May I utilize a “fluctuating workweek method” and pay overtime at a lower rate and potentially reduce our overtime expense?

Q:     My company pays overtime at time and one-half, and its overtime costs are soaring.  Somebody mentioned to me that my company may be able to utilize a “fluctuating workweek method” and pay overtime at a lower rate and potentially reduce our overtime expense.  What is this method?

A.    While the general rule is that overtime hours must be paid at one and one-half (1.5) times the employee’s regular hourly rate, the fluctuating workweek method (“fww method”) of computing overtime permits payment for overtime at a “half-time” rate.  This fww method is often overlooked as a potential overtime alternative, and it may allow a business to realize a savings in overtime costs. Generally, the fww method is used for employees whose hours of work fluctuate from week to week, although it can be used to pay any non-exempt employee to whom the employer is willing to guarantee a weekly salary.

Under the fww method the employer pays a guaranteed fixed salary as straight time pay for all hours the employee works in a workweek, no matter the number of hours the employee works, whether few or many.  For hours worked in a workweek over 40, the overtime pay is then calculated by multiplying the number of overtime hours worked by one-half (1/2) of the employee’s regular hourly rate instead of one and one-half (1.5) times the regular hourly rate because the employee’s salary already compensates for those overtime hours at the straight time regular rate.  The regular hourly rate of pay for the employee is determined by dividing the employee’s salary by the total number of hours worked in the workweek.  

The following is an example of the fww method:

Employee is guaranteed a weekly salary of $400 for all hours worked.

a.    Employee works 45 hours in a week.

The employee’s straight-time hourly rate is:  $400  45 hours = $8.89 per hour

The overtime to be paid is:  ($8.89  2) x 5 hours = $22.25

The total pay for the week is:  $400 + $22.25 = $422.25    

This is a savings of $52.75 over the standard hourly-paid method where the employee is paid $10 per hour rather than a $400 guaranteed weekly salary (in either case $400 for 40 hours worked).  Under the standard hourly-paid method, the employee must be paid $75 ($10 per hour x 1.5 x 5 hours) in overtime instead of $22.25.

b.    Employee works 50 hours in a week.

The employee’s straight-time hourly rate is:  $400  50 hours = $8 per hour   

The overtime to be paid is:  ($8  2) x 10 hours = $40

The total pay for the week is:  $400 + $40 = $440

This is a savings of $110 over the standard hourly-paid method where the employee is paid $10 per hour rather than a $400 guaranteed weekly salary (in either case $400 for 40 hours worked).  Under the standard hourly-paid method, the employee must be paid $150 ($10 per hour x 1.5 x 10 hours) in overtime instead of $40.

In order to utilize the fww method, all of the following requirements must be satisfied:

(1)    there must be a “clear understanding” by the employee that the fixed salary covers whatever hours the employee works in a workweek (this is typically done in a writing signed by the employee);

(2)    the salary must be paid for each week in which the employee performs any work even though in a particular workweek the employee may not have worked the full schedule of hours;

(3)    the salary must be sufficiently large to assure that the employee will receive at least the minimum wage (which, depending on the state, may be higher than the current federal minimum wage of $7.25 per hour) for every hour worked in the workweek, no matter how many; and

(4)    generally, deductions for absences may not be made from the salary.

The above is only a brief description of the fww method and does not cover all its aspects or variations.  Therefore, you should not implement or utilize this method before consulting with a knowledgeable attorney.

The above question and answer were provided by Michael J. Froehlich, a partner in the Employment and Labor Law Practice at Shulman, Rogers, Gandal, Pordy & Ecker, P.A. in Potomac, Maryland, which regularly addresses employment law issues for The Payroll AnswerMan.

Disclaimer:  The above question and answer are for informational purposes only, and do not constitute legal advice.  Readers are responsible for obtaining the necessary advice about their specific situations from their own counsel.