Fluctuating Workweek Overtime Premium Pay Calculation Under the Fair Labor Standards Act (FLSA)
A common technique for minimizing overtime liability is the utilization of the "fluctuating workweek." We often see this type of compensation system in retail environments. While this system can serve to control an employer's payroll and overtime costs, the calculation is somewhat complicated.
It is very easy, and therefore relatively common, for an employer to improperly implement a fluctuating workweek. If the employer fails to properly follow the regulations regarding the fluctuating workweek, then the employer may become liable any overtime worked at the standard time-and-a-half premium, plus liquidated damages.
Under the fluctuating workweek system, a nonexempt employee is paid a set salary for all hours worked during the week. Of course, it is a common misconception that salaried employees are automatically not entitled to overtime pay. The proper question is whether the employee is exempt or non-exempt. However, an employer can pay a salary to non-exempt employees if certain allowances are worked into the system to account for overtime work.
To use a fluctuating workweek system, the employee must agree to this system in advance and his or her hours must be flexible. However, the employer is still required to pay an overtime premium when the employee works more than 40 hours during the workweek. The calculation is not intuitive though. See 29 U.S.C. sec. 207(f); 29 C.F.R. sec. 778.114; see also 29 C.F.R. sec. 778.406-.414. The best way to understand the calculation is to look at an example.
Assume the employee is guaranteed a salary of $400 a week. If the employee works 40 hours, then the employee is paid $400, if the employee works 36 hours, she still gets $400. However, the analysis is different if the employee works 52 hours one workweek.
To calculate the employee's regular rate for that week, the employer must divide the $400 salary by the number of hours worked. ($400 / 52 = $7.69).
The employee is owed overtime premium pay of "time and a half" for all hours over 40. However, in this instance, the employee has already received $7.69 per hour for all 52 hours worked. Therefore, the only thing more that is owed is the "and a half."
The employer should then divide that week's regular rate in half to obtain the overtime premium rate ($7.69 / 2 = $3.85).
The employee's total overtime premium pay for the week is calculated by the number of overtime hours by that week's overtime premium rate (12 x $3.85 = $200.20)
Accordingly, the employee's total pay for the week is the sum of the week's guaranteed salary and that week's overtime premium pay ($400 + $200.20 = $600.20).
It is important to realize that this fluctuating workweek calculation must be done on a week by week analysis.
From a practical point of view, the fluctuating workweek has the impact of lowering an employee's hourly rate when the employee works more hours. In our example above, the employee might think of herself as being paid $10 per hour when she works 40 hours, but she is in reality only paid $7.69 per hour when she works 52 hours.