Fluctuating Workweek Method of Paying Salary (Part 1 of 2)

Due to the recent changes to the salary basis test under the Fair Labor Standards Act (“FLSA”), I’ve received a lot of questions from clients and webinar attendees about the fluctuating workweek method for paying non-exempt employees a salary.  Following is a brief overview of what it is and how to implement it.

Contrary to some of the opinions out there, it is not a violation of the FLSA to pay a non-exempt employee a salary.  As long as the salary pays at least minimum wage for the hours worked and the employee is compensated at 1.5 times the employee’s regular rate for overtime, it is complaint with the FLSA. 

The way a fluctuating workweek method works is as follows.  An employee earns a fixed salary for the hours worked during the workweek, no matter how many or few.  This means that you have to follow the same rules as you do for paying exempt employees.  Docking salary for going negative in PTO is not allowed as it would be for an hourly employee.  So, an employee earns at least the fixed salary amount regardless if they work one hour or 80 hours in a workweek.

For overtime, the calculation is a bit different than an hourly employee.  Where an hourly employee earns 1.5 times their hourly rate, the outlay for a salaried non-exempt employee is less.  These employees only earn .5 times their regular rate, as their salary is deemed to cover the straight time for all hours worked, including those over forty. 

Even better for employers, the regular rate for employees under the fluctuating workweek method actually goes down the more hours they work.  Take, for example, an employee earning a $1,000 salary per week.  If that employee worked 45 hours in a week, their regular rate would be $22.22/hr. (1000/45).  So, overtime for those 5 hours would equal $55.55.  Or, spelling out the math, it would be 5 hours at $11.11/hr.  If that employee worked 50 hours in a week, the regular rate would be $20/hr. (1000/50).  That employee would earn an additional $100 that week for overtime pay at 10 hours X $10/hr.

While this may seem enticing and like a no-brainer to implement, there are some traps for the unwary, which I will tackle in part 2 of this article.

Written by: Andrew Nielsen- Director of Compliance Services