By now, probably most people — and certainly all my discerning and perceptive readers — know that according to Federal law, overtime-eligible employees in the U.S.A. (i.e. “non-exempt” employees) must be paid overtime for any hours they work over 40 in any given work week. (And some of you also probably know that in some states the rule is any hours over eight in any given work day.)
Of course, you don’t have to specify non-exempt employees’ compensation as an hourly wage. Many clerical-level office employees, for instance, are paid a salary — or at least, it’s called a salary. And if they work their usual 40 hours a week, they get that “salary”… but if they work more, they get time-and-a-half overtime based on their equivalent hourly rate… and if they work less, they probably find their pay docked for the hours they were gone. Which, in the final analysis, makes their pay more like hourly and less like an actual salary, since in reality they are paid based simply on the number of hours they work.
Did you know there’s an alternative?
The Fluctuating Work Week
In a dark, seldom-visited corner of the Fair Labor Standards Act (FLSA) lurks a provision commonly known as the “fluctuating work week” method of calculating overtime (FWW).
In order to use the FWW for calculating overtime, you and your employees have to follow certain criteria:
The employee’s hours must fluctuate from one week to the next. The law doesn’t specify what exactly this means, but it does say typically this would apply to workers who do not have a set schedule of hours from one week to the next. If someone has a regular assigned schedule but occasionally works some overtime, they may not be eligible. (You’ll want to check with your employment law advisor to make sure your employees qualify.)
You must pay the worker a straight salary for all the hours they work in a week, regardless of how many (or how few). For instance, you can’t dock their pay if they leave early one day for a doctor’s appointment. As with your salaried exempt workers, as long as they work even part of a week, you have to pay them their full salary for the week. This is one of the downsides of a FWW arrangement: you have to pay the employee the entire week’s salary whether they worked a full 40 hours or not.
The salary must be enough that the employee earns the equivalent of minimum wage or more. In other words, assuming your state uses the Federal minimum wage and the employee can work as much as a 55 hour week, their weekly salary must be at least $398.75 (before withholdings). (That’s the current Federal minimum wage of $7.25 an hour multiplied by 55 hours. Note, however, the actual minimum wage in your state may be higher.)
You’ll want to make sure your salary covers this minimum wage requirement based on the maximum number of hours the employee might reasonably work during a week. Allow some leeway; it’s probably best to not play it too close to the line or you risk slipping below minimum if the employee puts in a particularly long week.
You and your employee need to both understand and agree to this compensation arrangement.
So what about overtime?
The employees covered by a FWW arrangement are still overtime eligible. So what do you do about overtime pay when they do work over 40 hours in a week?
That does require a bit of calculation — and this is another one of the downsides of the FWW method: the extra calculations you have to go through whenever one of these employees works over 40 hours a week.
In most states, for someone who’s paid by the hour, you pay them their regular hourly rate for the first 40 hours. Then you take their hourly rate and multiply by 1.5, then pay them that amount for all hours worked over 40 in that week. (Note that some states have slightly different rules for how to calculate overtime.)
For someone covered by a FWW agreement:
Divide their salary by the number of hours they actually worked that week. This gives you their “equivalent hourly rate.” Note this must be no less than $7.25 an hour (or more, depending on the minimum wage effective in your locale).
Multiply one-half of this equivalent hourly rate by the number of hours worked over 40 that week. This is the employee’s overtime pay.
So why would anybody adopt this crazy scheme?
Given the fact you have to pay the employee a full week’s salary regardless of how few hours they work… and give the extra calculations you have to go through to figure overtime when they work over 40 hours… you may be wondering why on earth any employer would agree to such a cockamamie arrangement.
There are a couple of reasons:
It can be important for some employees’ morale to be considered “salaried” or “white collar” workers, but because of the nature of their work they are not exempt from overtime regulations. This allows you to pay them on a salaried basis, but still keep on the right side of the law. It’s a win-win: good employee relations and compliance with overtime regulations.
If these employees typically work 40 hours or more a week, this method of overtime calculation can represent a potentially significant cost savings to you. Since they’re paid a fixed salary for all hours worked, their equivalent hourly rate goes down the more hours they put in. And their overtime pay is simply one-half that equivalent hourly rate.
(Of course, you need to balance this against the fact that if they work less than 40 hours a week, their equivalent hourly rate goes up. If the calculated equivalent rate turns out to be more than what you would have paid them on an hourly basis, it will cost you more than if they were simply paid by the hour. A FWW arrangement is probably not for you if your employees often work fewer than 40 hours a week.)
It’s a way to limit your exposure if you have employees you consider salaried (and who otherwise meet the eligibility criteria for FWW), but whose job duties are “borderline” for overtime exemption — without having to pay a full time-and-a-half overtime. In the event a DOL audit determines they truly are not exempt, they’ve already been paid overtime by an acceptable method of calculation.
Not for everybody
As noted, this is probably not the best arrangement for you if your fluctuating-hours employees often work less than 40 hours a week. And your employees may not be eligible under the rules, so you might not be able to use this method even if you want to.
Worse, set up an FWW agrrangement incorrectly, and your employees could be reclassified as hourly — potentially making your liable for hefty additional overtime payments, fines and penalties.
But for those who meet the criteria and implement an FWW arrangement correctly, it can represent a cost savings as well as an employee morale-booster.
As always, check with your employment law attorney to make sure you are eligible and you’ve set things up right. A little bit of time spent with your advisor now can save you significant money, time and headaches on down the road.