The "Fluctuating Work Week" -- An FLSA Mirage

July 8, 2013

By: James Holahan

There are mirages in the labor relations and employment desert.  Concepts and principles that, for a moment, you see and understand, but moments later you have confused or misapplied.  The “fluctuating work week” method of calculating overtime is one of those employment law mirages.  At first glance, it appears as an oasis for employers in the FLSA desert – then, like a mirage, disappears when carefully scrutinized and correctly applied.

The “fluctuating work week” (FWW) method of calculating overtime is an alternative to the familiar “time and one-half” method for paying non-exempt employees who actually work more than 40 hours in a workweek.  It was first recognized more than 70 years ago by the United States Supreme Court in Overnight Motor Transport Co. v. Missel, and was later codified in the federal wage and hour regulations at 29 C.F.R. §778.114.

Often referred to as the “half-time” measure of overtime, it applies:  (1) if there is a mutual understanding between an employer and a non-exempt employee that the employee will be paid a fixed weekly salary no matter how many hours that employee works in a week; (2) if the fixed salary is sufficiently large so that the employee’s regular rate of pay never drops below the minimum wage (federal or state); (3) if the employee’s work week fluctuates both over and under 40 hours per week; and (4) if the employee is paid a “half-time” overtime premium for hours worked beyond 40 in a week.  Using the “half-time” method, the employee’s overtime rate is one-half of the rate determined by dividing the employee’s weekly salary by the number of hours that the employee actually works in a week.  In other words, the overtime rate paid for hours worked in excess of 40 in a week declines the more hours that an employee works.

Not surprisingly, employees are not quick to embrace this system, and employers must consider the “labor relations” and “employee morale” implications of using the FWW method, even in those limited circumstances where it can be lawfully applied.  Employers who do use the FWW method are subject to legal challenges on many fronts.  For example, the USDOL takes the position that the FWW method may only be applied to employees whose weekly hours do not customarily follow a regular schedule and fluctuate both above and below 40 hours per week.  In other words, there must be evidence that the employee’s hours regularly dip below 40 in a week without any diminution in that employee’s fixed salary.  Second, the USDOL insists that the employee be paid a fixed salary – obviously without deductions or offsets, but also without non-discretionary enhancements such as commissions or bonuses.  Note, this “fixed salary” requirement is more stringent than the “salaried basis” test applicable to the “white collar” overtime exemptions.  In 2011, the USDOL considered, but ultimately rejected, proposed amendments to its regulations that would have allowed employers to use the FWW method even if the employer paid employees non-discretionary earned bonuses in addition to the required “fixed salary."  Clearly, the USDOL is not a fan.

Further complicating the use of the FWW method for New York employers is the open question whether this method also applies to overtime payments under New York law.  Several decisions (and an older NYSDOL opinion letter) have suggested that the federal methodology for computing overtime is permissible, but there is no clear precedent on this issue.  Employers should carefully consider whether to use the FWW method to compute overtime, and those who do should regularly review those arrangements to insure that they continue to meet the applicable standards (fluctuating work week, fixed salary, regular rate above the minimum wage, etc.).  Be careful or this FLSA “oasis” may turn out to be a “mirage” that will only produce unhappy employees and costly litigation.