the confusion caused by the divergent case
law.
This final rule makes clear that permitting all supplemental pay
while using the fluctuating workweek method is consistent with how
overtime pay is computed based on the regular rate under the FLSA.
The Department recognizes that this clarification is inconsistent
with certain legal precedent, such as those cases that adhere to the
judicially-developed dichotomy between hours-based and productivity-
based bonuses.\17\ However, as discussed above, neither the
Department's regulations nor the FLSA distinguish between production-
and hours-based bonuses when computing the regular rate and overtime
pay. Indeed, this dichotomy lacks support and is in tension with all of
the Department's prior written guidance on the issue. The
clarifications provided in this preamble discussion and the
corresponding explicit revisions to the regulatory text will bring much
needed clarity regarding the compatibility of all types of bonuses with
the fluctuating workweek method to the courts, employers, and employees
alike.
---------------------------------------------------------------------------
\17\ Indeed, given courts' different approaches, no rule here
can be consistent with all the case law since Missel, and the
Department does not attempt to do so. Rather, the Department's
objective is to provide a rule that gives clear guidelines to
employers and employees.
---------------------------------------------------------------------------
d.) Whether the Final Rule Is Consistent With the Department's Prior
Position
NELA argues that the final rule is inconsistent with the
Department's prior position, particularly the position taken in the
2011 final rule. But as explained in the NPRM and below, it is not
clear what precise position was taken in that final rule. In fact, that
is the point of this rulemaking: to clarify the Department's position
on whether payments of bonuses and premiums are permissible under the
fluctuating workweek method.
Since 1968, the regulatory text of Sec. 778.114 has explained
that, under the fluctuating workweek method, ``[p]ayment for overtime
hours at one-half [the regular] rate in addition to the salary
satisfies the overtime pay requirement because such hours have already
been compensated at the straight time regular rate, under the salary
arrangement.'' In the 2008 NPRM, the Department proposed to clarify
that the payment of additional bonuses and premiums was compatible with
the fluctuating workweek method. This was because, as explained in the
2009 opinion letter, ``[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.''
In the 2011 final rule, the Department did not adopt the proposed
clarifying language to Sec. 778.114, and instead 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 clarifications 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.'' Id. Because the Department had stated clearly
in both the 2008 NPRM and the 2009 opinion letter that payment of
bonuses was permissible under the same regulatory language in Sec.
778.114 that the Department retained in the 2011 final rule, the
Department's reference to the ``current rule'' prohibiting such
payments was unclear. See 73 FR at 43662; WHD Opinion Letter FLSA2009-
24 (Jan. 16, 2009) (withdrawn Mar. 2, 2009). As explained in the
background section of this preamble, the apparent misalignment between
the 2011 preamble language and the substantively unchanged final
regulatory text created substantial confusion for the regulated
community. See CWC (``[S]tatements in the preamble to the [2011] final
rule . . . contributed to the growing confusion over how additional
compensation should be treated'' because ``while DOL did not publish
any substantive changes to its codified rules, it articulated an
explanation directly contrary to past practice.'').
Attempting to make sense of the 2011 final rule, the court in
Sisson concluded that the 2011 final rule actually ``present[ed] an
about-face'' that ``alters the DOL's interpretation.'' 2013 WL 945372,
at *6; Switzer, 2012 WL 3685978, at *4 (describing the Department as
having ``shifted course'' in the 2011 final rule). This interpretation,
however, ignores the ``restore the current rule'' language and the
unchanged regulatory text. The Wills court concluded that ``the status
quo was being maintained,'' but defined the status quo as then-emerging
case law permitting production-based bonuses while prohibiting hours-
based ones. 981 F. Supp. 2d at 262; see Lalli, 814 F.3d at 9 (``DOL's
decision to leave the regulation alone means that the bulletin would
have done nothing to change the federal courts' existing `treatment of
that precise issue''') (quoting Wills, 981 F. Supp. 2d at 252). Many
subsequent courts have affirmed the distinction between production-
based and hours-based bonuses. See, e.g., Dacar, 914 F.3d at 926;
Lalli, 814 F.3d at 8-10. But the Department has never endorsed the
distinction between hours-based bonuses and production-based bonuses.
In fact, as NELA points out, the Department's documented intent to file
an amicus curiae brief in support of the appeal of the Wills decision
evinces the Department's disagreement with Wills.
The Department's clarification in this final rule is consistent
with its interpretations in the 2008 NPRM and the 2009 opinion letter
and, importantly, is also consistent with the regulatory text as
reaffirmed in the 2011 rule, which explained that employers that paid a
fixed salary to employees whose hours fluctuated from week to week
would satisfy their overtime payment obligation by paying an additional
50 percent of the employee's regular rate for all overtime hours. The
Department's clarification in this final rule does not alter this
fundamental principle of overtime compensation. Instead, it clarifies
that the employee's straight time compensation may include bonus and
premium payments in addition to a fixed salary. In such situations,
where the regular rate includes all payments that are not excludable
under section 207(e)(1)-(8), the employer's overtime payment obligation
will be met by the payment of an additional 50 percent of the
employee's regular rate for all overtime hours. Thus the Department
does not agree that the current rule is inconsistent with its prior
positions.
e.) Whether the Inverse Relationship Between the Regular Rate and Hours
Worked Undermines the FLSA
Several commenters expressed concern that, under the fluctuating
[[Page 34622]]
workweek method, the regular rate decreases when hours increase. For
instance, the State AGs stated that the fluctuating workweek method of
calculating overtime ``is therefore the only method whereby the
employee's regular rate of pay and the employee's overtime rate of pay
actually decrease as the hours worked increase.'' These commenters
assert that this inverse relationship is in tension with the remedial
purposes of the FLSA's overtime requirement and harms workers paid
under that method. NELA, for example, stated that the inverse
relationship between the regular rate and hours worked ``provides a
strong financial incentive to employers to require ever more overtime
hours and to limit the number of employees.''
As discussed above, however, the fluctuating workweek method is not
the only method under which the regular rate decreases as hours worked
increase. For instance, the regular rate of an employee paid through a
day-rate arrangement under Sec. 778.112 is equal to the fixed day-rate
amounts per week divided by hours worked. Because the day rate does not
increase for longer work days, the regular rate necessarily falls as
hours worked increase. Thus, there is some degree of inverse
relationship between the regular rate and hours worked in every
overtime compensation example listed in Sec. Sec. 778.110-778.115
except where the employee is paid exclusively through an hourly rate,
in Sec. Sec. 778.110(a) and 778.113. Whenever an employee receives any
compensation in addition to or in lieu of hourly pay--such as a fixed
bonus, or a day rate--the regular rate likely would vary inversely with
hours worked. But that does not mean such compensation arrangements are
at odds with the FLSA. Indeed, it is a function of the FLSA's
definition of the regular rate as non-excludable compensation divided
by hours worked. Furthermore, nothing in this rule changes the basic
rules for calculating pay under the fluctuating workweek method,
including overtime. As such, any ``financial incentive'' to requiring
overtime work would remain the same as in the status quo.
The Department further disagrees that the inverse relationship
``provides a strong financial incentive to employers to require ever
more overtime hours and to limit the number of employees.'' NELA. While
the overtime premium per hour decreases as hours increase, the employer
must still pay an overtime premium that is designed to discourage
overtime work and spread employment, and the total amount of overtime
premium an employer owes continues to increase as hours increase.
The Department notes that the payment of hours-based bonuses to
employees compensated under the fluctuating workweek method--which this
final rule clarifies is permitted--may diminish or even eliminate the
inverse relationship between hours worked and the regular rate that
commenters find objectionable. Consider the compensation scheme in
Black, which the court upheld as compatible with the fluctuating
workweek method, see 1994 WL 70113, at *2, *5: The Employee was paid a
fixed salary for all hours worked in a workweek plus a straight-time
bonus for each hour worked in excess of 45. The bonus rate equals the
weekly salary divided by 40 (which equals 0.025 of the fixed weekly
salary per hour). If the employee works more than 45 hours, the regular
rate equals:
[GRAPHIC] [TIFF OMITTED] TR08JN20.004
Under this this compensation scheme, so long as the employee works
enough hours to receive the bonus, the regular rate would actually
increase for each additional hour of overtime work. For example, an
employee who works 50 hours and receives a fixed salary of $600 plus a
straight-time bonus of $15 for each hour worked in excess of 45 would
have a regular rate of $13.50. But if he or she works five additional
hours, the regular rate would rise to $13.63.
f.) Effects on Workers Who Switch to the Fluctuating Workweek Method
The proposed clarification in Sec. 778.114(a)(5) would make it
more attractive for employers to use the fluctuating workweek method,
so employers would be more likely to start using the method. While some
commenters welcomed greater regulatory clarity, others, including EPI,
State AGs, and NELP, expressed concern that when an employee switches
to being paid under the fluctuating workweek method, the ``employee . .
. will lose the time-and-a-half overtime premium.'' EPI; see also State
AGs, NELP. EPI further described how, in its view, a worker switched to
the fluctuating workweek method could face reduced earnings:
``Employers will . . . be unlikely to switch to the fluctuating
workweek method unless their employees tend to work more hours above
their usual hours than below their usual hours. That means workers
whose employers choose to switch to the fluctuating workweek method are
likely to receive lower earnings than they receive under the usual
method.''
The Department does not believe this scenario is likely to be
widespread, if it occurs at all. It is certainly true that an employer
theoretically could reduce an employee's overall earnings by switching
that employee from hourly pay to the fluctuating workweek method. But
the same employer could also reduce the employee's earnings by the
exact same amount by lowering the employee's hourly rate of pay. As
such, the ability to switch an employee to the fluctuating workweek
method should not make the employer more able or willing to reduce the
employee's earnings.
Such an employee would be agnostic as to the method behind an
earning reduction: Having the hourly wage reduced or being switched to
the fluctuating workweek method with an equivalently low salary would
both make the employee equally dissatisfied because the negative effect
on earnings is the same. Worker dissatisfaction may affect morale,
turnover, and other productivity factors. The employer would also be
agnostic: The employer's labor cost savings are the same and the
employee is equally dissatisfied. So the employer faces the same
tradeoff between labor costs savings, on one hand, and worker
dissatisfaction on the other. The Department therefore finds no reason
why the ability to switch an hourly worker to the fluctuating workweek
method (an ability already present without the new rule) would make an
employer any more able or willing to reduce the employee's earnings as
compared to simply reducing the hourly rate of pay.\18\
---------------------------------------------------------------------------
\18\ While this possibility was not raised by EPI, the
Department posits that some hourly employees may be willing to forgo
a small amount of earnings to be switched to the fluctuating
workweek method, perhaps because the employee prefers a fixed salary
to unstable hourly pay. In this instance, an employer could
theoretically switch the employee to the fluctuating workweek method
while reducing the employee's earnings by the exact amount the
employee was willing to forgo without having a net effect on the
employee's satisfaction. But the Department does not believe that
the employer could convince the employee to forgo the entire amount
he or she is willing to forgo because an employer's market power--
while often substantial--is rarely absolute. As long as the employee
has even a small degree of market power, the employee is likely to
forgo less earnings than he or she was willing to be switched to the
fluctuating workweek method, leaving the employee more satisfied
than before. This hypothetical scenario does not raise significant
worker welfare concerns because the end outcome reflects the
employee's preferences as much as the employers. Indeed, by the
terms of the hypothetical scenario, switching to the fluctuating
workweek method is guaranteed to leave the employee at least as
satisfied as before.
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[[Page 34623]]
As such, the Department believes employers switching hourly
employees to the fluctuating workweek method should not, on balance,
reduce workers' earnings. To the contrary, overall earnings are likely
to increase. As explained below, the final rule is likely to reduce
labor market inefficiency, i.e., deadweight loss, by reducing
employers' need to manage the hours of employees who are switched to
the fluctuating workweek method and enabling employers to incentivize
work not presently being performed. The benefit of this deadweight loss
reduction will be distributed among both capital and labor factors,
meaning that, on average, employers' profits and workers' earnings will
both rise. See SHRM (``employees and employers are best served by a
system that promotes maximum flexibility in structuring employee pay
and benefits'').
g.) Effects on Workers Paid Under the Fluctuating Workweek Method
Several commenters, including State AGs and NELA, expressed concern
that the final rule would encourage employers to shift the compensation
of employees already being paid under the fluctuating workweek method
away from the fixed salary and towards bonuses and premiums. The NPRM
expressly considered this possibility, which was also raised in the
2011 final rule, but ultimately concluded that any compensation
shifting would not be significant. The Department's conclusion in this
regard relied on 2019 Bureau of Labor Statistics (BLS) data showing
that supplemental pay of the type permitted by the final rule--i.e.,
nonproduction bonuses and shift differentials--constitutes a relatively
small portion of employees' overall compensation nationwide, no more
than five percent of any occupation.\19\
---------------------------------------------------------------------------
\19\ Bureau of Labor Statistics, Employer Costs for Employee
Compensation--June 2019, https://www.bls.gov/news.release/pdf/ecec.pdf.
---------------------------------------------------------------------------
The Department reasoned that, if the prohibition against
nonproduction bonuses and shift differentials under the fluctuating
workweek method were lifted, employers using that method would, at
most, shift compensation away from the salary and towards such
supplemental pay to approximately the same extent as employers
nationwide who are not similarly restricted. Since BLS data show
employers nationwide have not shifted compensation away from base pay
towards nonproduction bonuses and shift differentials to a significant
degree (again, no more than five percent for any occupation), the
Department concluded that lifting the restriction for employers using
the fluctuating workweek method would not result in significant
compensation shifting towards those types of pay.
Some commenters agreed with this conclusion. See, e.g., SIGMA
(``The Association concurs with DOL's assessment, which is based upon
data from the Bureau of Labor statistics, that permitting employers to
pay bonuses, premiums, and additional pay to employees compensated with
the fluctuating workweek method will not lead employers to shift large
portions of salaries into those types of supplemental payments.'').
Other commenters disputed the Department's use of certain BLS data in
this rulemaking. NELA asserted, ``The fact that the Bureau's statistics
show employers currently pay civilians nonproduction bonuses as 1.8% of
compensation and shift differentials as 0.2% does not constitute
evidence or indication of any kind that employers will not shift
compensation to non-guaranteed bonuses and supplementary compensation
if given the opportunity to do so'' under the fluctuating workweek
method. The State AGs further argued that the Department's reliance on
the BLS data ``ignores . . . that the rule [the Department] is changing
has prevented employers from exploiting the [fluctuating workweek]
method and acted as a deterrent against shifting more pay towards
hours-based premiums.''
These commenters appear to believe that the perceived prohibition
of supplemental pay under the fluctuating workweek method is
responsible for the low rate at which employees nationwide receive
nonproduction bonuses and shift differentials in comparison to base pay
reflected in the BLS data. But that cannot be true because over 99
percent of employees nationwide are not paid under the fluctuating
workweek method and so do not face its perceived restrictions against
paying nonproduction bonuses and shift differentials.\20\ Even though
the vast majority of employees nationwide face no restrictions from
receiving nonproduction bonuses and shift differentials, their
employers have not shifted a significant portion of their compensation
towards such supplemental pay. Accordingly, the Department continues to
believe that BLS data indicate that, if employees paid using the
fluctuating workweek method of compensation begin to receive
supplemental pay, there would not be significant compensation shifting.
---------------------------------------------------------------------------
\20\ The RIA estimates that 698,393 workers are compensated
using the fluctuating workweek method, which represents 0.4 percent
of U.S. workers.
---------------------------------------------------------------------------
NELA further argued that ``the fact that the Bureau of Statistics
was reporting the same (and even lower) average figures of supplemental
pay as a percentage of total compensation when the 2008 NPRM issued . .
. and when the Department issued its 2011 Final Rule, proves that the
same Bureau statistics . . . are simply not evidence of the proposition
they are cited to purportedly support.'' According to NELA, this is
because ``those figures were reported and available to commenters and
the Department alike when it determined in 2011 that employers would
likely reduce salaries and shift compensation to non-guaranteed bonus
and other supplemental pay if given the opportunity to do so'' under
the fluctuating workweek method.\21\
---------------------------------------------------------------------------
\21\ Citing Bureau of Labor Statistics, Employer Costs for
Employee Compensation Historical Tables June 2019, Table 1, https://www.bls.gov/web/ecec/ececqrtn.pdf (reporting for ``all workers''
supplemental pay as percentage of total compensation at 2.5% (2008),
2.5% (2009), 2.3% (2010), 2.4% (2011); shift differentials at .2%
(2008-11); and nonproduction bonuses at 1.4% (2008), 1.5% (2009),
1.3% (2010), and 1.4% (2011)).
---------------------------------------------------------------------------
The Department agrees with NELA that the rate at which employers
nationwide have paid nonproduction bonuses and shift differentials as
compared to base pay has been very low for at least the past decade.
That supports the Department's conclusion that employers using the
fluctuating workweek method would not shift more compensation to
nonproduction bonuses and shift differentials if given the same
opportunity to do so as employers nationwide. The Department disagrees
with NELA that the availability of similar BLS data between 2008 and
2011 meant that the Department's concern regarding compensation
shifting was informed by such BLS data. No commenter presented BLS data
to the Department, and the Department's 2011 final rule did not cite
[[Page 34624]]
any such data. The 2011 final rule did not state that it relied on any
data whatsoever to conclude that the proposed regulation ``could have
had the unintended effect of permitting employers to pay a greatly
reduced fixed salary and shift a large portion of employees'
compensation into bonus and premium payments.'' 76 FR at 18850.
For these reasons, the Department continues to have confidence in
BLS data indicating that the final rule's clarification that employees
paid under the fluctuating workweek method may receive supplemental pay
would not result in significant shifting of compensation away from the
fixed salary towards supplemental pay.
h.) Whether the Final Rule Will Create Confusion for Employers
The State AGs argue that the proposed clarification will ``create
confusion for employers and courts.'' State AGs. In particular, the
State AGs note that certain states prohibit the fluctuating workweek
method, and believe that employers in these states will not understand
that the method is prohibited by state law. As such, these employers
may ``find themselves embroiled in costly litigation or subject to
investigation.'' Id.\22\
---------------------------------------------------------------------------
\22\ As set forth in the NPRM and confirmed by the State AGs,
Pennsylvania, Alaska, California, and New Mexico do not generally
permit employers to use the fluctuating workweek method.
---------------------------------------------------------------------------
States may and often do enact labor laws that are more restrictive
on employers than the federal standard. Employers routinely are able to
navigate both state and federal law. Thus, the Department believes that
employers in a state that prohibits the fluctuating workweek method,
such as California, will understand that the method remains prohibited
by that state's more restrictive law. It is unlikely such employers
will, as the State AGs fear, ``rush to use'' the fluctuating workweek
method in contravention of state law.
Instead, commenters that represent employers (or labor compliance
professionals) overwhelmingly agreed with the NPRM that this final rule
would reduce confusion and enhance clarity regarding the application of
the fluctuating workweek method. For instance, the Chamber stated that
``the 2011 Preamble generated substantial confusion and uncertainty for
courts and employers alike. Employers saw this as an attack on their
ability to reward their salaried nonexempt employees with variable
incentive compensation.'' The CWC explained that ``statements in the
preamble to the [2011] final rule . . . contributed to the growing
confusion over how additional compensation should be treated'' because
``while DOL did not publish any substantive changes to its codified
rules, it articulated an explanation directly contrary to past
practice.''
SHRM further stated that the 2011 preamble ``resulted in an initial
wave of confusion among HR professionals.'' SHRM; see also id. (``[T]he
source of confusion regarding the interaction of bonuses and
fluctuating workweek is the 2011 Preamble.''). This confusion has
deterred employers from paying their workers bonuses. According to
SHRM, ``The Department's statement in the 2011 Final Rule preamble that
the payment of any compensation in addition to the salary payment
somehow `invalidated' the fluctuating workweek method caused many
employers to either (1) eliminate bonuses for employees paid pursuant
to the fluctuating workweek method; or (2) pay previously salaried
employees an hourly rate (and continue any bonus programs). Although
these employers typically did not agree with [the] Department's legal
reasoning, nor believe the restructured pay plans best served the needs
of their business and employees, the substantial risk of litigation
created solely by the Department's preamble language forced their
hands.'' Therefore, the Department continues to be confident this final
rule will reduce confusion for employers.
i.) Whether To Exempt First Responders
The International Association of Fire Fighters (IAFF) ``urges the
Department to carve out an exception for fire fighters and other public
safety personnel should it choose to move forward with the proposed
regulation.'' As explained above, the fluctuating workweek method is
merely an example of how regular rate and overtime computation
principles apply in certain circumstances.
The Department has never had industry or occupational exceptions
for the use of the fluctuating workweek method and IAFF has not
provided sufficient evidence that the Department should consider such
an exception now. The Department is therefore adopting Sec.
778.114(a)(5) as proposed, with two minor changes. First, the
Department is adding ``commissions'' as an example of additional pay
that is compatible with the fluctuating workweek method. And second,
the Department is replacing ``not incompatible'' with ``compatible'' to
improve readability.
C. Examples of the Fluctuating Workweek Method
In the NPRM, the Department proposed two new examples to illustrate
how the fluctuating workweek method computes overtime pay when an
employee receives (1) a nightshift differential and (2) a productivity
bonus in addition to the fixed salary. Fisher Phillips stated in its
comment that ``the examples are unnecessarily lengthy'' and suggested
``that the calculation be performed for only one workweek instead of
all four in . . . examples [2 and 3] and/or collapse these examples as
the employee could earn both a shift differential and a productivity
bonus.''
The Department agrees that it is unnecessary to show how the
fluctuating workweek method computes overtime pay for four different
workweeks in examples 2 and 3. But the Department believes it would be
useful for each example to compute overtime for one workweek in which
hours worked is over 40 and one workweek in which it is under 40.
Accordingly, the Department is revising examples 2 and 3 to compute
overtime pay in two different workweeks: One workweek where the
employee works 37.5 hours and another in which the employee works 48
hours.
SHRM requested that the Department add ``an example that addresses
payments made for work outside of the employee's normal schedule.''
Specifically, SHRM suggested adding the following example to the
regulatory text: ``an employer and employee reach an understanding that
the salary is intended to cover all hours worked from Monday to Friday,
but occasional Saturday work will be paid at a day rate or hourly
rate.''
The Department does not believe the fluctuating workweek method
would be appropriate in the scenario SHRM described. This is because
the fluctuating workweek method computes overtime pay where the
employee and employer both understand that the fixed salary covers all
hours worked in the entire workweek, not just ``Monday to Friday'' as
in SHRM's suggestion. That said, if the parties understand that the
fixed salary covers all hours worked in a workweek, an employer may
offer a premium for weekend work outside the employee's normal schedule
and still use the fluctuating workweek method to compute the regular
rate and overtime pay.
D. Revisions to Sec. 778.114(c)
In its current form, Sec. 778.114(c) states that ``[w]here all the
legal prerequisites for use of the `fluctuating workweek'
[[Page 34625]]
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.'' 29 CFR 778.114(c). The
NPRM proposed non-substantive edits to this language for readability.
See 84 FR at 59602 (``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.'').
In its comment, the WHDI stated that, under the fluctuating
workweek method, the regular rate varies from week to week based on the
number of hours worked, thereby requiring employers to calculate the
amount that they owe in overtime premiums each week. WHDI asserted that
employers can avoid having to recompute the regular rate each week if
they simply divide the employee's salary (plus any other compensation
that must be included in the regular rate) by 40 and then pay one-half
the resulting rate for each overtime hour worked. WHDI stated that the
Department's proposed regulatory text in Sec. 778.114(c) ``confuse[d]
matters'' by implying that employers can pay more than half the regular
rate in overtime compensation only ``[w]here the conditions for the use
of the fluctuating workweek method of overtime payment are present.''
84 FR at 59602. WHDI thus requested that the Department clarify that
there are no ``legal prerequisites'' to paying more than the amount of
overtime compensation required by the Act.
Pursuant to the FLSA, in a workweek that exceeds 40 hours, an
employee is entitled to be compensated at his or her regular rate for
all hours worked (i.e., straight time) and to receive an overtime
premium (i.e., overtime) of at least one half the regular rate for the
hours worked in excess of 40. See 29 U.S.C. 207(a). The combination of
straight time and overtime equals the one and one-half time overtime
pay required by section 7 of the FLSA. See id. Therefore, to the extent
that an employer has already paid straighttime compensation for all
hours worked, the employer's resulting overtime obligation is only an
additional half of the regular rate for the hours worked in excess of
40 in the workweek.
As noted by WHDI, in an overtime week, an employer using the
fluctuating workweek method will always exceed its FLSA overtime
obligation if it calculates the regular rate based on 40 hours worked
(rather than the higher number of hours actually worked) and pays the
half-time overtime premium on that basis. See, e.g., FLSA Opinion
Letter, 2002 WL 32255314 (Oct. 31, 2002); FLSA Opinion Letter, 1986 WL
1171085 (Feb. 10, 1986). It is the Department's longstanding position
that employers are always permitted to pay more in overtime premiums
than required by the FLSA. The regulatory text at issue in revised
Sec. 778.114(c) simply states that this principle is true in the
fluctuating workweek context and does not impose any pre-conditions for
paying more in overtime compensation than required by law. See 84 FR at
59602.
E. Other Comments
The Department received a number of comments that were not directed
to a specific part of the proposed rule. These comments are addressed
below.
The American Horse Council and the National Thoroughbred Racing
Association requested guidance regarding how a bonus for a period that
spans multiple workweeks should be allocated to those workweeks for the
purpose of regular rate computation. The WFCA also requested that WHD
give employers the choice of either allocating such a bonus to the week
in which it is paid or to spread the bonus amount evenly across the
covered workweeks (i.e., the period the bonus was earned). However,
bonus allocation for the purpose of regular rate computations is not
within the scope of the proposed regulation. Instead, WHD's regulations
at 29 CFR 778.209 address how bonuses should be allocated for all
methods of regular rate computation, including the fluctuating workweek
method. Section 778.209 provides that, where possible, a bonus ``must
be apportioned back over the workweeks of the period during which it
may be said to have been earned.'' 29 CFR 778.209(a) (emphasis added).
If such apportionment is not possible, ``some other reasonable and
equitable method of allocation must be adopted.'' 29 CFR 778.209(b).
Accordingly, a bonus earned over a longer period may not be allocated
solely to the workweek in which it was paid.
The WFCA requested WHD to clarify that that ``preannouncement of
possible bonuses should not make a bonus nondiscretionary and therefore
included in the regular rate.'' However, the principles that govern
whether a bonus is or is not discretionary, and therefore excludable
from the regular rate, are the same whether an employer is using the
fluctuating workweek method or some other method of determining the
regular rate. These principles are found in the Department's
regulations at Sec. 778.211, which provides that ``if an employer
announces to his employees in January that he intends to pay them a
bonus in June, he has thereby abandoned his discretion regarding the
fact of payment by promising a bonus to his employees. Such a bonus
would not be excluded from the regular rate under section 7(e)(3)(a).''
This language is clearly inconsistent with the WFCA's request. The
preamble to WHD's recent Regular Rate final rule, published on December
16, 2019, provides further discussion of the distinction between
discretionary and non-discretionary bonuses, with examples of
discretionary bonuses common in the workplace, which may also provide
employers with helpful guidance on this issue. See 84 FR at 68754-56.
The National Newspaper Association requested that the Department
add a provision in the revised regulation that ``permit[s] the
fluctuating work `week' to be calculated on a biweekly or monthly basis
commensurate with the pay periods in many small businesses [to] allow
newspaper employers some needed flexibility.'' The FLSA expressly
requires employers to pay overtime compensation for any ``workweek
longer than forty hours.'' 29 U.S.C. 207(a). As such, the regular
rate--which is necessary to determine overtime compensation owed--must
also be calculated on a weekly basis. See 29 CFR 778.104 (``The Act
takes a single workweek as its standard and does not permit averaging
of hours over 2 or more weeks.'').
Several commenters urged WHD to state in the final rule that the
fluctuating workweek method may be used to compute back wages in failed
exemption cases. The commenters explained that, in such cases, an
employer may have classified a salaried employee as exempt under the
FLSA but it is later determined that such employee is in fact nonexempt
(e.g., because he or she is found to have performed nonexempt duties).
In such cases, courts must determine how to calculate back wages for
the salaried employees. Attorney Daniel Abrahams requested that the
Department's final rule expressly state, consistent with the weight of
the case law, that back wages in such cases may be calculated using the
fluctuating workweek method.\23\
[[Page 34626]]
Other commenters, such as Fisher Phillips and the WHDI, similarly
requested that the Department clarify that, while the fluctuating
workweek method may be used to calculate back wages in
misclassification cases, the specific requirements set forth in Sec.
778.114 do not apply to such back wage computations and instead are
applicable only to the use of the fluctuating workweek method as a
payroll practice.
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\23\ Many courts have permitted back wages in failed exemption
cases to be calculated by using the fluctuating workweek method,
although courts are divided as to whether the authority to apply the
method is based on the retroactive application of Sec. 778.114
itself or instead arises directly from the Supreme Court's Missel
decision. See, e.g., Black v. Settlepou, P.C., 732 F.3d 492, 496-98
(5th Cir. 2013) (applying fluctuating workweek method to computation
of back wages based on Missel); Lamonica v. Safe Hurricane Shutters,
Inc., 711 F.3d 1299, 1310-11 (11th Cir. 2013) (same); Urnikis-Negro
v. Am. Family Prop. Servs., 616 F.3d 665, 676-84 (7th Cir. 2010)
(same); Clements, 530 F.3d at 1230-31 (applying Sec. 778.114 to
retroactively calculate back pay); Valerio, 173 F.3d at 39-40
(affirming district court's retroactive application of section
778.114).
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The Department agrees with the general observation by Fisher
Phillips and WHDI that the specific conditions set forth in Sec.
778.114 (e.g., the clear and mutual understanding requirement) are
intended to govern the use of the fluctuating workweek method as a
prospective payroll practice. See, e.g., Lamonica, 711 F.3d at 1311;
Urnikis-Negro, 616 F.3d at 678 (explaining that 29 CFR 778.114 ``on its
face is not a remedial measure. It says nothing about how a court is to
calculate damages where, as here, the employer has breached its
obligation to pay the employee an overtime premium. Its focus instead
is on how an employer may comply with its statutory obligations in the
first instance and avoid liability for breach of those obligations.'').
Accordingly, the Department declines to opine in this final rule on the
permissibility of using the fluctuating workweek method to
retroactively calculate back wages in failed exemption cases. The
Department does not believe it would be appropriate, in the context of
this rulemaking, to discuss the method of back wage calculation that
courts should use in litigation involving failed exemption status,
which necessarily involves fact-specific determinations and analysis.
The NPRM did not specifically address back wage computations for
misclassification cases, and the Department declines to do so in the
final rule. As the Department has explained elsewhere in this preamble,
however, to the extent that an employer has paid straight time
compensation for all hours worked in the workweek, the employer's
resulting overtime obligation under the Act is only an additional half
of the regular rate for the hours worked in excess of 40 in the
workweek. This general FLSA principle applies regardless of whether the
specific compensation scheme at issue satisfies the technical
requirements of Sec. 778.114.
IV. 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 final rule 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 did not receive any comments on this determination.
V. Executive Order 12866; Regulatory Planning and Review; and Executive
Order 13563, Improved Regulation and Regulatory Review
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 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 final rule is economically significant. The
Department has prepared a Regulatory Impact Analysis (RIA) in
connection with this rule, 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 Rule and Potential Affected Employees
This rule clarifies that bonuses, premiums, and any other
supplemental payments are compatible with the fluctuating workweek
method of calculating overtime pay. Prior to this rule, legal
uncertainty regarding the compatibility of supplemental pay with the
fluctuating workweek method deterred employers from making such
payments to employees paid under the fluctuating workweek method.
Employers were also deterred from paying employees under the
fluctuating workweek method if they regularly paid bonuses and
premiums. This rule will 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.
This rule makes clear to employers that employees paid under the
fluctuating workweek method are eligible for all supplemental payments.
As in the NPRM, in order to estimate the impact of this rule, the
Department relied on data from the Current Population Survey (CPS) to
estimate a total pool of employees who could possibly be affected.\24\
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.\25\ First, under 29 CFR 778.113,
[[Page 34627]]
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, (5) are paid on a salary basis; and (6)
work hours that ``vary'' from week to week.\26\ 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.
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\24\ 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.
\25\ 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.
\26\ 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., No. 22 WAP 2018, 2019 WL 6139547 (Pa. Nov.
20, 2019); N.M. Dep't of Labor v. Echostar Commc'ns Corp., 134 P.3d
780, 783 (N.M. Ct. App. 2006).
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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.
All together, 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). The Department lacks data to
determine how prevalent this compensation method actually is amongst
this group.\27\ 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. The actual number may be higher or lower.
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\27\ The Department received comments with anecdotal information
about the prevalence of the fluctuating workweek method. For
example, the National Newspaper Association surveyed their member
publishers, and found that 11 percent are presently shifting
additional employees to the fluctuating workweek method. And
Attorney C. Andrew Head indicated that he has represented more than
20,000 fluctuating workweek employees in his litigation practice.
While these comments do not provide enough data for the Department
to add precision to its illustrative cost-savings estimates, they do
indicate that there is significant use of the FWW method by at least
some employers, and give the Department more confidence that the
economic effects of this rule likely will be significant, even if
they cannot be precisely measured.
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This rule 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.\28\ 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.\29\
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\28\ 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.
\29\ The Department lacks the required CPS data from before
2004.
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In the NPRM, the Department noted that the estimated percentage of
U.S. workers compensated under the fluctuating workweek method 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.\30\
---------------------------------------------------------------------------
\30\ Compare, e.g., Wills, 981 F. Supp. 2d at 256, with Sisson,
2013 WL 945372, at *1.
---------------------------------------------------------------------------
One commenter noted concerns with the Department's finding that the
decline in workers compensated under the fluctuating workweek method is
due in part to legal uncertainty. EPI claimed that this finding is
based on an unjustified assumption that the share of workers who are
paid under the fluctuating workweek method out of all the workers who
might be paid under the fluctuating workweek method remains constant at
50 percent over this period. But other commenters, such as SHRM and the
Chamber, indicated that uncertainty did affect negatively the number of
workers paid under the fluctuating workweek method. Because the
Department lacks counts for the precise number of workers paid under
the fluctuating workweek method, this analysis merely assumes that half
the workers whose characteristics make them not only eligible, but
whose hours and earnings data appear similar to what would be expected
under the fluctuating workweek, are actually compensated under the
fluctuating workweek method. The Department acknowledges that this
share could fluctuate over this or any period, and that there are other
factors, beyond confusion created by legal uncertainty, that could be
responsible for the decline in the share of the labor force compensated
under the fluctuating workweek method, and thus does not include
workers who might be ``switched'' to the fluctuating workweek method in
its quantified cost savings analysis.
For example, the Department recognizes that the total number of
nonexempt FLSA full-time salaried workers decreased both in total
number
[[Page 34628]]
and also as a share of the employee population over this same
period.\31\ 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.
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\31\ From approximately 27.0 million in 2004 to 19.2 million in
2018.
---------------------------------------------------------------------------
C. Costs
As stated in the proposed rule, the Department believes that,
because the rule merely lifts a restriction on employers paying bonuses
and other supplemental payments to employees paid under the fluctuating
workweek method, 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 the 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 rule by the estimated time to review the rule and the average
hourly compensation of a Compensation, Benefits, and Job Analysis
Specialist. The Department did not receive any comments about
additional costs associated with this rulemaking.
To calculate costs associated with reviewing the rule, the
Department first estimated the number of establishments likely to
review the rule. The most recent data on private sector establishments
at the time this final rule was drafted are from the 2016 Statistics of
U.S. Businesses (SUSB), which reports 7.8 million establishments with
paid employees.\32\
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\32\ 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 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 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 method 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 rule in greater detail. Because the rule is a
clarification of 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 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 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.\33\ 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 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%)).\34\
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\33\ Bureau of Labor Statistics, May 2018 National Occupational
Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm.
\34\ 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 time x $49.37 per hour + 7.8 million establishments x 0.083
hours of review time x $49.37 per hour). This rule does 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 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.
D. Cost Savings
The Department believes that this rule could lead to three
categories of potential cost savings: (1) The elimination of
opportunity costs for 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 analysis to develop illustrative estimates of cost savings.
Based on these estimates, the Department believes total cost savings
are likely to exceed regulatory familiarization costs.
First, the rule could 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.\35\ Legal uncertainty
[[Page 34629]]
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 rule would eliminate such costs.
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\35\ ``[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.
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In the NPRM, the Department evaluated the potential scope of
opportunity costs as the economic value of supplemental incentive pay
prevented by current legal uncertainty. The Department assumed 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.\36\ On the other hand, some 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 were 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 BLS
categorizes as ``nonproduction bonuses.'' \37\
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\36\ 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
any bonus or premium, even 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.
\37\ 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 estimate the precise
deadweight loss attributable to legal uncertainty, including the
economic value of work that fluctuating workweek employees do not
perform because their employers cannot provide certain supplemental
pay. With the publication of the NPRM, the Department published an
appendix, which contained a detailed illustrative analysis regarding
possible ranges of potential opportunity cost eliminated and the
critical variables upon which these estimates depend. The appendix
illustrated that even 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 of 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.\38\ And if all workers compensated
under the fluctuating workweek method received such a bonus, the
productivity savings from the elimination of this opportunity cost
would exceed $600 million. The Department received comments from some
employers indicating that the proposed change would result in more
bonuses being paid to workers, but those comments did not discuss the
magnitude of such bonuses. The Department received no comments or data
specifically addressing the estimates presented in the appendix, and
has ultimately decided to continue to include those in the final
analysis for illustrative purposes only. The table below reflects the
range of potential cost savings that were included in the Appendix to
the NPRM.\39\
---------------------------------------------------------------------------
\38\ 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.
\39\ See 84 FR 59601 (Nov. 5, 2019).
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
----------------------------------------------------------------------------------------------------------------
Second, the rule could 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. SHRM
affirmed this belief in their comment, saying, ``The Department's
statement in the 2011 Final Rule preamble that the payment of any
compensation in addition to the salary payment somehow `invalidated'
the fluctuating workweek method caused many employers to either (1)
eliminate bonuses for employees paid pursuant to the fluctuating
workweek method; or (2) pay previously salaried employees an hourly
rate (and continue any bonus programs).'' Since overtime pay premiums
for hourly employees who do not receive supplemental pay 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 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 marginal cost to an
employer of each hour of work under the fluctuating workweek is lower
than
[[Page 34630]]
the marginal cost of an hourly employee.\40\
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\40\ The fluctuating workweek marginal cost for hours 2-40 in a
workweek is $0, and for hours 41+, the marginal cost is only the
overtime premium, while marginal costs for hourly employees during
the same hours is the hourly rate plus any overtime premium for any
hours over 40. Conversely, when an hourly-paid employee works less
than 40 hours in a workweek, the employer is obligated to pay only
the hours worked, while under the fluctuating workweek method, the
employer is obligated to pay the full salary for the workweek.
---------------------------------------------------------------------------
There was little precedent or data to aid in evaluating these
managerial costs, and the Department did not receive any comments about
this cost savings. 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
each additional hour of work would be lower than an hourly employee.
While the Department does not estimate the precise number of hourly
workers whose employers would switch from paying hourly pay to the
fluctuating workweek method following this rule, the Department
believes that management costs may be reduced for every worker who is
switched because their managers can spend less time managing their
schedules if such schedule management is intended either to optimize
compensation levels or to ensure coverage for less desirable shifts or
projects. If, hypothetically, 150,000 workers were switched, employers
might reduce their annual managerial costs by over $66 million.\41\
---------------------------------------------------------------------------
\41\ 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).
---------------------------------------------------------------------------
Third, the clarifying language and updated examples included in
this rule 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 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 $3.3 million.\42\ 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,\43\ and the Department adjusted
this to $94.75 per hour to account for fringe benefits and
overhead.\44\ 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 $3.3 million per year.\45\ As
noted above, this figure is an illustrative example of potential annual
cost savings due to reducing legal-review burdens.
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\42\ Although earlier in the economic analysis the Department
estimates that it will take employers anywhere from 5-30 minutes to
familiarize themselves with the rule, it is likely that lawyers are
currently spending significantly more time annually advising their
clients on issues related to the fluctuating workweek method. The
lawyers need not only be familiar with the rule but must also apply
the rule to specific compensation schemes used or proposed by their
clients.
\43\ Bureau of Labor Statistics, May 2018 National Occupational
Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm
\44\ 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)).
\45\ This estimate of establishments is discussed in greater
detail in the Costs section, above.
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Even though the Department cannot quantify the precise amount of
total cost savings, it is expected that they will significantly
outweigh regulatory familiarization costs. Unlike one-time
familiarization costs, the calculated and other potential cost savings
described in this section would continue into the future, saving
employers valuable time and resources. This rule also offers increased
flexibility to employers in the way that they compensate their
employees. However, in the absence of additional data, the Department
is unable to precisely quantify all cost savings and other potential
effects of the proposed rule.
E. Transfers
Transfer payments occur when income is redistributed from one party
to another. The Department believes this rule may cause transfer
payments to flow from some employers to their employees and also may
cause transfer payments to flow from employees to some employers. When
discussing these transfers in the NPRM, the Department noted that the
incidence, magnitude, and ultimate beneficiaries of such transfers is
unknown.
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. If employers offer these new bonuses to employees
already paid under the fluctuating workweek method, it would constitute
a transfer from employers to employees.
Some commenters argued that employers will reduce their employees'
salaries paid under the fluctuating workweek and shift compensation to
non-guaranteed bonuses, essentially reducing some of that employer's
workers' earnings. See e.g., EPI, State Attorneys General, Head Law
Firm, IAFF, NELA. The commenters assume that employers look only to
lower their labor costs, and if they can use bonuses in conjunction
with the fluctuating workweek method to pay less for overtime, they are
likely to do so. If such a shift were to occur, if the scope of such a
shift in comparison to the current fluctuating workweek wage is large,
and if bonuses were small, the commenters claim this reduction could
constitute a transfer from employees to employers. These comments do
not cite any data to show the opposite effect from the 2011 perceived
prohibition on paying certain bonuses, nor do they cite data to
indicate that employers who pay their employees under the fluctuating
workweek method would be willing to risk a drastic downward change in
total compensation.
The Department acknowledges that, for employees compensated under
the fluctuating workweek method, an employer and employee may now agree
[[Page 34631]]
to a new allocation of compensation between the fixed salary for all
hours of work, bonuses, benefits, supplemental pay, and other job
perks. Some allocations could result in their salaries being augmented,
but employers could also decrease the fixed portion of the employee's
salary and shift compensation to bonuses and incentive pay. These are
merely two of a host of allocations not discussed in the comments.
However, even if the agreement could result in somewhat lower
compensation, there is a limit to how much employers are able to reduce
employees' total compensation. The fluctuating workweek method still
requires that an employee's fixed salary be at or above the minimum
wage for all hours worked, so employers are unable to reduce
compensation below the minimum wage (plus overtime for all hours over
40).
This supplemental pay is also a way for employers to incentivize
employees to do undesirable tasks, or work undesirable shifts. As
supplemental pay may be the most efficient means to incentivize
employees to perform this valuable work, many employers in such a
scenario will be more than willing to pay the extra amount for these
valuable services without decreasing employees' base salaries. Absent
data to the contrary, the Department disagrees with commenters'
assertion that permitting new bonus payments to employees paid under
the fluctuating workweek method will generally result in those workers
being paid less for the same or more work.
These same commenters also assert that the proposed rule will
encourage the use of overtime because the fluctuating workweek regular
rate of pay falls as hours increase. See, e.g., EPI, State Attorneys
General, NELP, IAFF, NELA, Head Law Firm. These commenters posit that
the marginal cost to the employer of an hour of overtime is lower for
employees who are shifted to the fluctuating workweek method and assert
that this creates incentives for employers to overwork current
employees instead of hiring additional staff, undermining job creation.
The Department acknowledges that this rule could encourage more
employers to use the fluctuating workweek method to compensate their
employees, if they previously chose not to use the fluctuating workweek
method because they also wanted to provide incentive pay but believed
they were not permitted to do so. However, contrary to the commenters'
assertion, nothing in this rule changes the basic rules for calculating
fluctuating workweek wages, including overtime. As such, any
``disincentive'' to requiring overtime work remains the same as the
status quo other than the potential increase in the marginal costs
attributable to newly-permitted incentive and bonus payments. Further,
these commenters offered no data to support their contentions that,
merely because they are now permitted to pay bonuses, employers will
increase fluctuating workweek overtime hours and choose not to hire
additional workers.
F. Benefits
The Department believes the rule could 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. This rule will provide a simple standard that permits
all supplemental pay under the fluctuating workweek method, and
therefore should reduce unnecessary disputes and litigation.\46\ The
Department lacks data to quantify this benefit.
---------------------------------------------------------------------------
\46\ The costs of such disputes and litigation are not
insignificant, but are not estimated here nor included in the
projected regulatory cost savings.
---------------------------------------------------------------------------
The Department also believes that this rule will allow employers
and employees to better utilize flexible work schedules. This is
especially important as workers return to work during the COVID-19
pandemic. Some employers are likely to promote social distancing in the
workplace by having their employees adopt variable work schedules,
possibly staggering their start and end times for the day. This rule
will make it easier for employers and employees to agree to unique
scheduling arrangements while allowing employees to retain access to
the bonuses and premiums, including hazard pay, they would otherwise
earn.
G. Summary
This rule will result in a one-time rule-familiarization cost of
$32,828,582. The Department estimated average annualized costs of this
rule over 10 years and in perpetuity. Over ten years, this rule would
have an average annualized cost of $3.7 million at a discount rate of 3
percent, or $4.4 million at a discount rate of 7 percent in 2018
dollars. When the Department uses a perpetual time horizon to allow for
cost comparisons under E.O. 13771, the perpetual annualized cost is
$1,569,905 at a discount rate of 7 percent in 2016 dollars.
VI. 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 rule will 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
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 will be
trivial for small business entities, and will 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 rule will 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 rule will also
[[Page 34632]]
reduce administrative costs of small businesses that respond by
switching hourly employees to the fluctuating workweek method. The 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 will 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,
the Department believes such benefits will be limited to few small
businesses.\47\ Based on this determination, the Department certifies
that the rule will not have a significant economic impact on a
substantial number of small entities.
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\47\ The Department of Labor estimates that only 0.45% of U.S.
workers are compensated using fluctuating workweek method.
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VII. Unfunded Mandate 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.
VIII. Executive Order 13132, Federalism
The Department has reviewed this rule in accordance with Executive
Order 13132 regarding federalism and determined that it does not have
federalism implications. The rule will 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.
IX. Executive Order 13175, Indian Tribal Governments
This rule will 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.
List of Subjects in 29 CFR Part 778
Wages.
Signed at Washington, DC, this 15th day of May, 2020.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.
For the reasons set out in the preamble, the Department of Labor
amends title 29 of the Code of Federal Regulations part 778 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:
Sec. 778.114 Fluctuating Workweek Method of Computing Overtime.
(a) An employer may use the fluctuating workweek method to properly
compute overtime compensation based on the regular rate for a nonexempt
employee under the following circumstances:
(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 the 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, commissions,
hazard pay, or other additional pay of any kind not excludable from the
regular rate under section 7(e)(l) through (8) of the Act) for the
total hours worked each workweek regardless of the number of hours,
although the clear and mutual understanding does not need to extend to
the specific method used to calculate overtime pay; and
(5) The employee receives overtime compensation, in addition to
such fixed salary and any bonuses, premium payments, commissions,
hazard pay, 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, commissions, hazard pay, and additional pay of any
kind is compatible 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 stated above 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, commissions, hazard pay, 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 receives
no additional compensation and 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 weeks, only additional
half-time pay is due for overtime hours. 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 one-half times the regular rate of $13.64 for a total
overtime payment of $27.28); for the third week $660 (fixed salary of
$600, and 10 hours of overtime pay at one-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 one-half times the
regular rate of $12.50 for a total overtime payment of $50).
(2) Example. If during the course of 2 weeks this employee works
37.5 and 48
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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 premium pay for the 4 nightshift hours). In this case,
the regular rate of pay in each of these weeks is $16.53 and $12.92,
respectively, and the employee's total compensation would be calculated
as follows: For the 37.5 hour week the employee is owed $620 (fixed
salary of $600 plus $20 of non-overtime premium pay, with no overtime
hours); and for the 48 hour week $671.68 (fixed salary of $600 plus $20
of non-overtime premium pay, and 8 hours of overtime at one-half times
the regular rate of $12.92 for a total overtime payment of $51.68).
This principle applies in the same manner regardless of the reason for
the hourly premium rate (e.g., weekend hours).
(3) Example. If during the course of 2 weeks this employee works
37.5 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 and $14.58,
respectively, and the employee's total compensation would be calculated
as follows: For the 37.5 hour week the employee is owed $700 (fixed
salary of $600 plus $100 productivity bonus, with no overtime hours);
and for the 48 hour week $758.32 (fixed salary of $600 plus $100
productivity bonus, and 8 hours of overtime at one-half times the
regular rate of $14.58 for a total overtime payment of $58.32).
(c) Typically, such fixed salaries 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.
(d) The fixed salary described in paragraph (a) of this section
does not vary with the number of hours worked in the workweek, whether
few or many. However, employers using the fluctuating workweek method
of overtime payment may take occasional disciplinary deductions from
the employee's salary for willful absences or tardiness or for
infractions of major work rules, provided that the deductions do not
cut into the minimum wage or overtime pay required by the Act.
[FR Doc. 2020-10872 Filed 6-5-20; 8:45 am]
BILLING CODE 4510-27-P
