BILLING CODE: 4510-27-P
DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 778
RIN 1235-AA31
Fluctuating Workweek Method of Computing Overtime under 29 CFR 778.114
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Final rule.
SUMMARY: The Department of Labor (the Department) is revising its regulation for
computing overtime compensation of salaried nonexempt employees who work hours that vary
each week (fluctuating workweek) under the Fair Labor Standards Act (FLSA or the Act). The
final rule clarifies that payments in addition to the fixed salary are compatible with the use of the
fluctuating workweek method of compensation, and that such payments must be included in the
calculation of the regular rate as appropriate under the Act. The Department also adds examples
and makes minor revisions to make the rule easier to understand.
DATES: This final rule is effective on [insert date 60 days after the date of publication].
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division (WHD), U.S. Department
of Labor, Room S-3502, 200 Constitution Avenue, NW, Washington, DC 20210; telephone:
(202) 693-0406 (this is not a toll-free number). Copies of this final rule may be obtained in
alternative formats (Large Print, Braille, Audio Tape, or Disc), upon request, by calling (202)
693-0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to
obtain information or request materials in alternative formats.
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Questions of interpretation and/or enforcement of the agency’s regulations may be
directed to the nearest WHD district office. Locate the nearest office by calling WHD’s toll-free
help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or log onto WHD’s website for a nationwide listing of WHD district and area offices at
http://www.dol.gov/whd/america2.htm.
I. EXECUTIVE SUMMARY
Section 7(a) of the FLSA requires employers to pay their nonexempt employees overtime
pay of at least “one and one-half times the regular rate at which [the employee] is employed” for
all hours worked in excess of 40 in a workweek. 29 U.S.C. 207(a). In other words, for each hour
over 40 an employee works in a workweek, the employee is entitled to straight-time
compensation at the regular rate and an additional 50 percent of the regular rate for that hour.
Where an employee receives a fixed salary for fluctuating hours, an employer may use the
“fluctuating workweek method” to compute overtime compensation owed, if certain conditions
are met. 29 CFR 778.114.
Under current 29 CFR 778.114, an employer may use the fluctuating workweek method
if the employee works fluctuating hours from week to week and receives, pursuant to a clear and
mutual understanding with the employer, a fixed salary as straight time compensation for
whatever hours the employee is called upon to work in a workweek, whether few or many. 29
CFR 778.114(a). In such cases, because the salary “compensate[s] the employee at straight time
rates for whatever hours are worked in the workweek,” the regular rate “is determined by
dividing the number of hours worked in the workweek into the amount of the salary,” and an
employer satisfies the overtime pay requirement of section 7(a) of the FLSA if it compensates
the employee, in addition to the salary amount, at a rate of at least one-half of the regular rate of
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pay for the hours worked each overtime hour. 29 CFR 778.114(a). Because the employee’s hours
of work fluctuate from week to week, the regular rate must be determined separately each week
based on the number of hours actually worked each week. Id.
The payment of additional bonus and premium payments on top of the fixed salary to
employees compensated under the fluctuating workweek method has presented challenges to
employers and the courts alike, as set forth in more detail below. In the Notice of Proposed
Rulemaking (NPRM), the Department proposed to clarify that bonus payments, premium
payments, and other additional pay are consistent with the use of the fluctuating workweek
method of compensation. See 84 FR 59590, 59591 (Nov. 5, 2019). Such supplemental payments
and the fixed salary provide straight-time compensation for all hours worked and the regular rate
is determined by dividing that amount by the hours worked in the workweek. Additional bonuses
or premium payments must be included in the calculation of the regular rate unless they may be
excluded under FLSA sections 7(e)(1)-(8). See 29 U.S.C. 207(e)(1)-(8).
The Department proposed a similar clarification through an NPRM in 2008. See 73 FR
43654, 43662, 43669-70 (July 28, 2008). However, the final rule issued in 2011 did not adopt
this proposal because the Department, at the time, believed that courts had “not been unduly
challenged” in applying the current regulatory text, that the proposed clarification “would have
been inconsistent” with the Supreme Court’s decision in Overnight Motor Transportation Co. v.
Missel, 316 U.S. 572 (1942), and that the proposed clarifying language “may create an incentive”
for employers “to require employees to work long hours.” 76 FR 18832, 18848-50 (Apr. 5,
2011). The preamble to the 2011 final rule further stated, for the first time in rulemaking by the
Department, that all straight-time bonus and premium payments were incompatible with the
fluctuating workweek method, while maintaining that the preamble “restore[d] the current rule.”
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The decision in that rulemaking not to make any substantive changes to the regulatory text,
however, caused courts to interpret the 2011 final rule in different ways and to reach inconsistent
holdings based on a judicially-crafted distinction between certain types of bonuses that the
Department has never recognized.
As explained below, the Department has considered anew the need for a clarification,
particularly in light of the 2011 final rule and its interpretation by courts, now finds the reasons
articulated in 2011 to be unpersuasive, and is therefore finalizing revisions that are substantially
similar to those initially proposed in 2008. Specifically, the Department is adding language to
§ 778.114(a) clarifying that bonuses, premium payments, and other additional pay of any kind
are compatible with the use of the fluctuating workweek method of compensation. The
Department is also adding examples to § 778.114(b) to illustrate the fluctuating workweek
method of calculating overtime where an employee is paid (1) a nightshift differential, (2) a
productivity bonus in addition to a fixed salary, and (3) premium pay for weekend work. The
Department is further making non-substantive revisions to § 778.114(a) and (c) that were not
proposed in the 2008 NPRM to enhance clarity. Specifically, revised § 778.114(a) will now list
each of the requirements for using the fluctuating workweek method, while duplicative text is
being removed from revised § 778.114(c). Finally, the Department is changing the title of the
regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek Method of
Computing Overtime.”
The Department also believes that this rule will allow employers and employees to better
utilize flexible work schedules. This is especially important as workers return to work following
the COVID-19 pandemic. Some employers are likely to promote social distancing in the
workplace by having their employees adopt variable work schedules, possibly staggering their
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start and end times for the day. This rule will make it easier for employers and employees to
agree to unique scheduling arrangements while allowing employees to retain access to the
bonuses and premiums they would otherwise earn.
This final rule is an Executive Order (E.O.) 13771 deregulatory action. Details on the
estimated reduced burdens and cost savings of this final rule can be found in the rule’s economic
analysis.
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs has designated this rule as a “major rule” as defined by 5
U.S.C. 804(2).
II. BACKGROUND
A. Principles of Computing Overtime Pay Based on the Regular Rate
Section 7(a) of the FLSA requires employers to pay their nonexempt employees overtime
premium pay of at least “one and one-half times the regular rate at which [the employee] is
employed” for all hours worked in excess of 40 in a workweek. 29 U.S.C. 207(a). The regular
rate is computed for each workweek and is defined as “all remuneration for employment,” save
for eight statutory exclusions, divided by the number of hours worked. 29 U.S.C. 207(e); see also
Bay Ridge Operating Co. v. Aaron, 334 U.S. 446, 458 (1948) (stating that the “regular rate must
be computed by dividing the total number of hours worked into the total compensation
received”).
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For each hour over 40 an employee works in a workweek, the employee is entitled
to straight time compensation at the regular rate and an additional 50 percent of the regular rate
for that hour. See, e.g., Walling v. Youngerman-Reynolds Hardwood Co., 325 U.S. 419, 423-24
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The preamble to the Department’s 2019 rulemaking concerning “Regular Rate under the Fair
Labor Standards Act” discusses in greater detail the legislative and regulatory history of the
regular rate. See 84 FR 68736, 68737-39 (Dec. 16, 2019).
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(1945). Dividing non-excludable remuneration by hours worked is the only proper method to
compute the regular rate and the Department’s regulations at §§ 778.110-.115 “give some
examples of the proper method of determining the regular rate of pay in particular instances.” 29
CFR 778.109.
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One of the examples is § 778.114, which concerns instances where the employee is paid a
fixed salary that is understood to be compensation for a variable number of hours worked each
week, whether few or many, as opposed to a specific number of hours. The regular rate equals
the quotient of the weekly salary and the number of hours worked and necessarily changes as the
number of hours vary week to week. For each overtime hour worked, the employee is entitled to
straight-time pay plus an additional 50 percent of the regular rate as an overtime premium.
Because the weekly salary is compensation for all hours worked in a workweek, the employee
would have already received straight-time pay for any overtime hours worked, so he or she is
entitled to additional compensation at one-half of the regular rate for overtime hours. This
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Total non-excludable remuneration is divided by all hours worked to determine the regular rate
where all hours worked have been compensated. This will always be the case under the
fluctuating workweek method because the fixed salary covers all hours worked and, when
combined with non-excludable bonuses and premiums, constitutes all straight time pay. When an
employee is paid a salary for fixed hours, however, the salary is divided by the hours that it
covers, not the total hours worked, and additional straight time is due for any additional hours, as
well as any overtime premium. 29 CFR 778.113. Similarly, if an employee who is paid hourly,
for example, has worked uncompensated hours, the uncompensated hours are not included in
determining the regular rate and the employee is owed their regular rate for the uncompensated
hours as well as any overtime premium. See 29 CFR 778.109 (regular rate is non-excludable
remuneration divided “by the total number of hours actually worked by [the employee] in that
workweek for which such compensation was paid”) (emphasis added).
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method of computing overtime pay is the subject of this rulemaking and is known as the
fluctuating workweek method.
The fluctuating workweek method is not the only such example where additional
overtime compensation is properly computed as one-half the regular rate because the straight
time portion of the required “one and one-half times the regular rate” has already been paid. This
method of computation is also appropriate where an employee is compensated through piece
rate, job rate, or day rate arrangements.
Section 778.110 concerns instances where the employee is paid an hourly wage. If an
hourly wage were the sole component of compensation, the regular rate would simply be the
hourly wage. 29 CFR 778.110(a). Compensation for each overtime hour would equal one times
the hourly rate as straight-time pay plus an additional one-half times the hourly rate, for a total of
“one and one-half times the regular rate.” 29 U.S.C. 207(a).
Section 778.111 concerns instances where the employee is paid on a piece rate basis plus
an hourly premium for time spent waiting. In § 778.111(a)’s scenario, the regular rate for each
week is computed by adding piece rate compensation to the total waiting premium and then
dividing that sum by the number of hours worked. This constitutes the employee’s straight time
pay and “[o]nly additional half-time pay is required” for overtime hours worked. 29 CFR
778.111.
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Section 778.112 concerns instances where the employee is paid a flat amount for a day’s
work or a specific job, regardless of how many hours were actually worked on a particular day or
for a particular job. The regular rate is computed as the sum of all day rate or job rate
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Section 778.111(b) further provides that, for any workweek in which a piece rate employee
receives an hourly guarantee in lieu of the piece rate compensation, the regular rate is equal to
the guaranteed hourly rate.
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compensation in a workweek divided by the total number of hours worked. As with piece rate
pay, this constitutes straight-time pay for all hours worked. Accordingly, the employee “is then
entitled to extra half-time pay at this [regular] rate for all hours worked in excess of 40 in the
workweek.” 29 CFR 778.112.
Section 778.113 concerns instances where the employee is paid a salary for a specific
number of hours each week. In this scenario, the salary can be expressed as a constant hourly
rate equal to the salary amount divided by the specific number of hours that the salary is intended
to compensate.
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Since the salary covers a specific number of hours, and not all hours in a
workweek, it would not cover straight-time compensation for hours in excess of that specific
number, including any such overtime hours. Accordingly, the employee must receive straight-
time pay at the regular rate in addition to one-half of the regular rate as overtime premium for
each such overtime hour.
Finally, § 778.115 concerns instances where an employee receives straight-time pay at
multiple different rates in the same workweek. In such cases, the “regular rate for that week is
the weighted average of such rates” and the employee is entitled to additional half-time for
overtime hours. 29 CFR 778.115.
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These examples all apply the same fundamental principle for computing the regular rate:
the regular rate for each workweek is calculated by dividing non-excludable remuneration by the
number of hours worked. They also apply the same fundamental principle for computing
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If the salary covers a period longer than a week, an hourly rate can still be computed by
dividing the salary by the number of hours covered in the period, whether that is a month, a year,
or something else.
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Under certain circumstances, an employer may also pay overtime to an employee who is
employed at two different rates “at a rate not less than one and one-half times the hourly
nonovertime rate established for the type of work [the employee] is performing during such
overtime hours.” 29 CFR 778.419(a); see 29 U.SC. 207(g)(2).
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overtime pay: overtime pay for each hour worked above 40 is equal to straight-time pay for that
hour plus an additional 50 percent of the regular rate as overtime premium. With these examples
and principles in mind, the Department turns to the background specific to the fluctuating
workweek method of computing overtime pay under § 778.114.
B. History of the Fluctuating Workweek Method
The Department introduced the fluctuating workweek method of calculating overtime pay
in its 1940 Interpretive Bulletin No. 4. See Interpretative Bulletin No. 4 ¶ ¶ 10, 12 (Nov. 1940).
In 1942, the U.S. Supreme Court upheld the fluctuating workweek method in Overnight Motor
Transp. Co., v. Missel, 316 U.S. 572, 580 (1942). In that case, the Court held that where a
nonexempt employee had received only a fixed weekly salary (with no additional overtime pay)
for working irregular hours that frequently exceeded 40 per week and fluctuated from week to
week, the employer was required to retroactively pay an additional 50 percent of the employee’s
regular rate of pay multiplied by the overtime hours worked to satisfy the FLSA’s time and a half
overtime pay requirement. Id. at 573–74, 580–81.
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The quotient of the weekly salary divided by
the number of hours actually worked each week, including the overtime hours, determined the
“regular rate at which [the] employee [was] employed” under the fixed salary arrangement. Id. at
580.
In 1968, informed by the Supreme Court’s holding in Missel, the Department issued 29
CFR 778.114, which explains how to perform the regular rate calculation under the FLSA for
nonexempt salaried employees who work fluctuating hours. See 29 CFR 778.1, 778.109,
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As discussed above, half-time, rather than time-and-a-half pay, for overtime is appropriate where
the employee’s weekly earnings constitute compensation for all hours worked that week, including
overtime hours. Such a pay system already compensates the employee for overtime hours at the
regular rate, and so the employee is entitled under the FLSA to an additional half-time the regular
rate for those hours. See 29 U.S.C. 207(a).
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778.114. The Supreme Court has “interpreted the [FLSA] statute in a manner that would ‘afford
the fullest possible scope to agreements’ that are designed to address ‘the special problems
confronting employer and employee in businesses where the work hours fluctuate from week to
week and from day to day . . . .’” Hunter v. Sprint Corp., 453 F. Supp. 2d 44, 56–57 (D.D.C.
2006) (quoting Walling v. A.H. Belo Corp., 316 U.S. 624, 635 (1942)).
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Indeed, “[t]he
[fluctuating workweek] method was developed to permit FLSA-covered employees who work
irregular hours to negotiate a consistent minimum salary with their employers.” Hunter, 453 F.
Supp. 2d at 61 (emphasis in original).
Consistent with this manner of interpretation and purpose, the Department, until 2011,
had never explicitly forbidden in rulemaking the payment of bonuses and premiums beyond the
minimum salary to employees compensated under the fluctuating workweek method. To the
contrary, as explained more fully below, in both the 2008 NPRM and in a 2009 opinion letter,
the Department stated that such bonuses were consistent with using the fluctuating workweek
method. However, in the preamble to the 2011 final rule, the Department stated a different
position. The Department now adds clarifying language to 29 CFR 778.114 affirming its current
position that employers using the fluctuating workweek method to calculate overtime
compensation may pay bonuses and premiums in addition to the minimum salary.
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Note that Belo concerned a different type of flexible pay agreement, now codified under section
7(f) of the FLSA, under which an employee was paid on an hourly basis with a guaranteed weekly
sum. The Department cites Belo here only for the limited purpose of recognizing the manner in
which the Court generally interprets work arrangements under the FLSA when work hours vary
from week to week. In Hunter, the district court similarly referenced Belo in analyzing the regular
rate, and found notable that the Court decided Belo and Missel on the same day and that both cases
ultimately informed the promulgation of the fluctuating workweek regulatory scheme. See Hunter,
453 F. Supp. 2d at 56, 58 (“With the companion decisions of Missel and Belo as a backdrop, the
Department of Labor promulgated regulations that provide ‘examples of the proper method of
determining the regular rate of pay in particular instances,’” including the fluctuating workweek
method) (quoting § 778.109).
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Early examples of Department guidance and court decisions exemplify interpretations of
the FLSA that “afford the fullest scope possible” to fluctuating workweek arrangements. For
example, a 1999 WHD opinion letter explained that an employer using the fluctuating workweek
method may pay bonuses for working holidays or vacations, broadly instructing that “[w]here all
the legal prerequisites for the use of the fluctuating workweek method of overtime payment are
present, the FLSA, in requiring that ‘not less than’ the prescribed premium of 50 percent for
overtime hours worked be paid, does not prohibit paying more.”
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As another example, courts
have applied and endorsed the fluctuating workweek method when employees received
additional bonus payments. See, e.g., Cash v. Conn Appliances, Inc., 2 F. Supp. 2d 884, 908
(E.D. Tex. 1997) (applying fluctuating workweek method where employee received incentive
bonuses in addition to fixed salary); see id. at 893 n.17 (citing Parisi v. Town of Salem, No. 95-
67-JD, 1997 WL 228509, at *3 (D.N.H. Feb. 20, 1997) (“The rules promulgated by the Secretary
do not change when base compensation includes not only a salary but a bonus payment; the
bonus payment is simply included in calculating the regular rate.”)); Black v. Comdial Corp.,
Civ. A. No. 92-O81-C, 1994 WL 70113, at *5 (W.D. Va. Feb. 15, 1994) (“The provision of
[straight time] bonus pay for hours 45–61 changes neither the salary basis of [an employee’s]
pay, nor the applicability of the fluctuating workweek method of 29 C.F.R. § 778.114.”).
However, in 2003, the First Circuit held that certain types of additional pay were
incompatible with the fluctuating workweek method. See O’Brien v. Town of Agawam, 350 F.3d
279 (1st Cir. 2003). In O’Brien, the First Circuit held that police officers’ receipt of “bonus” pay
for working nights and long hours was contrary to the fluctuating workweek method. Id. at 288.
The O’Brien court reasoned that an employer using the method must pay a “fixed amount as
8
WHD Opinion Letter, 1999 WL 1002399, at *2 (May 10, 1999) (emphasis added).
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straight time pay for whatever hours … work[ed],” and therefore, any extra compensation would
violate this “fixed amount” requirement. Id. (quoting 29 CFR 778.114(a)).
The Department filed an amicus brief in support of the ultimate overtime-back-pay result
in O’Brien, reasoning that the “base salary covered only 1950 hours of work annually” under the
specific officers’ agreement at issue, and therefore, this “base salary was not intended to
compensate them for an unlimited number of hours,” as required by 29 CFR 778.114. Brief for
the Sec’y of Labor as Amicus Curiae, O’Brien, 350 F.3d 279, 2004 WL 5660200, at *11, 13
(Feb. 20, 2004). In other words, the Department reasoned that the fluctuating workweek method
could not be used because the officers’ fixed salary was understood to compensate them for a
specific—rather than fluctuating—number of hours each week. Id. However, the Department’s
brief did not address whether bonus pay beyond the “fixed amount” required was incompatible
with the fluctuating workweek method.
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Some courts followed O’Brien to hold that certain types of bonuses were incompatible
with the fluctuating workweek method,
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while others continued to hold that bonuses were
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In reflecting on Valerio and Tango’s Restaurant, the Department stated that “[n]othing in either
of those decisions suggests that 29 CFR 778.114 extends, contrary to its terms, to a pay system in
which an employee, while receiving a fixed salary for a certain minimum number of hours, is
paid more for additional straight time worked beyond a regular schedule.” O’Brien Amicus Br. at
*18 (citing Valerio v. Putnam Assocs. Inc., 173 F.3d 35, 39 (1st Cir. 1999); Martin v. Tango’s
Restaurant, 969 F.2d 1319, 1324 (1st Cir. 1992)). Section 778.113 should be used to compute
overtime owed based on the regular rate where a fixed salary is understood to cover a certain
number of hours. While the brief did not address the precise issue of whether bonus pay beyond
the “fixed amount” required was incompatible with the fluctuating workweek method, to the
extent that the brief could be read to suggest that this may have been the Department’s position
at the time, the Department is making clear that this is not the Department’s position. The
Department instead seeks to clarify that bonus pay for extra straight time work is compatible
with the fluctuating work week method. See, e.g., Black, 1994 WL 70113, at *2 (“The provision
of [straight time] bonus pay for hours 45-61 changes neither the salary basis of [an employee's]
pay, nor the applicability of the fluctuating workweek method of 29 CFR 778.114.”).
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See, e.g., Ayers v. SGS Control Servs., Inc., No. 03 CIV. 9077 RMB, 2007 WL 646326, at *10
(S.D.N.Y. Feb. 27, 2007) (“Plaintiff who received sea pay or day-off pay did not have ‘fixed’
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compatible with that method.
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These inconsistent decisions appeared to have created practical
confusion for employers.
The Department’s 2008 NPRM, in an effort to “eliminate confusion over the effect of
paying bonus supplements and premium payments to affected employees,” proposed to add a
sentence to the end of § 778.114(a) providing that payment of overtime premiums and other
bonus and non-overtime premium payments will not invalidate the “fluctuating workweek”
method of overtime payment, but such payments must be included in the calculation of the
regular rate unless excluded under section 7(e)(1) through (8) of the FLSA. 73 FR at 43656,
43670. The Department also proposed to add “an example to § 778.114(b) to illustrate these
principles where an employer pays an employee a nightshift differential in addition to a fixed
salary.” Id. at 43662; see also id. at 43670. The proposed clarifying language in the 2008 NPRM
reflected the Department’s position that bonus and premium payments are compatible with the
fluctuating workweek method.
On January 16, 2009, WHD reaffirmed this same position when it issued an opinion letter
explaining that “[r]eceipt of additional bonus payments does not negate the fact that an employee
receives straight-time compensation through the fixed salary for all hours worked whether few or
many, which is all that is required under § 778.114(a).” WHD Opinion Letter FLSA2009-24
(Jan. 16, 2009) (withdrawn Mar. 2, 2009).
weekly straight time pay, in violation of 29 C.F.R. § 778.114(a).”); Dooley v. Liberty Mut. Ins.
Co., 369 F. Supp. 2d 81, 87 (D. Mass. 2005) (bonus pay arrangement for weekend work violated
requirement that “the employee must receive a fixed salary that does not vary with the number of
hours worked during the week”) (internal quotation marks and citation omitted).
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See, e.g., Clements v. Serco, Inc., 530 F.3d 1224, 1230 (10th Cir. 2008) (applying fluctuating
workweek method where employee received recruitment bonus in addition to fixed salary);
Perez v. RadioShack Corp., No. 02 C 7884, 2005 WL 3750320, at *1 (N.D. Ill. Dec. 14, 2005)
(applying fluctuating workweek method where employee received tenure pay, commissions, and
other bonuses in addition to fixed salary).
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On May 5, 2011, the Department issued a final rule, which did not adopt the proposed
clarifying language to § 778.114. See 76 FR 18832. Instead, in the preamble, the Department
stated it would leave the text of § 778.114 unchanged except for minor revisions. Id. at 18853.
The Department expressly stated that the decision not to implement the proposed changes would
avoid “expand[ing] the use of [the fluctuating workweek] method of computing overtime pay
beyond the scope of the current regulation,” and would “restore the current rule.” Id. at 18850.
The same 2011 preamble, however, interpreted the “current rule” to mean that bonus and
premium payments “are incompatible with the fluctuating workweek method of computing
overtime under section 778.114.” Id.
The 2011 preamble’s reference to the “current rule” appears to have generated further
confusion among the courts, as the “record indicate[d] that in 2008 and 2009, … DOL construed
the [fluctuating workweek] regulation to permit bonus payments,” then “shifted course” in 2011
in a manner “contrary to its publicly-disseminated prior position.” Switzer v. Wachovia Corp.,
No. CIV.A. H-11-1604, 2012 WL 3685978, at *4 (S.D. Tex. Aug. 24, 2012). For example, one
court stated that the 2011 preamble “presents an about-face” that “alters the DOL’s
interpretation” so as to prohibit employers from using the fluctuating workweek method for
workers who receive bonuses. Sisson v. RadioShack Corp., No. 1:12CV958, 2013 WL 945372,
at *6 (N.D. Ohio Mar. 11, 2013). Another court presented with identical facts as Sisson reached
an opposite conclusion because it interpreted the 2011 preamble as “a decision to maintain the
status quo” that “does not[] disturb the law permitting employers to use the [fluctuating
workweek] method to calculate the overtime pay of workers who receive performance bonuses.”
Wills v. RadioShack Corp., 981 F. Supp. 2d 245, 259 (S.D.N.Y. 2013). As another example, a
third court declined to give any weight to the 2011 preamble because it rested on an
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“unconvincing” interpretation of Missel. Smith v. Frac Tech Servs., LLC, No. 4:09CV00679
JLH, 2011 WL 11528539, at *2 (E.D. Ark. June 15, 2011).
A growing number of courts, since 2011, have developed a dichotomy between
“productivity-based” supplemental payments, such as commissions, and “hours-based”
supplemental payments, such as night-shift premiums. Such courts hold that productivity-based
supplemental payments are compatible with the fluctuating workweek method, but not hours-
based supplemental payments. See, e.g., Dacar v. Saybolt, L.P., 914 F.3d 917, 926 (5th Cir.
2018), as amended on denial of rehearing (Feb. 1, 2019) (“Time-based bonuses, unlike
performance-based commissions, run afoul of the [fluctuating workweek] regulations.”); Lalli v.
Gen. Nutrition Ctrs., Inc., 814 F.3d 1, 10 (1st Cir. 2016) (“a compensation structure employing a
fixed salary still complies with section 778.114 when it includes additional, variable
performance-based commissions”). However, as explained in the NPRM, the Department has
never drawn this distinction, and this distinction is in tension with all of the Department’s prior
written guidance and statements on the issue such as the 2004 O’Brien amicus brief (declining to
support application of fluctuating workweek method to payment of additional straight-time
hours), the 2008 NPRM and the 2009 opinion letter (permitting bonuses as compatible with the
fluctuating workweek), and even the 2011 final rule (declining to implement the 2008 NPRM
and stating that the current rule prohibits all bonuses as compatible with the fluctuating
workweek).
As explained in the NPRM, the divergent views of the Department and the courts–and
even among courts–have created considerable uncertainty for employers regarding the
compatibility of various types of supplemental pay with the fluctuating workweek method. As
discussed below, comments received from several commenters support this assessment and
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document the confusion. As such, the need for the Department to clarify its fluctuating
workweek rule is even stronger now than in 2008, when it proposed a substantially similar
clarification. The Department is therefore issuing this final rule to clarify that bonus and
premium payments (whether hours-based, production-based, or other) are compatible with the
use of the fluctuating workweek method of compensation.
C. The Department’s Proposal
On November 5, 2019, the Department issued an NPRM proposing to revise its existing
regulation at § 778.114(a) to clarify that any bonuses, premium payments, or other additional pay
of any kind are compatible with the fluctuating workweek method of compensation, and that
such payments must be included in the calculation of the regular rate unless they are excludable
under FLSA sections 7(e)(1)-(8). See 84 FR at 59591. The NPRM further proposed to add
examples to § 778.114(b) to illustrate these principles where an employer pays an employee, in
addition to a fixed salary, (1) a nightshift differential and (2) a productivity bonus. Id. The
Department also proposed simplifying revisions § 778.114 by listing each required circumstance
for the fluctuating workweek method to correctly compute overtime pay and removing
duplicative text from revised § 778.114(c). Id. Finally, the Department proposed to change the
title of the regulation from “Fixed salary for fluctuating hours” to “Fluctuating Workweek
Method of Computing Overtime” to better reflect the purpose of the subsection and to improve
the ability of employers to locate the applicable rules. Id.
Approximately 36 individuals and organizations commented on the NPRM during the 30-
day comment period that ended on December 5, 2019. The Department received comments from
a diverse array of constituencies, including individual employees, employer and industry
associations, employee advocacy groups, non-profit organizations, law firms, professional
17
associations, and other interested members of the public. Many of the commenters supported the
Department’s efforts to clarify the fluctuating workweek regulation, while other commenters
opposed the proposed rule. All timely comments received may be viewed on
www.regulations.gov, docket ID WHD-2019-0006. The Department has carefully considered
the timely-submitted comments on the proposed changes.
The Department received a few comments that are beyond the scope of this rulemaking,
such as requests to raise the federal minimum wage. The Department does not have authority to
effectuate such a statutory change and therefore did not consider doing so as part of the proposed
rule. This final rule does not address comments that are out of scope of this rulemaking.
Significant issues raised in the comments on the Department’s proposal are discussed
below, along with the Department’s response to those comments.
III. FINAL REGULATORY REVISIONS
The Department is finalizing its proposal to revise and update the regulation at § 778.114
to clarify that bonus payments, premium payments, and other additional pay are consistent with
using the fluctuating workweek method of compensation, and that such payments must be
included in the calculation of the regular rate unless they may be excluded under FLSA sections
7(e)(1)-(8). See 29 U.S.C. 207(e)(1)-(8). The sections below discuss, in turn, the major issues
raised by commenters and the Department’s responses.
A. Section 778.114 is an Example of Computing Overtime Pay Based on the Regular
Rate
The NPRM proposed to revise § 778.114(a) to state that “[t]he fluctuating workweek
method may be used to calculate overtime compensation for a nonexempt employee if the
[listed] conditions are met[.]” 84 FR 59602. The purpose of the revision was to provide a list of
conditions which, if present, ensure that overtime pay is correctly computed under the FLSA.
18
But the proposed revision appears to have created, or at least did not dispel, the misconception
that the fluctuating workweek method deviates from the standard “one and one-half times”
overtime payment obligation under the FLSA. Some commenters, for instance, characterized the
fluctuating workweek method as an “exception” or “alternative” to the overtime premium
requirement. See, e.g., Center for Workplace Compliance (CWC), National Employment
Lawyers Association (NELA), National Employment Law Project (NELP).
Other commenters observed that the fluctuating workweek method in § 778.114 is
merely an example of how to compute the regular rate and overtime compensation in certain
circumstances. The U.S. Chamber of Commerce (Chamber) requested that the Department
“make clear that section 778.114 (like the other examples in the interpretive bulletin of which it
is a part) merely provides an example of how to calculate overtime in the particular
circumstances described in the example.” Associated Builders and Contractors (ABC) similarly
urged the Department “to clarify that examples given in the final rule are just that: examples.”
The Chamber further requested that the Department clarify that, because the fluctuating
workweek method in § 778.114 merely provides an example, it “does not impose any
restrictions, conditions, or limitations on the ‘wages divided by hours’ approach to calculating
the regular rate and the resulting overtime premium.” See also ABC at 3 (“The department
should make clear that examples given do not impose limitations, restrictions or other conditions
on applying the overtime calculation.”).
The Department agrees that § 778.114 is an example of how to properly compute
overtime compensation based on the regular rate. Section 778.109 states, “The following
sections give some examples of the proper method of determining the regular rate of pay in
particular instances,” and § 778.114 is one of these examples. See Allen v. Bd. of Pub. Educ. for
19
Bibb Cty., 495 F.3d 1306, 1313 (11th Cir. 2007) (“[R]eading section 778.115 in the context of
section 778.109, it becomes apparent that the former is one of the examples mentioned in the
latter as a way that the regular rate may be calculated in certain cases.”). The Department briefly
discussed these examples in the background section of this preamble, to make clear that the
fluctuating workweek method under § 778.114 is merely one of several examples of how to
properly compute the regular rate and overtime pay to satisfy the FLSA’s statutory pay
requirements.
As an example of correct computation of overtime pay based on the regular rate,
§ 778.114 cannot impose requirements that are inconsistent with overtime pay requirements
under the FLSA. See Allen, 495 F.3d at 1312. That said, § 778.114 can impose restrictions that
are consistent with how overtime pay is computed under the FLSA. When an employee is paid a
fixed salary as straight-time compensation for all hours worked and then receives a bonus, the
fluctuating workweek method described in § 778.114 correctly computes the regular rate and
overtime owed under the FLSA.
For the foregoing reasons, the Department is clarifying that the fluctuating workweek
method under § 778.114 is just one example of how to properly compute overtime pay owed
under the FLSA in the circumstances described therein. To make this point clearer, the
Department is revising § 778.114(a) to state: “An employer may use the fluctuating workweek
method to properly compute overtime compensation based on the regular rate for a nonexempt
employee under the following circumstances: …”
B. Circumstances Where an Employer May Use the Fluctuating Workweek Method to
Compute Overtime Pay
20
Proposed § 778.114(a)(1)-(5) lists five circumstances which, if all are met, enable an
employer to use the fluctuating workweek method to properly compute the regular rate and
overtime pay owed under the FLSA. Each of these circumstances is discussed below.
1. Hours that Fluctuate from Week to Week
Current § 778.114(a) states that the fluctuating workweek method is appropriate where,
inter alia, an employee “ha[s] hours of work which fluctuate from week to week.” The NPRM
proposed to retain this requirement in § 778.114(a)(1), which lists “the employee works hours
that fluctuate from week to week” as a condition that must be met. 84 FR at 59602.
Some commenters, such as Jackson Lewis, expressed concern that the NPRM did not
specify whether the employee’s fluctuation in hours worked per week could involve any range of
hours or whether the hours worked must sometimes fluctuate below forty hours in the workweek.
Although neither the current nor the proposed regulatory language require an employee’s hours
to sometimes fluctuate below forty hours per week, commenters pointed out that there has been
uncertainty about this point. Commenters requested that the Department clarify that employers
are able to use the fluctuating workweek method even for employees whose hours worked rarely,
if ever, go below forty in the workweek.
The Department has long held the position that there is no requirement that the
employee’s hours of work must fluctuate below forty hours per week. The Department has
consistently stated that the fluctuating workweek method remains appropriate even when it is
only the number of overtime hours that fluctuate. See WHD Opinion Letter FLSA (October 27,
1967) (“There is no requirement that the hours of work of an employee compensated on the
fluctuating workweek basis fluctuate above and below 40 hours in a workweek as there is for
employees employed pursuant to section 7(f) (formerly section 7(e)) of the Act.”); WHD
21
Opinion Letter FLSA2009-3, 2009 WL 648995 (Jan. 14, 2009) (stating that the fluctuating
workweek method can be used to compute back wages for workers whose hours fluctuated, but
who were generally expected to work a minimum of fifty hours per week).
Moreover, although a few courts have held that an employee’s hours must fluctuate
below forty hours per week before his or her overtime can be computed using the fluctuating
workweek method,
12
courts have more frequently found that the fluctuating workweek method
does not actually require that the employee’s hours fluctuate below forty hours. See, e.g., Aiken
v. County of Hampton, 172 F.3d 43, 1998 WL 957458, at *3 (4th Cir. 1998) (unpublished)
(holding that an employer can use the fluctuating workweek method when the employee reliably
works a base number of hours over forty per week, so long as the number of overtime hours per
week fluctuate); Condo v. Sysco Corp., 1 F.3d 599, 602 (7th Cir. 1993) (stating that the employer
may use the fluctuating workweek method when an employee’s hours fluctuate above but not
below forty hours per week); Mitchell v. Abercrombie & Fitch Co., 428 F. Supp. 2d 725, 735
(S.D. Ohio 2006), aff’d 225 F. App’x 362 (6th Cir. 2007) (per curiam) (finding no support for the
argument that an employee’s hours must fluctuate both above and below forty hours per week
for the fluctuating workweek method to be used); Ramos v. Telegian Corp., 176 F. Supp. 3d 181,
195 (E.D.N.Y. Mar. 31, 2016) (holding that the fluctuating workweek regulation does not require
or even suggest a requirement that an employee’s hours fluctuate both above and below forty in
the workweek).
Having reviewed and considered the comments, the Department is adopting its proposed
regulatory language regarding the requirement that an employee must receive a fixed salary that
12
See, e.g., Blotzer v. L-3 Comms. Corp., No. CV–11–274–TUC–JGZ, 2012 WL 6086931, at
*12 (D. Ariz. Dec. 6, 2012); Hasan v. GPM Investments, LLC, 896 F. Supp. 2d 145, 150 (D.
Conn. 2012); Costello v. Home Depot USA, Inc., 944 F. Supp. 2d 199, 208 (D. Conn. 2013).
22
does not vary with the number of hours worked in the workweek, whether few or many, for the
fluctuating workweek method to be applicable. To prevent any further misunderstanding,
however, the Department is also clarifying that the regulation does not require that an
employee’s hours must sometimes fluctuate below forty hours per week, so long as the
employee’s hours worked do vary.
2. Fixed Salary that Does Not Vary with the Number of Hours Worked
Section 778.114(a) currently provides that, in order for an employer to calculate overtime
pay pursuant to the fluctuating workweek method, the employee must be paid a “fixed salary . . .
for the hours worked each workweek, whatever their number.” 29 CFR 778.114(a). The
regulation also requires employers using the fluctuating workweek method to pay the guaranteed
salary even where “the workweek is one in which a full schedule of hours is not worked.” 29
CFR 778.114(c). The NPRM proposed to modify the current regulation to clarify that employers
may pay bonuses, premium payments, and other additional pay of any kind in addition to the
fixed salary. See 84 FR 59602. The NPRM did not propose, however, to substantively change the
current requirement that an employee must be paid a “fixed salary” representing compensation
for all of the hours worked in the workweek. The proposed regulatory text in the NPRM stated
that one of the conditions that must be satisfied in order to use the fluctuating workweek method
is that the employee be paid “a fixed salary that does not vary with the number of hours worked
in the workweek.” Id.
A few commenters, including ABC and the Chamber, requested that the Department state
in the final rule that the fluctuating workweek method may be used as long as the employee is
paid on a salary basis as defined in 29 CFR 541.602. They asked the Department to replace the
current “fixed salary” requirement with, or to define the “fixed salary” requirement by, reference
23
to the salary basis test that is used for the minimum wage and overtime exemption for executive,
administrative, and professional employees in section 13(a)(1) of the FLSA. 29 U.S.C. 213(a).
The Chamber urged the adoption of the salary basis test as defined in 29 CFR 541.602 in the
fluctuating workweek context so that employers could make deductions from the “fixed salary”
under the fluctuating workweek method on the same basis that deductions are permitted under
part 541. The Wage & Hour Defense Institute (WHDI) similarly requested that the Department
provide in the final rule that deductions from the salary for full days not worked (e.g., due to
illness) are permissible while using the fluctuating workweek method.
The Department has carefully considered these commenters’ requests to incorporate the
salary basis definition and to allow the same types of deductions permissible under part 541 from
the “fixed salary” in § 778.114 and has determined not to adopt such a change at this time. The
Department has consistently rejected the argument that the executive, administrative, and
professional exemption’s salary basis requirements and the permitted deductions from salary set
forth in § 541.602 should apply to the fluctuating workweek method. See, e.g., FLSA2006-15
Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006); FLSA Opinion Letter, 1999 WL
1002415, at *1-2 (May 28, 1999); FLSA Opinion Letter, 1991 WL 11648489, at *1 (Aug. 20,
1991). Adoption of the part 541 salary basis requirements and permitted pay deductions would
be contrary to the Department’s longstanding interpretation that salary deductions for days or
hours not worked are generally incompatible with the payment of a “fixed” salary under the
fluctuating workweek method. See, e.g., FLSA2006-15 Opinion Letter, 2006 WL 1488849, at *1
(May 12, 2006); FLSA Opinion Letter, 1991 WL 11648489, at *1 (Aug. 20, 1991); FLSA
Opinion Letter, 1983 WL 802650, at *1 (Nov. 30, 1983); FLSA Opinion Letter, 1978 WL
388412, at *1 (Dec. 29, 1978).
24
As the Department has explained, “[I]t is the longstanding position of the Wage and Hour
Division that an employer utilizing the fluctuating workweek method of payment may not make
deductions from an employee’s salary for absences occasioned by the employee.” FLSA2006-15
Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006). For example, an employer using the
fluctuating workweek method may not make deductions from an employee’s salary when the
employee has exhausted his or her sick leave bank or has not yet earned sufficient sick leave to
cover an absence due to illness. Id.; see also FLSA Opinion Letter, 1978 WL 388412, at *1 (Dec.
29, 1978) (explaining that deductions made for “excused absences, even for personal reasons
(such as time off to visit a relative who is ill) would be inconsistent” with the requirement in
§ 778.114 that an employee be paid a full, “fixed” salary for any week in which he or she
performs work).
The Department has for many years advised, however, that an employer using the
fluctuating workweek method of computing overtime pay “may take a disciplinary deduction
from an employee’s salary for willful absences or tardiness or for infractions of major work rules,
provided that the deductions do not cut into the required minimum wage or overtime
compensation.” FLSA2006-15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006)
(emphasis added); see also FLSA Opinion Letter, 1983 WL 802650, at *1 (Nov. 30, 1983)
(same); WHD Field Operations Handbook 32b04b(b) (same); Samson v. Apollo Resources, Inc.,
242 F.3d 629, 639 (5th Cir. 2001) (concluding that occasional deductions from pay for willful
absences or tardiness “do not run afoul of the guidelines governing the [fluctuating workweek]
method”). If such deductions are consistently or frequently made, however, then “the practice of
making such deductions would raise questions as to the validity of the compensation plan.”
25
FLSA2006-15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006) (citing 29 CFR
778.306(b)); FLSA Opinion Letter, 1983 WL 802650, at *1 (Nov. 30, 1983) (same).
Replacing the “fixed salary” requirement of the fluctuating workweek method with the
salary basis definition in § 541.602, thereby expanding the types of pay deductions that would be
permissible under § 778.114, could have a significant effect on the scope and applicability of the
fluctuating workweek method. Because the request to adopt the salary basis test and to permit
new deductions not previously recognized as compatible with the “fixed salary” requirement in
the fluctuating workweek context would constitute a significant change to the current regulation
and the Department’s longstanding interpretation of that regulation, the Department would want
to solicit and carefully consider public comment on the issue before adopting such a revision.
Accordingly, the Department declines to grant the request to apply the salary basis
requirements of § 541.602 to § 778.114 at this time. The Department has, however, determined
that it would be helpful to the public to expressly incorporate in the regulation itself its
longstanding interpretation that employers using the fluctuating workweek method may take
occasional disciplinary deductions from an employee’s salary for willful absences or tardiness or
for infractions of major work rules, provided that the deductions do not cut into the required
minimum wage or overtime compensation. The Department has therefore decided to add such
clarifying language to the regulatory text in § 778.114(d).
3. The Fixed Salary Satisfies the Minimum Wage
Current § 778.114(a) states that the fluctuating workweek method is appropriate where,
inter alia, “the amount of the salary is sufficient to provide compensation to the employee at a
rate not less than the applicable minimum wage rate for every hour worked in those workweeks
in which the number of hours the employee works is greatest.” 29 CFR 778.114(a). The NPRM
26
included nearly identical text in proposed § 778.114(a)(3) as one of the circumstances that must
be met for using the fluctuating workweek method.
A few commenters noted that, because the regular rate falls as hours increase under the
fluctuating workweek method, in occasional workweeks in which an employee works extremely
high hours, the regular rate may fall below the minimum wage, even where employers have
endeavored to ensure that the payment system generally is compliant with minimum wage
requirements. See, e.g., Chamber; ABC. These commenters acknowledge that, in such situations,
the employer would violate the FLSA unless it provides additional payments to satisfy the
minimum wage. The commenters request, however, that the Department clarify that an
employer’s intermittent need to provide supplemental payments to ensure the minimum wage is
met would not retroactively invalidate the fluctuating workweek method. They further request
that the Department add language providing that the fixed salary need only be “reasonably
calculated” to provide compensation at a rate not less than the applicable minimum wage.
After careful consideration, the Department has decided to adopt the language as
proposed. As the commenters acknowledge, in any given workweek where the employee’s fixed
salary does not at least meet the applicable minimum wage, the employer must make an
additional payment to bring the employee up to the applicable minimum wage. See WHD
Opinion Letter FLSA 945 (Feb. 6, 1969); WHD Opinion Letter FLSA (June 12, 1969); Cash, 2
F. Supp. 2d at 894. Therefore, the proposed regulation maintains the requirement for the use of
the fluctuating workweek method that the fixed salary be sufficient to compensate the employee
for all hours worked at a rate not less than the applicable minimum wage.
In explaining that the fixed salary must be sufficient to compensate the employee at a rate
not less than the minimum wage for the fluctuating workweek method to be used, however, the
27
proposed regulatory language does not indicate that an occasional failure to meet this
requirement retroactively invalidates the use of the fluctuating workweek method in previous
workweeks or prevents the employer from continuing to use the fluctuating workweek method
for that employee in subsequent workweeks. On the contrary, the Department has already
determined that where an employer has reasonably calculated the fixed salary to cover at least
the minimum wage for all hours worked, an occasional workweek where the fixed salary does
not at least equal the applicable minimum wage, due to unusual and unforeseeable
circumstances, does not invalidate the use of the fluctuating workweek method in other
workweeks in which the salary equals or exceeds the applicable minimum wage as anticipated.
See WHD Opinion Letter FLSA-883 (Aug. 30, 1966) (stating that the employer “must not only
in fact assure that no workweek will be worked in which the salary fails to provide at least the
current statutory minimum hourly rate of $1.25, but the salary must also be so arranged that it is
reasonably calculated to provide for such a statutory minimum”); WHD Opinion Letter FLSA
(Feb. 6, 1969) (finding that “the bona fides of the pay plan will not fail solely on the grounds that
in five weeks in an annual period, due to unforeseen circumstances beyond the control or the
anticipation of the employer and employee, the salary failed to provide at least the applicable
statutory minimum hourly rate of pay”).
The courts have also consistently held that the employer is not prohibited from using the
fluctuating workweek method in other workweeks merely due to infrequent workweeks where
the fixed salary did not at least equal the minimum wage for all hours worked due to unforeseen
circumstances. See, e.g., Cash, 2 F. Supp. 2d at 894 (finding that the employer’s use of the
fluctuating workweek method was still appropriate in most workweeks despite “infrequent
occasions when unforeseen events cause the employee to work so many hours that her salary
28
fails to support an average hourly rate at least equal to the applicable minimum wage”); Perez v.
Radio Shack Corp., 2005 WL 3750320, at *5 (N.D. Ill. Dec. 14, 2005) (declining to conclude
that the employer should have foreseen that employees’ hours worked would be so high that their
fixed salary would not cover the applicable minimum wage in all workweeks, when all
employees in the potential class received less than the minimum wage approximately forty-nine
times in a four-year time period); Aiken, 172 F.3d 43, 1998 WL 957458, at *5-6 (according
substantial weight to the Department’s opinion letters that suggest that “making a minimum
wage adjustment on five occasions in a two-year period does not defeat the validity of the
fluctuating workweek plan,” and concluding that employees are not entitled to any additional
compensation beyond the minimum wage straight time and overtime adjustments they had
already received for those workweeks); Davis v. Friendly Exp., Inc., 2003 WL 21488682, at *2
(11th Cir. 2003) (finding that an employer does not have to adopt another method of computing
overtime where the fixed salary did not at least equal the applicable minimum wage for all hours
worked in a few, isolated workweeks due to unforeseen events).
The overall use of the fluctuating workweek method is thus not invalidated by occasional
and unforeseeable workweeks in which the employee’s fixed salary did not provide
compensation to the employee at a rate not less than the applicable minimum wage, so long as
the fixed salary was reasonably calculated to compensate the employee at or above the applicable
minimum wage in the foreseeable circumstances of the employee’s work. It is important to note,
however, that the employer will not be able to use the fluctuating workweek method in
circumstances where the employer could have foreseen that the employee’s salary would not at
least equal the applicable minimum wage in all workweeks, or where the employee’s salary in
fact did not at least equal the applicable minimum wage with some degree of frequency. In such
29
circumstances, the employer and the employee must reach a new understanding, either as to the
number of hours that the employee is to work or the amount of fixed salary to be paid, or the
employer must use a different method to compute overtime. See WHD Opinion Letter FLSA
(Feb. 6, 1969) (stating that the fluctuating workweek method “would be inapplicable where the
employer could have foreseen or anticipated that the salary would be insufficient to yield the
minimum wage even in a nominal number of workweeks such as five in an annual period”);
WHD Opinion Letter FLSA (June 12, 1969) (finding that “the fact that the employee’s salary
failed to equal the statutory minimum wage in as many as 27 workweeks[] in one year would
render moot any consideration that such a situation could not have been anticipated … [and] to
ensure that his fluctuating workweek plan will be valid in the future, the employer must reach a
new understanding with the employee”); Davis v. Friendly Exp., Inc., No. 02-14111, 2003 WL
21488682, at *2 (11th Cir. 2003) (per curiam) (“If, however, the need for a minimum wage
supplement becomes common, the fluctuating workweek calculation may not apply unless the
employer and the employee reach a new understanding.”); Aiken, 172 F.3d 43, 1998 WL 957458,
at *5 (rejecting an employee’s argument that an employer and employee must reach a new
understanding regarding the use of the fluctuating workweek method if there is even a single
workweek in which the employee’s fixed salary falls below the minimum wage, stating instead
that the validity of such a pay plan is defeated only if such workweeks are foreseeable or
frequent); Perez v. Radio Shack Corp., No. 02 C 7884, 2005 WL 3750320, at *3 (N.D. Ill. Dec.
14, 2005) (“If the breaches become too common, however, the employer must cease using the
fluctuating workweek method and reach a new understanding with the employee.”).
4. Clear and Mutual Understanding
30
In its current form, § 778.114(a) provides that, to use the fluctuating workweek method
of computing overtime, an employer and employee must, inter alia, possess “a clear mutual
understanding . . . that the fixed salary is compensation (apart from overtime premiums) for the
hours worked each workweek, whatever their number, rather than for working 40 hours or some
other fixed weekly work period.” 29 CFR 778.114(a). The current regulation further explains
that the fluctuating workweek method may not be used “unless the employee clearly understands
that the salary covers whatever hours the job may demand in a particular workweek and the
employer pays the salary even though the workweek is one in which a full schedule of hours is
not worked.” 29 CFR 778.114(c).
The NPRM proposed to modify the current language regarding the clear and mutual
understanding requirement for readability and to clarify that employers may pay bonuses,
premium payments, and other additional pay of any kind in addition to the fixed salary. See 84
FR 59602. The NPRM did not, however, propose to substantively change the current
requirement that an employee and employer must clearly understand that the fixed salary
represents compensation for all of the hours worked in the workweek, whether many or few. See
id. (proposing that the employee and employer must “have a clear and mutual understanding that
the fixed salary is compensation (apart from overtime premiums and any bonuses, premium
payments, or other additional pay of any kind not excludable from the regular rate under section
7(e)(1) through (8) of the Act) for the total hours worked each workweek regardless of the
number of hours”).
A few commenters, including the WHDI and Fisher Phillips, requested that this clear and
mutual understanding requirement be removed or modified in the final rule. WHDI stated that, as
previously interpreted by the Department and courts, an employer is not required to prove an
31
employee’s state of mind in order to satisfy this requirement. In other words, WHDI asserted that
the fluctuating workweek method “is established via objective evidence, not state of mind
evidence” and thus the reference to a clear and mutual understanding between the employer and
employee is misleading and should be deleted. Fisher Phillips similarly argued that the NPRM’s
proposed “clear and mutual understanding” language would erroneously create a heightened
“requirement” for use of the fluctuating workweek method. Fisher Phillips requested that WHD
simply use the term “understanding” to avoid future litigation over the meaning of this provision.
The “clear mutual understanding” language has appeared in § 778.114 since 1968. See 33
FR 986, 991 (Jan. 26, 1968). The Department’s longstanding position is that the mutual
understanding that must exist between the employer and employee is that the fixed salary paid to
the employee represents compensation for all the hours worked in that workweek, however many
or few. See, e.g., FLSA2009-3 Opinion Letter, 2009 WL 648995, at *2 (Jan. 14, 2009); FLSA
Opinion Letter, 1999 WL 1002399, at *1 (May 10, 1999). The clear and mutual understanding
requirement does not, however, extend to the specific method used to compute the overtime pay.
See FLSA2009-3 Opinion Letter, 2009 WL 648995, at *2 (Jan. 14, 2009). In other words, the
current regulation does not impose a requirement that the employee needs to fully understand the
precise payroll method by which his or her overtime compensation is calculated. Id. Numerous
courts have reached the same conclusion in analyzing the current regulation. See, e.g., Garcia v.
Yachting Promotions, Inc., 662 F. App’x 795, 797 (11th Cir. 2016) (per curiam) (“An employee
does not have to understand every contour of how the fluctuating workweek method is used . . .
so long as the employee understands that his base salary is fixed regardless of the hours
worked.”); Clements v. Serco, Inc., 530 F.3d 1224, 1230-31 (10th Cir. 2008) (same); Valerio v.
Putnam Assocs. Inc., 173 F.3d 35, 40 (1st Cir. 1999) (“The parties must only have reached a
32
‘clear mutual understanding’ that while the employee’s hours may vary, his or her base salary
will not.”); Bailey v. Cnty. of Georgetown, 94 F.3d 152, 156 (4th Cir. 1996) (“Neither [section
778.114] nor the FLSA in any way indicates that an employee must also understand the manner
in which his or her overtime pay is calculated.”). The NPRM did not propose to substantively
modify this longstanding interpretation or to create a new heightened requirement with respect to
the nature of the understanding that must exist between the parties.
The Department believes that the clear and mutual understanding requirement is an
important condition placed upon the usage of the fluctuating workweek method. The
commenters requesting deletion of this requirement did not present evidence that courts,
employers, or employees are unduly challenged in understanding or applying the requirement.
Accordingly, the Department declines to substantively modify its proposal to incorporate the
existing clear and mutual understanding requirement in the regulatory text. The Department has
decided, however, to add clarifying text in § 778.114(a) to emphasize that, although the parties
must have a clear and mutual understanding that the fixed salary is compensation for all hours
worked in the workweek, they need not possess such an understanding as to the specific method
used to calculate overtime pay.
5. Computing Overtime Pay Owed under the Fluctuating Workweek Method
Proposed § 778.114(a)(5) requires that “[t]he employee receives overtime compensation,
in addition to such fixed salary and any bonuses, premium payments, and additional pay of any
kind, for all overtime hours worked at a rate of not less than one-half the employee’s regular rate
of pay for that workweek.” It further clarifies that “[p]ayment of any bonuses, premium
payments, and additional pay of any kind is not incompatible with the fluctuating workweek
method of overtime payment, and such payments must be included in the calculation of the
33
regular rate unless excludable under section 7(e)(1) through (8) of the Act.” Proposed
§ 778.114(a)(5) also revises the current rule’s explanation of how the regular rate and overtime
pay would be computed under the fluctuating workweek method to account for cases where the
employee receives non-excludable supplemental payments. Specifically, “the regular rate of the
employee will vary from week to week and is determined by dividing the amount of the salary
and any non-excludable additional pay received each workweek by the number of hours worked
in the workweek” and “[p]ayment for overtime hours at not less than one-half such rate satisfies
the overtime pay requirement because such hours have already been compensated at the straight
time rate by payment of the fixed salary and non-excludable additional pay.” 84 FR at 59602.
13
As discussed above, the fluctuating workweek method computes overtime pay where an
employee receives a weekly salary that is understood to be compensation for all hours worked.
Accordingly, § 778.114 is an example of a scenario where additional overtime compensation is
properly computed as one-half the regular rate because the straight-time portion of the required
“one and one-half times the regular rate” has already been paid. Any pay arrangement that
provides compensation for all hours worked in a workweek would cover the straight-time portion
of required overtime pay, leaving the need to pay only an additional half-time premium for each
overtime hour. See 29 CFR 778.111, 778.112. The fact that an employee received a bonus or
premium payment as part of such an arrangement would not negate the fact that he or she has
already received the straight-time portion of required overtime pay as long at the additional
13
By comparison, current § 778.114(a) states that “the regular rate of the employee will vary
from week to week and is determined by dividing the number of hours worked in the workweek
into the amount of the salary to obtain the applicable hourly rate for the week” and “[p]ayment
for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay
requirement because such hours have already been compensated at the straight time regular rate,
under the salary arrangement.” 29 CFR 778.114(a).
34
payment is appropriately included in the regular rate. In other words, payment of bonuses,
premiums, and other additional pay under the fluctuating workweek method will not change the
half-time overtime calculation, as long as those payments are appropriately included in the
regular rate, because the employees will have already received the straight-time due to them for
all hours worked, and only additional half-time needs to be computed for overtime hours to
comply with the FLSA.
For example, suppose an employee were paid $491 in fixed weekly salary plus an $8 per
hour nightshift premium. In a week in which the employee works 50 hours, including 4 hours for
which the employee receives the nightshift premium, the employee’s straight time pay is $523
($491 salary plus $32 nightshift premium), and the regular rate is $10.46. The employer need
only pay an additional $5.23, half time the regular rate, for each of the 10 overtime hours, for a
total of $52.30. The payment of the $8 nightshift premium is reflected in this fluctuating
workweek method computation. The fluctuating workweek method therefore correctly computes
overtime pay owed under the FLSA when an employee receives a fixed salary and hours based
premiums that compensate him or her for all hours worked. This is the same result as would
occur if the employee were paid, for example, on a piece rate basis but also received additional
pay for specific hours. See 29 CFR 778.111(a) (providing a regulatory example of payment of
waiting time in addition to piece rate and explaining that only additional half time is due for
overtime hours).
Many commenters welcomed the proposed clarification in § 778.114(a)(5). According to
the Society for Human Resource Management (SHRM), “employees and employers are best
served by a system that promotes maximum flexibility in structuring employee pay and benefits
and clarity for employers when preparing total compensation packages” and the proposed
35
clarification “will provide much-needed clarity to the regulated community.” The Society of
Independent Gasoline Marketers of America (SIGMA) stated that “[t]reating all such bonus
payments consistently will reduce employer confusion and regulatory burdens and facilitate
compliance with overtime rules.” See also CWC, World Floor Covering Association (WFCA).
Some of the commenters supporting the clarification in proposed § 778.114(a)(5)
requested that the Department further clarify the types of “additional pay of any kind”
that would be compatible with the fluctuating workweek method. SHRM requested that the
Department “specifically referenc[e] ‘commissions’ as a permissible form of additional pay… to
eliminate any confusion over whether such commission payments are compatible with the
fluctuating workweek method.” As noted in the NPRM, the Department agrees that commissions
constitute a type of “additional pay of any kind” that would be compatible with the fluctuating
workweek method. See 84 FR at 59594 (“[e]xamples of ‘additional pay of any kind’ may include
commissions”).
14
Additionally, the Department believes hazard pay also would be compatible
with the fluctuating workweek method. Id. at 59601 (listing additional pay “for hazard duty,
graveyard shifts, and so forth” as types of premiums that would be permitted under this final
rule). Accordingly, the Department is revising the phrase “any bonuses, premium payments, or
other additional pay of any kind” in proposed § 778.114 to “any bonuses, premium payments,
commissions, hazard pay, or other additional pay of any kind.”
14
29 CFR 778.117 (“Commissions (whether based on a percentage of total sales or of sales in
excess of a specified amount, or on some other formula) are payments for hours worked and
must be included in the regular rate. This is true regardless of whether the commission is the sole
source of the employee’s compensation or is paid in addition to a guaranteed salary or hourly
rate, or on some other basis, and regardless of the method, frequency, or regularity of computing,
allocating and paying the commission.”).
36
The WFCA requested that the Department restrict “additional pay of any kind” that
would not invalidate the fluctuating workweek method “to what is ultimately included in the
definition of the regular rate.” Such a restriction would imply that supplemental payments that
are excludable from the regular rate under section 207(e)—such as overtime premiums under
section 207(e)(5)-(7), or “payments in the nature of gifts made at Christmas time” under section
207(e)(1)—would invalidate the fluctuating workweek method. Such supplemental pay,
however, does not impact the employee’s straight time compensation because it is excludable
from the regular rate. The Department has never interpreted such payments as being inconsistent
with the use of the fluctuating workweek method of compensation.
The requested restriction would also have the effect of discouraging employers using the
fluctuating workweek method from offering excludable supplemental pay. But as explained more
fully in the Department’s recent rulemaking regarding the regular rate, 84 FR 68736, excludable
payments such as on-site medical care, wellness programs, and contributions to health and
retirement plans, benefit workers immensely. See 29 CFR 778.215, 778.224. The Department
believes such excludable remuneration should be encouraged and not discouraged. As such, the
Department declines to restrict the types of additional pay that would be compatible with the
fluctuating workweek method.
Several commenters objected to the proposed clarification that “[p]ayment of bonuses,
premium payments, and additional pay of any kind is not incompatible with the fluctuating
workweek method of overtime payment” and requested that the Department rescind the proposed
revisions to § 778.114(a)(5). These commenters raised a number of arguments, which the
Department addresses below.
a.) Whether Use of the Fluctuating Workweek Method Is Consistent with
thePurpose of the FLSA
37
Comments submitted by NELA, NELP, Economic Policy Institute (EPI), and 18 State
Attorneys General (State AGs) contend that, by making it easier for employers to use the
fluctuating workweek method, the proposed clarification in § 778.114(a)(5) is contrary to the
FLSA’s remedial purpose. For instance, NELA asserts that the proposed rule would undermine
“the primary purposes of the FLSA’s overtime provisions,” which are “to protect workers from
long hours of work and to spread employment.” See also NELP, EPI, State AGs.
As an initial matter, the Department emphasizes, as previously discussed, that the
fluctuating workweek method does not deviate from the standard method of computing overtime
pay under the FLSA. As has always been clear in the regulatory text, because the employee has
received straight time compensation for all hours in the workweek, the overtime payment
obligation is met by payment of an additional one-half the regular rate for all hours over 40 in the
workweek.
Far from being contrary to the purpose of the FLSA’s overtime requirement, half-time
overtime under the fluctuating workweek method furthers that purpose. As the Supreme Court
has explained, “[B]y increasing the employer’s labor costs by 50% at the end of the 40-hour
week and by giving the employees a 50% premium for all excess hours, Section 7(a) achieves its
dual purpose of inducing the employer to reduce the hours of work and to employ more men and
of compensating the employees for the burden of a long workweek.” Youngerman-Reynolds
Hardwood, 325 U.S. at 423-24. The Supreme Court has further warned against the “flawed
premise that the FLSA pursues its remedial purpose at all costs.” Encino Motorcars, LLC v.
Navarro, 138 S. Ct. 1134, 1142 (2018) (internal quotation marks omitted). In this case, the FLSA
pursues its remedial purpose in its overtime requirement at a clearly defined cost: “increasing the
employer’s labor costs by 50% … for all [overtime] hours.” Youngerman-Reynolds Hardwood,
38
325 U.S. at 423. That is precisely what the fluctuating workweek method achieves. As such, the
fluctuating workweek method is consistent with the FLSA, and the Department believes that any
increased use of the method by employers in response to this final rule will not conflict with the
purposes of the Act.
b.) Whether the Final Rule is Consistent with Supreme Court Precedent
In its comment, NELA states that the final rule is inconsistent with the Supreme Court’s
decision in Missel, 316 U.S. 572. According to NELA, “the [Missel] Court held that an employer
may pay a diminishing half-time overtime premium only if the employee receives a fixed weekly
wage amount that never varies based on work performed.” In support of this conclusion, NELA
stated that “[n]owhere in Missel did the Court consider, let alone authorize, the scenario of an
employer paying a fixed salary [plus] other variable hours-based compensation under a half-time
pay scheme.” NELA further contended that the Missel Court “directly answered” the question of
“whether an employer can ever pay any amount other than base salary while still availing itself
of [the fluctuating workweek method].” The plaintiff in Missel received a $2.50 per week
allowance for supper money in addition to the fixed salary, which NELA argued is a type of
supplemental pay that does not vary with respect to hours worked.
15
According to NELA, since
the Missel Court permitted non-hours-based additional compensation under the fluctuating
workweek method provided that the employee’s total compensation was fixed in advance and
guaranteed, it must also have prohibited all hours-based additional compensation under that
method. See NELA (arguing that Missel held that additional compensation is permitted under the
15
The Department notes that the Supreme Court’s opinion in Missel made no mention of the
allowance for supper money, which was noted in the lower court opinions. The fixed salary
amount referenced in the Court’s opinion, however, included the weekly allowance. The
Department also notes that under certain circumstances supper money can be excluded from the
regular rate. 29 CFR 778.217(b)(4).
39
fluctuating workweek method “if (and only if) the additional compensation amounts – like the
base salary–are fixed and do not vary based on the number or type of hours worked”).
The Department agrees with NELA that the Missel Court did not consider the scenario
where an employee receives hours-based supplemental pay on top of a fixed salary, and so could
not have expressly authorized such payments under the fluctuating workweek method. But for
that same reason, the Missel Court could not have precluded such payments. 84 FR at 59593
(“Missel did not even address the issue of bonus or incentive payments beyond the fixed salary,
let alone preclude certain types of payments.”); see also Smith, 2011 WL 11528539, at *2
(“Nothing in Missel prohibits the use of the fluctuating work week method for calculating
[overtime owed] whenever an employer gives a bonus to an employee.”).
The Department does not agree that the Missel Court’s decision means that all hours-
based compensation must be forbidden. As NELA conceded, Missel did not address hours-based
compensation. As such, the Court could not have “directly answered” any question concerning
hours-based supplemental pay. Therefore, Missel does not support NELA’s contention that a
half-time overtime premium is appropriate “only if the employee receives a fixed weekly wage
amount that never varies based on work performed.”
c.) Whether the Final Rule Is Inconsistent with Other Legal Precedent
Several commenters, including NELP, argued that “since Missel, courts have consistently
been clear in their application of the [fluctuating workweek] rule. Under the [fluctuating
workweek method], the employer’s regular rate of pay can vary only with the number of hours
worked per week, not the type of work performed during those hours or any premiums paid for
those hours.” See also State AGs. These commenters list several court cases holding that the
40
fluctuating workweek method is not compatible with hours-based bonuses. See, e.g., NELP;
State AGs.
However, since Missel, courts have taken a wide range of approaches regarding the
payment of bonuses and premium payments under the fluctuating workweek method and have
not been consistent in their application of the fluctuating workweek rule. For example, some
courts held that bonus and premium payments were permitted under the fluctuating workweek
method, and did not make the distinction between hours-based and production-based payments
that some courts later developed. See, e.g., Cash, 2 F. Supp. 2d at 908 (applying fluctuating
workweek method where employee received incentive bonuses in addition to fixed salary);
Black, 1994 WL 70113, at *5 (applying fluctuating workweek method where employee received
straight-time bonuses for long hours in addition to fixed salary). Conversely, other courts have
categorically prohibited such pay. See West v. Verizon Servs. Corp., No. 8:08–cv–1325–T–
33MAP, 2011 WL 208314, at *11 (M.D. Fla. Jan. 21, 2011) (fluctuating workweek method
invalid because employee “received various bonus payments and commissions”).
In 2003, the First Circuit held that the fluctuating workweek method may be used only
where an employee receives a “‘fixed amount as straight time pay for whatever hours [the
employee] is called upon to work in a workweek.’” O’Brien, 350 F.3d at 288 (quoting 29 CFR
778.114(a)). Following O’Brien, and citing the 2011 final rule preamble in their reasoning, some
courts have developed a dichotomy that permits production-based bonuses but prohibits hours-
based bonuses under the fluctuating workweek method. See Dacar, 914 F.3d at 926; Lalli, 814
F.3d at 10. The Department notes, however, that neither the Department’s regulations nor the
FLSA distinguish between production-based and hours-based bonuses. Further, and perhaps
most importantly, this legal precedent was based on the wording of the regulation prior to this
41
rulemaking, and was exacerbated by the unclear preamble discussion in the 2011 final rule, both
of which the Department is addressing in this rulemaking.
16
As these divergent approaches demonstrate, and contrary to the assertions of some
commenters, the case law is neither consistent nor clear. These inconsistent interpretations by
courts have created practical confusion and challenges for employers. Comments received in this
rulemaking document the confusion caused by the judicially-developed distinction between
productivity-based and hours-based bonuses. See CWC (“Some courts have permitted additional
payments, others have prohibited them. S[t]ill other courts have drawn distinctions between
permitted and prohibited additional payments based on the purpose of the payments. This widely
divergent case law has created a greater disincentive for employers to consider the fluctuating
workweek [method].”). One of the reasons for this rulemaking is to clear up the confusion
caused by the divergent case law.
This final rule makes clear that permitting all supplemental pay while using the
fluctuating workweek method is consistent with how overtime pay is computed based on the
regular rate under the FLSA.
The Department recognizes that this clarification is inconsistent with certain legal
precedent, such as those cases that adhere to the judicially-developed dichotomy between hours-
16
NELP states in a footnote that courts issuing case law that is inconsistent with the final rule
“have been interpreting Supreme Court precedent, not the regulation.” But, as explained above,
Supreme Court precedent does not directly address the compatibility of bonus and premium
payments with the fluctuating workweek method. And the courts cited by NELP ground their
analysis in the Department’s fluctuating workweek regulation. For instance, the O’Brien court
explained that “the parties limit their arguments to whether the compensation scheme …
comports with the regulation, and we confine ourselves to the same question.” 350 F.3d 287
n.15.
42
based and productivity-based bonuses.
17
However, as discussed above, neither the Department’s
regulations nor the FLSA distinguish between production- and hours-based bonuses when
computing the regular rate and overtime pay. Indeed, this dichotomy lacks support and is in
tension with all of the Department’s prior written guidance on the issue. The clarifications
provided in this preamble discussion and the corresponding explicit revisions to the regulatory
text will bring much needed clarity regarding the compatibility of all types of bonuses with the
fluctuating workweek method to the courts, employers, and employees alike.
d.) Whether the Final Rule is Consistent with the Department’s Prior Position
NELA argues that the final rule is inconsistent with the Department’s prior position,
particularly the position taken in the 2011 final rule. But as explained in the NPRM and below, it
is not clear what precise position was taken in that final rule. In fact, that is the point of this
rulemaking: to clarify the Department’s position on whether payments of bonuses and premiums
are permissible under the fluctuating workweek method.
Since 1968, the regulatory text of § 778.114 has explained that, under the fluctuating
workweek method, “[p]ayment for overtime hours at one-half [the regular] rate in addition to the
salary satisfies the overtime pay requirement because such hours have already been compensated
at the straight time regular rate, under the salary arrangement.” In the 2008 NPRM, the
Department proposed to clarify that the payment of additional bonuses and premiums was
compatible with the fluctuating workweek method. This was because, as explained in the 2009
opinion letter, “[r]eceipt of additional bonus payments does not negate the fact that an employee
receives straight-time compensation through the fixed salary for all hours worked.”
17
Indeed, given courts’ different approaches, no rule here can be consistent with all the case law
since Missel, and the Department does not attempt to do so. Rather, the Department’s objective is
to provide a rule that gives clear guidelines to employers and employees.
43
In the 2011 final rule, the Department did not adopt the proposed clarifying language to
§ 778.114, and instead the Department stated it would leave the text of § 778.114 unchanged
except for minor revisions. The Department expressly stated that the decision not to implement
the proposed clarifications would avoid “expand[ing] the use of [the fluctuating workweek]
method of computing overtime pay beyond the scope of the current regulation,” and would
“restore the current rule.” 76 FR at 18850. The same 2011 preamble, however, interpreted the
“current rule” to mean that bonus and premium payments “are incompatible with the fluctuating
workweek method of computing overtime under section 778.114.” Id. Because the Department
had stated clearly in both the 2008 NPRM and the 2009 opinion letter that payment of bonuses
was permissible under the same regulatory language in § 778.114 that the Department retained in
the 2011 final rule, the Department’s reference to the “current rule” prohibiting such payments
was unclear. See 73 FR at 43662; WHD Opinion Letter FLSA2009-24 (Jan. 16, 2009)
(withdrawn Mar. 2, 2009). As explained in the background section of this preamble, the apparent
misalignment between the 2011 preamble language and the substantively unchanged final
regulatory text created substantial confusion for the regulated community. See CWC
(“[S]tatements in the preamble to the [2011] final rule …contributed to the growing confusion
over how additional compensation should be treated” because “while DOL did not publish any
substantive changes to its codified rules, it articulated an explanation directly contrary to past
practice.”).
Attempting to make sense of the 2011 final rule, the court in Sisson concluded that the
2011 final rule actually “present[ed] an about-face” that “alters the DOL’s interpretation.” 2013
WL 945372, at *6; Switzer, 2012 WL 3685978, at *4 (describing the Department as having
“shifted course” in the 2011 final rule). This interpretation, however, ignores the “restore the
44
current rule” language and the unchanged regulatory text. The Wills court concluded that “the
status quo was being maintained,” but defined the status quo as then-emerging case law
permitting production-based bonuses while prohibiting hours-based ones. 981 F. Supp. 2d at
262; see Lalli, 814 F.3d at 9 (“DOL’s decision to leave the regulation alone means that the
bulletin would have done nothing to change the federal courts’ existing ‘treatment of that precise
issue’”) (quoting Wills, 981 F. Supp. 2d at 252). Many subsequent courts have affirmed the
distinction between production-based and hours-based bonuses. See, e.g., Dacar, 914 F.3d at
926; Lalli, 814 F.3d at 8-10. But the Department has never endorsed the distinction between
hours-based bonuses and production-based bonuses. In fact, as NELA points out, the
Department’s documented intent to file an amicus curiae brief in support of the appeal of the
Wills decision evinces the Department’s disagreement with Wills.
The Department’s clarification in this final rule is consistent with its interpretations in the
2008 NPRM and the 2009 opinion letter and, importantly, is also consistent with the regulatory
text as reaffirmed in the 2011 rule, which explained that employers that paid a fixed salary to
employees whose hours fluctuated from week to week would satisfy their overtime payment
obligation by paying an additional 50 percent of the employee’s regular rate for all overtime
hours. The Department’s clarification in this final rule does not alter this fundamental principle
of overtime compensation. Instead, it clarifies that the employee’s straight time compensation
may include bonus and premium payments in addition to a fixed salary. In such situations, where
the regular rate includes all payments that are not excludable under section 207(e)(1)-(8), the
employer’s overtime payment obligation will be met by the payment of an additional 50 percent
of the employee’s regular rate for all overtime hours. Thus the Department does not agree that
the current rule is inconsistent with its prior positions.
45
e.) Whether the Inverse Relationship between the Regular Rate and Hours
Worked Undermines the FLSA
Several commenters expressed concern that, under the fluctuating workweek method, the
regular rate decreases when hours increase. For instance, the State AGs stated that the fluctuating
workweek method of calculating overtime “is therefore the only method whereby the employee’s
regular rate of pay and the employee’s overtime rate of pay actually decrease as the hours
worked increase.” These commenters assert that this inverse relationship is in tension with the
remedial purposes of the FLSA’s overtime requirement and harms workers paid under that
method. NELA, for example, stated that the inverse relationship between the regular rate and
hours worked “provides a strong financial incentive to employers to require ever more overtime
hours and to limit the number of employees.”
As discussed above, however, the fluctuating workweek method is not the only method
under which the regular rate decreases as hours worked increase. For instance, the regular rate of
an employee paid through a day-rate arrangement under § 778.112 is equal to the fixed day-rate
amounts per week divided by hours worked. Because the day rate does not increase for longer
work days, the regular rate necessarily falls as hours worked increase. Thus, there is some degree
of inverse relationship between the regular rate and hours worked in every overtime
compensation example listed in §§ 778.110-.115 except where the employee is paid exclusively
through an hourly rate, in §§ 778.110(a) and .113. Whenever an employee receives any
compensation in addition to or in lieu of hourly pay—such as a fixed bonus, or a day rate—the
regular rate likely would vary inversely with hours worked. But that does not mean such
compensation arrangements are at odds with the FLSA. Indeed, it is a function of the FLSA’s
definition of the regular rate as non-excludable compensation divided by hours worked.
46
Furthermore, nothing in this rule changes the basic rules for calculating pay under the fluctuating
workweek method, including overtime. As such, any “financial incentive” to requiring overtime
work would remain the same as in the status quo.
The Department further disagrees that the inverse relationship “provides a strong
financial incentive to employers to require ever more overtime hours and to limit the number of
employees.” NELA. While the overtime premium per hour decreases as hours increase, the
employer must still pay an overtime premium that is designed to discourage overtime work and
spread employment, and the total amount of overtime premium an employer owes continues to
increase as hours increase.
The Department notes that the payment of hours-based bonuses to employees
compensated under the fluctuating workweek method—which this final rule clarifies is
permitted—may diminish or even eliminate the inverse relationship between hours worked and
the regular rate that commenters find objectionable. Consider the compensation scheme in Black,
which the court upheld as compatible with the fluctuating workweek method, see 1994 WL
70113, at *2, *5: the employee was paid a fixed salary for all hours worked in a workweek plus a
straight-time bonus for each hour worked in excess of 45. The bonus rate equals the weekly
salary divided by 40 (which equals 0.025 of the fixed weekly salary per hour). If the employee
works more than 45 hours, the regular rate equals:
(
)
+ ((ℎ − 45) × 0.025 ( ))
(ℎ )
Under this this compensation scheme, so long as the employee works enough hours to receive
the bonus, the regular rate would actually increase for each additional hour of overtime work.
For
example, an employee who works 50 hours and receives a fixed salary of $600 plus a straight-
47
time bonus of $15 for each hour worked in excess of 45 would have a regular rate of $13.50. But
if he or she works five additional hours, the regular rate would rise to $13.63.
f.) Effects on Workers Who Switch to the Fluctuating Workweek Method
The proposed clarification in § 778.114(a)(5) would make it more attractive for
employers to use the fluctuating workweek method, so employers would be more likely to start
using the method. While some commenters welcomed greater regulatory clarity, others,
including EPI, State AGs, and NELP, expressed concern that when an employee switches to
being paid under the fluctuating workweek method, the “employee … will lose the time-and-a-
half overtime premium.” EPI; see also State AGs, NELP. EPI further described how, in its view,
a worker switched to the fluctuating workweek method could face reduced earnings: “Employers
will … be unlikely to switch to the fluctuating workweek method unless their employees tend to
work more hours above their usual hours than below their usual hours. That means workers
whose employers choose to switch to the fluctuating workweek method are likely to receive
lower earnings than they receive under the usual method.”
The Department does not believe this scenario is likely to be widespread, if it occurs at
all. It is certainly true that an employer theoretically could reduce an employee’s overall earnings
by switching that employee from hourly pay to the fluctuating workweek method. But the same
employer could also reduce the employee’s earnings by the exact same amount by lowering the
employee’s hourly rate of pay. As such, the ability to switch an employee to the fluctuating
workweek method should not make the employer more able or willing to reduce the employee’s
earnings.
Such an employee would be agnostic as to the method behind an earning reduction:
having the hourly wage reduced or being switched to the fluctuating workweek method with an
48
equivalently low salary would both make the employee equally dissatisfied because the negative
effect on earnings is the same. Worker dissatisfaction may affect morale, turnover, and other
productivity factors. The employer would also be agnostic: the employer’s labor cost savings are
the same and the employee is equally dissatisfied. So the employer faces the same tradeoff
between labor costs savings, on one hand, and worker dissatisfaction on the other. The
Department therefore finds no reason why the ability to switch an hourly worker to the
fluctuating workweek method (an ability already present without the new rule) would make an
employer any more able or willing to reduce the employee’s earnings as compared to simply
reducing the hourly rate of pay.
18
As such, the Department believes employers switching hourly employees to the
fluctuating workweek method should not, on balance, reduce workers’ earnings. To the contrary,
overall earnings are likely to increase. As explained below, the final rule is likely to reduce labor
market inefficiency, i.e., deadweight loss, by reducing employers’ need to manage the hours of
employees who are switched to the fluctuating workweek method and enabling employers to
incentivize work not presently being performed. The benefit of this deadweight loss reduction
18
While this possibility was not raised by EPI, the Department posits that some hourly
employees may be willing to forgo a small amount of earnings to be switched to the fluctuating
workweek method, perhaps because the employee prefers a fixed salary to unstable hourly pay.
In this instance, an employer could theoretically switch the employee to the fluctuating
workweek method while reducing the employee’s earnings by the exact amount the employee
was willing to forgo without having a net effect on the employee’s satisfaction. But the
Department does not believe that the employer could convince the employee to forgo the entire
amount he or she is willing to forgo because an employer’s market power—while often
substantial—is rarely absolute. As long as the employee has even a small degree of market
power, the employee is likely to forgo less earnings than he or she was willing to be switched to
the fluctuating workweek method, leaving the employee more satisfied than before. This
hypothetical scenario does not raise significant worker welfare concerns because the end
outcome reflects the employee’s preferences as much as the employers. Indeed, by the terms of
the hypothetical scenario, switching to the fluctuating workweek method is guaranteed to leave
the employee at least as satisfied as before.
49
will be distributed among both capital and labor factors, meaning that, on average, employers’
profits and workers’ earnings will both rise. See SHRM (“employees and employers are best
served by a system that promotes maximum flexibility in structuring employee pay and
benefits”).
g.) Effects on Workers Paid Under the Fluctuating Workweek Method
Several commenters, including State AGs and NELA, expressed concern that the final
rule would encourage employers to shift the compensation of employees already being paid
under the fluctuating workweek method away from the fixed salary and towards bonuses and
premiums. The NPRM expressly considered this possibility, which was also raised in the 2011
final rule, but ultimately concluded that any compensation shifting would not be significant. The
Department’s conclusion in this regard relied on 2019 Bureau of Labor Statistics (BLS) data
showing that supplemental pay of the type permitted by the final rule—i.e., nonproduction
bonuses and shift differentials—constitutes a relatively small portion of employees’ overall
compensation nationwide, no more than five percent of any occupation.
19
The Department reasoned that, if the prohibition against nonproduction bonuses and shift
differentials under the fluctuating workweek method were lifted, employers using that method
would, at most, shift compensation away from the salary and towards such supplemental pay to
approximately the same extent as employers nationwide who are not similarly restricted. Since
BLS data show employers nationwide have not shifted compensation away from base pay
towards nonproduction bonuses and shift differentials to a significant degree (again, no more
than five percent for any occupation), the Department concluded that lifting the restriction for
19
Bureau of Labor Statistics, Employer Costs for Employee Compensation – June 2019,
https://www.bls.gov/news.release/pdf/ecec.pdf.
50
employers using the fluctuating workweek method would not result in significant compensation
shifting towards those types of pay.
Some commenters agreed with this conclusion. See, e.g., SIGMA (“The Association
concurs with DOL’s assessment, which is based upon data from the Bureau of Labor statistics,
that permitting employers to pay bonuses, premiums, and additional pay to employees
compensated with the fluctuating workweek method will not lead employers to shift large
portions of salaries into those types of supplemental payments.”). Other commenters disputed the
Department’s use of certain BLS data in this rulemaking. NELA asserted, “The fact that the
Bureau’s statistics show employers currently pay civilians nonproduction bonuses as 1.8% of
compensation and shift differentials as 0.2% does not constitute evidence or indication of any
kind that employers will not shift compensation to non-guaranteed bonuses and supplementary
compensation if given the opportunity to do so” under the fluctuating workweek method. The
State AGs further argued that the Department’s reliance on the BLS data “ignores … that the rule
[the Department] is changing has prevented employers from exploiting the [fluctuating
workweek] method and acted as a deterrent against shifting more pay towards hours-based
premiums.”
These commenters appear to believe that the perceived prohibition of supplemental pay
under the fluctuating workweek method is responsible for the low rate at which employees
nationwide receive nonproduction bonuses and shift differentials in comparison to base pay
reflected in the BLS data. But that cannot be true because over 99 percent of employees
nationwide are not paid under the fluctuating workweek method and so do not face its perceived
51
restrictions against paying nonproduction bonuses and shift differentials.
20
Even though the vast
majority of employees nationwide face no restrictions from receiving nonproduction bonuses and
shift differentials, their employers have not shifted a significant portion of their compensation
towards such supplemental pay. Accordingly, the Department continues to believe that BLS data
indicate that, if employees paid using the fluctuating workweek method of compensation begin
to receive supplemental pay, there would not be significant compensation shifting.
NELA further argued that “the fact that the Bureau of Statistics was reporting the same
(and even lower) average figures of supplemental pay as a percentage of total compensation
when the 2008 NPRM issued … and when the Department issued its 2011 Final Rule, proves
that the same Bureau statistics … are simply not evidence of the proposition they are cited to
purportedly support.” According to NELA, this is because “those figures were reported and
available to commenters and the Department alike when it determined in 2011 that employers
would likely reduce salaries and shift compensation to non-guaranteed bonus and other
supplemental pay if given the opportunity to do so” under the fluctuating workweek method.
21
The Department agrees with NELA that the rate at which employers nationwide have
paid nonproduction bonuses and shift differentials as compared to base pay has been very low
for at least the past decade. That supports the Department’s conclusion that employers using the
fluctuating workweek method would not shift more compensation to nonproduction bonuses and
shift differentials if given the same opportunity to do so as employers nationwide. The
20
The RIA estimates that 698,393 workers are compensated using the fluctuating workweek
method, which represents 0.4 percent of U.S. workers.
21
Citing Bureau of Labor Statistics, Employer Costs for Employee Compensation Historical
Tables June 2019, Table 1, https://www.bls.gov/web/ecec/ececqrtn.pdf (reporting for “all
workers” supplemental pay as percentage of total compensation at 2.5% (2008), 2.5% (2009),
2.3% (2010), 2.4% (2011); shift differentials at .2% (2008-11); and nonproduction bonuses at
1.4% (2008), 1.5% (2009), 1.3% (2010), and 1.4% (2011)).
52
Department disagrees with NELA that the availability of similar BLS data between 2008 and
2011 meant that the Department’s concern regarding compensation shifting was informed by
such BLS data. No commenter presented BLS data to the Department, and the Department’s
2011 final rule did not cite any such data. The 2011 final rule did not state that it relied on any
data whatsoever to conclude that the proposed regulation “could have had the unintended effect
of permitting employers to pay a greatly reduced fixed salary and shift a large portion of
employees’ compensation into bonus and premium payments.” 76 FR at 18850.
For these reasons, the Department continues to have confidence in BLS data indicating
that the final rule’s clarification that employees paid under the fluctuating workweek method
may receive supplemental pay would not result in significant shifting of compensation away
from the fixed salary towards supplemental pay.
h.) Whether the Final Rule Will Create Confusion For Employers
The State AGs argue that the proposed clarification will “create confusion for employers
and courts.” State AGs. In particular, the State AGs note that certain states prohibit the
fluctuating workweek method, and believe that employers in these states will not understand that
the method is prohibited by state law. As such, these employers may “find themselves embroiled
in costly litigation or subject to investigation.” Id.
22
States may and often do enact labor laws that are more restrictive on employers than the
federal standard. Employers routinely are able to navigate both state and federal law. Thus, the
Department believes that employers in a state that prohibits the fluctuating workweek method,
such as California, will understand that the method remains prohibited by that state’s more
22
As set forth in the NPRM and confirmed by the State AGs, Pennsylvania, Alaska, California,
and New Mexico do not generally permit employers to use the fluctuating workweek method.
53
restrictive law. It is unlikely such employers will, as the State AGs fear, “rush to use” the
fluctuating workweek method in contravention of state law.
Instead, commenters that represent employers (or labor compliance professionals)
overwhelmingly agreed with the NPRM that this final rule would reduce confusion and enhance
clarity regarding the application of the fluctuating workweek method. For instance, the Chamber
stated that “the 2011 Preamble generated substantial confusion and uncertainty for courts and
employers alike. Employers saw this as an attack on their ability to reward their salaried
nonexempt employees with variable incentive compensation.” The CWC explained that
“statements in the preamble to the [2011] final rule … contributed to the growing confusion over
how additional compensation should be treated” because “while DOL did not publish any
substantive changes to its codified rules, it articulated an explanation directly contrary to past
practice.”
SHRM further stated that the 2011 preamble “resulted in an initial wave of confusion
among HR professionals.” SHRM; see also id. (“[T]he source of confusion regarding the
interaction of bonuses and fluctuating workweek is the 2011 Preamble.”). This confusion has
deterred employers from paying their workers bonuses. According to SHRM, “The Department’s
statement in the 2011 Final Rule preamble that the payment of any compensation in addition to
the salary payment somehow ‘invalidated’ the fluctuating workweek method caused many
employers to either (1) eliminate bonuses for employees paid pursuant to the fluctuating
workweek method; or (2) pay previously salaried employees an hourly rate (and continue any
bonus programs). Although these employers typically did not agree with [the] Department’s
legal reasoning, nor believe the restructured pay plans best served the needs of their business and
employees, the substantial risk of litigation created solely by the Department’s preamble
54
language forced their hands.” Therefore, the Department continues to be confident this final rule
will reduce confusion for employers.
i.) Whether to Exempt First Responders
The International Association of Fire Fighters (IAFF) “urges the Department to carve out
an exception for fire fighters and other public safety personnel should it choose to move forward
with the proposed regulation.” As explained above, the fluctuating workweek method is merely
an example of how regular rate and overtime computation principles apply in certain
circumstances.
The Department has never had industry or occupational exceptions for the use of the
fluctuating workweek method and IAFF has not provided sufficient evidence that the
Department should consider such an exception now. The Department is therefore adopting
§ 778.114(a)(5) as proposed, with two minor changes. First, the Department is adding
“commissions” as an example of additional pay that is compatible with the fluctuating workweek
method. And second, the Department is replacing “not incompatible” with “compatible” to
improve readability.
C. Examples of the Fluctuating Workweek Method
In the NPRM, the Department proposed two new examples to illustrate how the
fluctuating workweek method computes overtime pay when an employee receives (1) a
nightshift differential and (2) a productivity bonus in addition to the fixed salary. Fisher Phillips
stated in its comment that “the examples are unnecessarily lengthy” and suggested “that the
calculation be performed for only one workweek instead of all four in … examples [2 and 3]
and/or collapse these examples as the employee could earn both a shift differential and a
productivity bonus.”
55
The Department agrees that it is unnecessary to show how the fluctuating workweek
method computes overtime pay for four different workweeks in examples 2 and 3. But the
Department believes it would be useful for each example to compute overtime for one workweek
in which hours worked is over 40 and one workweek in which it is under 40. Accordingly, the
Department is revising examples 2 and 3 to compute overtime pay in two different workweeks:
one workweek where the employee works 37.5 hours and another in which the employee works
48 hours.
SHRM requested that the Department add “an example that addresses payments made for
work outside of the employee’s normal schedule.” Specifically, SHRM suggested adding the
following example to the regulatory text: “an employer and employee reach an understanding
that the salary is intended to cover all hours worked from Monday to Friday, but occasional
Saturday work will be paid at a day rate or hourly rate.”
The Department does not believe the fluctuating workweek method would be appropriate
in the scenario SHRM described. This is because the fluctuating workweek method computes
overtime pay where the employee and employer both understand that the fixed salary covers all
hours worked in the entire workweek, not just “Monday to Friday” as in SHRM’s suggestion.
That said, if the parties understand that the fixed salary covers all hours worked in a workweek,
an employer may offer a premium for weekend work outside the employee’s normal schedule
and still use the fluctuating workweek method to compute the regular rate and overtime pay.
D. Revisions to § 778.114(c)
In its current form, § 778.114(c) states that “[w]here all the legal prerequisites for use of
the ‘fluctuating workweek’ method of overtime payment are present, the Act, in requiring that
‘not less than’ the prescribed premium of 50 percent for overtime hours worked be paid, does not
prohibit paying more.” 29 CFR 778.114(c). The NPRM proposed non-substantive edits to this
56
language for readability. See 84 FR at 59602 (“Where the conditions for the use of the
fluctuating workweek method of overtime payment are present, the Act, in requiring that ‘not
less than’ the prescribed premium of 50 percent for overtime hours worked be paid, does not
prohibit paying more.”).
In its comment, the WHDI stated that, under the fluctuating workweek method, the
regular rate varies from week to week based on the number of hours worked, thereby requiring
employers to calculate the amount that they owe in overtime premiums each week. WHDI
asserted that employers can avoid having to recompute the regular rate each week if they simply
divide the employee’s salary (plus any other compensation that must be included in the regular
rate) by 40 and then pay one-half the resulting rate for each overtime hour worked. WHDI stated
that the Department’s proposed regulatory text in § 778.114(c) “confuse[d] matters” by implying
that employers can pay more than half the regular rate in overtime compensation only “[w]here
the conditions for the use of the fluctuating workweek method of overtime payment are present.”
84 FR at 59602. WHDI thus requested that the Department clarify that there are no “legal
prerequisites” to paying more than the amount of overtime compensation required by the Act.
Pursuant to the FLSA, in a workweek that exceeds 40 hours, an employee is entitled to be
compensated at his or her regular rate for all hours worked (i.e., straight time) and to receive an
overtime premium (i.e., overtime) of at least one half the regular rate for the hours worked in
excess of 40. See 29 U.S.C. 207(a). The combination of straight time and overtime equals the
one and one-half time overtime pay required by section 7 of the FLSA. See id. Therefore, to the
extent that an employer has already paid straighttime compensation for all hours worked, the
employer’s resulting overtime obligation is only an additional half of the regular rate for the
hours worked in excess of 40 in the workweek.
57
As noted by WHDI, in an overtime week, an employer using the fluctuating workweek
method will always exceed its FLSA overtime obligation if it calculates the regular rate based on
40 hours worked (rather than the higher number of hours actually worked) and pays the half-time
overtime premium on that basis. See, e.g., FLSA Opinion Letter, 2002 WL 32255314 (Oct. 31,
2002); FLSA Opinion Letter, 1986 WL 1171085 (Feb. 10, 1986). It is the Department’s
longstanding position that employers are always permitted to pay more in overtime premiums
than required by the FLSA. The regulatory text at issue in revised § 778.114(c) simply states that
this principle is true in the fluctuating workweek context and does not impose any pre-conditions
for paying more in overtime compensation than required by law. See 84 FR at 59602.
E. Other Comments
The Department received a number of comments that were not directed to a specific part
of the proposed rule. These comments are addressed below.
The American Horse Council and the National Thoroughbred Racing Association
requested guidance regarding how a bonus for a period that spans multiple workweeks should be
allocated to those workweeks for the purpose of regular rate computation. The WFCA also
requested that WHD give employers the choice of either allocating such a bonus to the week in
which it is paid or to spread the bonus amount evenly across the covered workweeks (i.e., the
period the bonus was earned). However, bonus allocation for the purpose of regular rate
computations is not within the scope of the proposed regulation. Instead, WHD’s regulations at
29 CFR 778.209 address how bonuses should be allocated for all methods of regular rate
computation, including the fluctuating workweek method. Section 778.209 provides that, where
possible, a bonus “must be apportioned back over the workweeks of the period during which it
may be said to have been earned.” 29 CFR 778.209(a) (emphasis added). If such apportionment
58
is not possible, “some other reasonable and equitable method of allocation must be adopted.” 29
CFR 778.209(b). Accordingly, a bonus earned over a longer period may not be allocated solely
to the workweek in which it was paid.
The WFCA requested WHD to clarify that that “preannouncement of possible bonuses
should not make a bonus nondiscretionary and therefore included in the regular rate.” However,
the principles that govern whether a bonus is or is not discretionary, and therefore excludable
from the regular rate, are the same whether an employer is using the fluctuating workweek
method or some other method of determining the regular rate. These principles are found in the
Department’s regulations at § 778.211, which provides that “if an employer announces to his
employees in January that he intends to pay them a bonus in June, he has thereby abandoned his
discretion regarding the fact of payment by promising a bonus to his employees. Such a bonus
would not be excluded from the regular rate under section 7(e)(3)(a).” This language is clearly
inconsistent with the WFCA’s request. The preamble to WHD’s recent Regular Rate final rule,
published on December 16, 2019, provides further discussion of the distinction between
discretionary and non-discretionary bonuses, with examples of discretionary bonuses common in
the workplace, which may also provide employers with helpful guidance on this issue. See 84 FR
at 68754-56.
The National Newspaper Association requested that the Department add a provision in
the revised regulation that “permit[s] the fluctuating work ‘week’ to be calculated on a biweekly
or monthly basis commensurate with the pay periods in many small businesses [to] allow
newspaper employers some needed flexibility.” The FLSA expressly requires employers to pay
overtime compensation for any “workweek longer than forty hours.” 29 U.S.C. 207(a). As such,
the regular rate—which is necessary to determine overtime compensation owed—must also be
59
calculated on a weekly basis. See 29 CFR 778.104 (“The Act takes a single workweek as its
standard and does not permit averaging of hours over 2 or more weeks.”).
Several commenters urged WHD to state in the final rule that the fluctuating workweek
method may be used to compute back wages in failed exemption cases. The commenters
explained that, in such cases, an employer may have classified a salaried employee as exempt
under the FLSA but it is later determined that such employee is in fact nonexempt (e.g., because
he or she is found to have performed nonexempt duties). In such cases, courts must determine
how to calculate back wages for the salaried employees. Attorney Daniel Abrahams requested
that the Department’s final rule expressly state, consistent with the weight of the case law, that
back wages in such cases may be calculated using the fluctuating workweek method.
23
Other
commenters, such as Fisher Phillips and the WHDI, similarly requested that the Department
clarify that, while the fluctuating workweek method may be used to calculate back wages in
misclassification cases, the specific requirements set forth in § 778.114 do not apply to such back
wage computations and instead are applicable only to the use of the fluctuating workweek
method as a payroll practice.
The Department agrees with the general observation by Fisher Phillips and WHDI that
the specific conditions set forth in § 778.114 (e.g., the clear and mutual understanding
23
Many courts have permitted back wages in failed exemption cases to be calculated by using
the fluctuating workweek method, although courts are divided as to whether the authority to
apply the method is based on the retroactive application of § 778.114 itself or instead arises
directly from the Supreme Court’s Missel decision. See, e.g., Black v. Settlepou, P.C., 732 F.3d
492, 496-98 (5th Cir. 2013) (applying fluctuating workweek method to computation of back
wages based on Missel); Lamonica v. Safe Hurricane Shutters, Inc., 711 F.3d 1299, 1310-11
(11th Cir. 2013) (same); Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665, 676-84 (7th
Cir. 2010) (same); Clements, 530 F.3d at 1230-31 (applying § 778.114 to retroactively calculate
back pay); Valerio, 173 F.3d at 39-40 (affirming district court’s retroactive application of section
778.114).
60
requirement) are intended to govern the use of the fluctuating workweek method as a prospective
payroll practice. See, e.g., Lamonica, 711 F.3d at 1311; Urnikis-Negro, 616 F.3d at 678
(explaining that 29 CFR 778.114 “on its face is not a remedial measure. It says nothing about
how a court is to calculate damages where, as here, the employer has breached its obligation to
pay the employee an overtime premium. Its focus instead is on how an employer may comply
with its statutory obligations in the first instance and avoid liability for breach of those
obligations.”). Accordingly, the Department declines to opine in this final rule on the
permissibility of using the fluctuating workweek method to retroactively calculate back wages in
failed exemption cases. The Department does not believe it would be appropriate, in the context
of this rulemaking, to discuss the method of back wage calculation that courts should use in
litigation involving failed exemption status, which necessarily involves fact-specific
determinations and analysis. The NPRM did not specifically address back wage computations for
misclassification cases, and the Department declines to do so in the final rule. As the Department
has explained elsewhere in this preamble, however, to the extent that an employer has paid
straight time compensation for all hours worked in the workweek, the employer’s resulting
overtime obligation under the Act is only an additional half of the regular rate for the hours
worked in excess of 40 in the workweek. This general FLSA principle applies regardless of
whether the specific compensation scheme at issue satisfies the technical requirements of
§ 778.114.
IV. PAPERWORK REDUCTION ACT
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its attendant
regulations, 5 CFR part 1320, require the Department to consider the agency's need for its
information collections and their practical utility, the impact of paperwork and other information
61
collection burdens imposed on the public, and how to minimize those burdens. This final rule
does not require a collection of information subject to approval by the Office of Management
and Budget (OMB) under the PRA, or affect any existing collections of information. The
Department did not receive any comments on this determination.
V. EXECUTIVE ORDER 12866; REGULATORY PLANNING AND REVIEW; AND
EXECUTIVE ORDER 13563, IMPROVED REGULATION AND REGULATORY
REVIEW
A. Introduction
Under E.O. 12866, OMB’s Office of Information and Regulatory Affairs (OIRA)
determines whether a regulatory action is significant and therefore, subject to the requirements of
the E.O. and OMB review. Section 3(f) of E.O. 12866 defines a “significant regulatory action” as
an action that is likely to result in a rule that (1) has an annual effect on the economy of $100
million or more, or adversely affects in a material way a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or state, local, or tribal governments
or communities (also referred to as economically significant); (2) creates serious inconsistency or
otherwise interferes with an action taken or planned by another agency; (3) materially alters the
budgetary impacts of entitlement grants, user fees, or loan programs, or the rights and obligations
of recipients thereof; or (4) raises novel legal or policy issues arising out of legal mandates, the
President’s priorities, or the principles set forth in the E.O. As described below, this final rule is
economically significant. The Department has prepared a Regulatory Impact Analysis (RIA) in
connection with this rule, as required under section 6(a)(3) of Executive Order 12866, and OMB
has reviewed the rule.
62
Executive Order 13563 directs agencies to propose or adopt a regulation only upon a
reasoned determination that its benefits justify its costs; the regulation is tailored to impose the
least burden on society, consistent with achieving the regulatory objectives; and in choosing
among alternative regulatory approaches, the agency has selected those approaches that
maximize net benefits. Executive Order 13563 recognizes that some benefits are difficult to
quantify and provides that, where appropriate and permitted by law, agencies may consider and
discuss qualitatively values that are difficult or impossible to quantify, including equity, human
dignity, fairness, and distributive impacts.
B. Overview of the Rule and Potential Affected Employees
This rule clarifies that bonuses, premiums, and any other supplemental payments are
compatible with the fluctuating workweek method of calculating overtime pay. Prior to this rule,
legal uncertainty regarding the compatibility of supplemental pay with the fluctuating workweek
method deterred employers from making such payments to employees paid under the fluctuating
workweek method. Employers were also deterred from paying employees under the fluctuating
workweek method if they regularly paid bonuses and premiums. This rule will eliminate this
deterrent effect, and thereby permit employers who compensate their employees under the
fluctuating workweek method to pay employees a wider range of supplemental pay.
This rule makes clear to employers that employees paid under the fluctuating workweek
method are eligible for all supplemental payments. As in the NPRM, in order to estimate the
impact of this rule, the Department relied on data from the Current Population Survey (CPS) to
estimate a total pool of employees who could possibly be affected.
24
In particular, the
24
The CPS is a monthly survey of about 60,000 households that is jointly sponsored by the U.S.
Census Bureau and BLS.
Households are surveyed for four months, excluded from the survey for
eight months, surveyed for an additional four months, and then permanently dropped from the
63
Department focused on full-time, nonexempt workers who report earning a fixed salary. The
Department’s regulations recognize only two ways that an FLSA-covered employer may pay a
nonexempt employee a fixed salary.
25
First, under 29 CFR 778.113, the employer may pay a
salary for a specific number of hours each week. For the purpose of this analysis, the Department
assumes that a nonexempt worker paid under 29 CFR 778.113 would likely report having a
“usual” number of hours worked in the CPS. Second, under 29 CFR 778.114, the employer pays
a salary for whatever number of hours are worked—this is the fluctuating workweek method. For
the purpose of this analysis, the Department assumes that a nonexempt worker paid under the
fluctuating workweek method generally would not report having a “usual” number of hours
worked each week, but rather would report working hours that “vary” from week to week. The
Department estimated the number of such workers who could be compensated using the
fluctuating workweek method by counting CPS respondents who (1) are employed at a FLSA-
covered establishment; (2) are nonexempt from FLSA overtime obligations; (3) work full time at
a single job; (4) reside in the District of Columbia or a state that permits the use of the
fluctuating workweek method, (5) are paid on a salary basis; and (6) work hours that “vary” from
week to week.
26
The Department calculated that 721,656 workers satisfy all these criteria based
on 2018 CPS data. These workers are generally eligible to be paid under the fluctuating
sample. During the last month of each rotation in the sample (month 4 and month 16), employed
respondents complete a supplementary questionnaire in addition to the regular survey.
25
Under either method of salary payment, the employee is entitled to overtime premium pay of
at least one and one-half times the regular rate. However, the method of calculating the overtime
due differs because of the difference in what the salary payment is intended to cover.
26
Currently, four states generally prohibit the use of the fluctuating workweek method under
state law: Alaska, California, Pennsylvania, and New Mexico. See 8 Alaska Admin. Code §
15.100(d)(3); Cal. Labor Code § 515(d); Chevalier v. Gen. Nutrition Ctrs., Inc., No. 22 WAP
2018, 2019 WL 6139547 (Pa. Nov. 20, 2019); N.M. Dep’t of Labor v. Echostar Commc’ns
Corp., 134 P.3d 780, 783 (N.M. Ct. App. 2006).
64
workweek method, but the Department lacks specific data as to how many are actually paid that
way.
Using this group of workers to estimate the fluctuating workweek population may
overstate the number of employees paid under the fluctuating workweek method because not all
nonexempt and full-time CPS respondents who report earning a salary for working hours that
“vary” from week to week are paid under the fluctuating workweek method. Some such
respondents may actually be paid a salary for a specific number of hours under § 778.113,
despite working fluctuating hours, and so classifying them as employees paid under the
fluctuating workweek method would result in over-counting. Such an estimate may also
undercount the number of employees paid under the fluctuating workweek method because the
Department’s methodology excludes all CPS respondents with “usual” hours from counting as an
employee paid under the fluctuating workweek method. But an employee who works a “usual”
number of hours may still be paid under the fluctuating workweek method if there is some
weekly variation in the number of hours worked. Indeed, relying on 2018 CPS data, the
Department estimates that an additional 675,130 nonexempt, full-time, and salaried workers
report having a “usual” number of hours but routinely work hours that differ from that “usual”
number. These additional workers are also eligible to be paid under the fluctuating workweek
method, but the Department lacks data as to how many are actually paid that way.
All together, the total number of workers the Department estimates who may currently be
paid under the fluctuating workweek method is about 1.4 million (721,656 workers who report
their hours vary plus 675,130 workers who report having a “usual” number of hours but who
work hours that differ from that number). The Department lacks data to determine how prevalent
65
this compensation method actually is amongst this group.
27
Without data on the precise number,
and for purposes of this illustrative analysis, the Department assumes that half of these workers
are currently being paid using the fluctuating workweek method, meaning 698,393 workers
could become eligible for a wider range of supplemental payments. The actual number may be
higher or lower.
This rule may also encourage some employers to switch their employees who are
currently paid on an hourly basis to the fluctuating workweek method. The Department believes
legal confusion over the last fifteen years, exacerbated by the 2011 final rule, likely caused some
employers to stop using the fluctuating workweek method to compensate employees, and instead
pay them on an hourly basis.
28
The Department applied the same estimation methodology it used
to approximate the current number of employees paid under the fluctuating workweek method to
approximate the number of such employees in previous years—going back to 2004—using CPS
data from those years.
29
In the NPRM, the Department noted that the estimated percentage of U.S. workers
compensated under the fluctuating workweek method declined from 0.83 percent in 2004 to 0.45
27
The Department received comments with anecdotal information about the prevalence of the
fluctuating workweek method. For example, the National Newspaper Association surveyed their
member publishers, and found that 11 percent are presently shifting additional employees to the
fluctuating workweek method. And Attorney C. Andrew Head indicated that he has represented
more than 20,000 fluctuating workweek employees in his litigation practice. While these
comments do not provide enough data for the Department to add precision to its illustrative cost-
savings estimates, they do indicate that there is significant use of the FWW method by at least
some employers, and give the Department more confidence that the economic effects of this rule
likely will be significant, even if they cannot be precisely measured.
28
The Department believes that few employers would have switched employees from the
fluctuating workweek method to a fixed salary for a specific number of hours under § 778.113
because those employees would have, by definition, worked hours that varied from week to
week.
29
The Department lacks the required CPS data from before 2004.
66
percent in 2018. At least some portion of this decline likely may be attributed to the legal
uncertainty discussed in greater detail above, but some may be attributable to unrelated causes.
30
One commenter noted concerns with the Department’s finding that the decline in workers
compensated under the fluctuating workweek method is due in part to legal uncertainty. EPI
claimed that this finding is based on an unjustified assumption that the share of workers who are
paid under the fluctuating workweek method out of all the workers who might be paid under the
fluctuating workweek method remains constant at 50 percent over this period. But other
commenters, such as SHRM and the Chamber, indicated that uncertainty did affect negatively
the number of workers paid under the fluctuating workweek method. Because the Department
lacks counts for the precise number of workers paid under the fluctuating workweek method, this
analysis merely assumes that half the workers whose characteristics make them not only eligible,
but whose hours and earnings data appear similar to what would be expected under the
fluctuating workweek, are actually compensated under the fluctuating workweek method. The
Department acknowledges that this share could fluctuate over this or any period, and that there
are other factors, beyond confusion created by legal uncertainty, that could be responsible for the
decline in the share of the labor force compensated under the fluctuating workweek method, and
thus does not include workers who might be “switched” to the fluctuating workweek method in
its quantified cost savings analysis.
For example, the Department recognizes that the total number of nonexempt FLSA full-
time salaried workers decreased both in total number and also as a share of the employee
population over this same period.
31
The Department further assumes that some employers who
30
Compare, e.g., Wills, 981 F. Supp. 2d at 256, with Sisson, 2013 WL 945372, at *1.
31
From approximately 27.0 million in 2004 to 19.2 million in 2018.
67
switched their employees away from the fluctuating workweek method due to legal uncertainty
would be likely to switch those employees back to the fluctuating workweek. However, the
Department lacks sufficient information to estimate the precise number of “switchers” due to
elimination of legal uncertainty.
C. Costs
As stated in the proposed rule, the Department believes that, because the rule merely lifts
a restriction on employers paying bonuses and other supplemental payments to employees paid
under the fluctuating workweek method, the only likely costs attributable to this rulemaking are
regulatory familiarization costs, which represent direct costs to businesses associated with
reviewing changes to regulatory requirements caused by the rule. Familiarization costs do not
include recurring compliance costs that regulated entities would incur with or without a
rulemaking. The Department calculated regulatory familiarization costs by multiplying the
estimated number of establishments likely to review the rule by the estimated time to review the
rule and the average hourly compensation of a Compensation, Benefits, and Job Analysis
Specialist. The Department did not receive any comments about additional costs associated with
this rulemaking.
To calculate costs associated with reviewing the rule, the Department first estimated the
number of establishments likely to review the rule. The most recent data on private sector
establishments at the time this final rule was drafted are from the 2016 Statistics of U.S.
Businesses (SUSB), which reports 7.8 million establishments with paid employees.
32
32
U.S. Census Bureau, 2016 Statistics of U.S. Businesses (SUSB) Annual Data Tables by
Establishment Industry, https://www.census.gov/data/tables/2016/econ/susb/2016-susb-
annual.html
68
The Department believes that each of the 7.8 million establishments will review the rule.
All employers will give the rule a cursory review, lasting no more than five minutes, to
determine if they need to comply with the rule. Most employers will not spend any more time on
the rule, because they do not have any employees compensated under the fluctuating workweek
method. Additionally, the Department believes that employers currently using or interested in
using the fluctuating workweek method to pay workers will give the rule a more detailed review.
The Department estimates that 698,393 workers are paid under the fluctuating workweek
method, based on the 2018 CPS data. The Department uses this number to help estimate the
number of establishments who will spend more time reviewing the rule. As previously discussed,
the Department lacks data to identify the specific employers or employees who may switch to the
fluctuating workweek method given the new legal clarity, but estimates, for purposes of this cost
analysis, that employers will switch additional employees to being paid under the fluctuating
workweek method. This entire pool is approximately 0.45 percent of the 155.8 million workers
in the United States. By assuming these workers are proportionally distributed among the 7.8
million establishments, the Department estimates approximately 35,100 establishments pay or
are interested in paying employees using the fluctuating workweek method, and therefore would
review the rule in greater detail. Because the rule is a clarification of the interaction between the
fluctuating workweek method and supplemental payments, the Department estimates it would
take an average of 30 additional minutes (on top of the five minutes spent on an initial review)
for each of these employers to review and understand the rule. Some might spend more than 30
additional minutes reviewing the rule, while others might take less time; the Department believes
that 30 minutes is a reasonable estimated average for all interested employers in light of the
rule’s simplicity.
69
Next, the Department estimated the hourly compensation of the employees who would
likely review the rule. The Department assumes that a Compensation, Benefits, and Job Analysis
Specialist (Standard Occupation Classification 13–1141), or an employee of similar status and
comparable pay, would review the rule at each establishment. The median hourly wage of a
Compensation, Benefits, and Job Analysis Specialist is $30.29.
33
The Department adjusted this
base wage rate to reflect fringe benefits such as health insurance and retirement benefits, as well
as overhead costs such as rent, utilities, and office equipment. The Department used a fringe
benefits rate of 46 percent of the base rate and an overhead rate of 17 percent of the base rate,
resulting in a fully loaded hourly compensation rate for Compensation, Benefits, and Job
Analysis Specialists of $49.37 = ($30.29 + ($30.29 × 46%) + ($30.29 × 17%)).
34
The Department estimates one-time regulatory familiarization costs in Year 1 of $32.8
million (= 35,100 establishments × 0.5 hours of review time × $49.37 per hour + 7.8 million
establishments × 0.083 hours of review time × $49.37 per hour). This rule does not impose any
new requirements on employers or require any affirmative measures for regulated entities to
come into compliance; therefore, there are no other costs attributable to this rule. The
Department acknowledges that employers who do switch to the fluctuating workweek method
may encounter adjustment costs as they make changes to their payroll systems. These costs were
not captured here; however, because employers are not required to change their payment method
(i.e., their choice to switch is voluntary), and the Department assumes employers will make
33
Bureau of Labor Statistics, May 2018 National Occupational Employment and Wage
Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm
34
The benefits-earnings ratio is derived from BLS’s Employer Costs for Employee
Compensation data using variables CMU1020000000000D and CMU1030000000000D.
70
economically rational decisions, then such costs would reasonably be expected to be less than
employers’ combined cost savings.
D. Cost Savings
The Department believes that this rule could lead to three categories of potential cost
savings: (1) the elimination of opportunity costs for previously forgone activities; (2) reduced
management costs for non-hourly employees; and (3) reduced legal costs for employers. The
Department uses the assumptions previously discussed in this analysis to develop illustrative
estimates of cost savings. Based on these estimates, the Department believes total cost savings
are likely to exceed regulatory familiarization costs.
First, the rule could eliminate some of the opportunity costs in lost productivity resulting
from employers’ current inability to offer supplemental incentive pay to employees compensated
under the fluctuating workweek method.
35
Legal uncertainty regarding the compatibility of such
pay with the fluctuating workweek method prevents employers and employees from entering into
certain mutually beneficial exchanges. For instance, an employer using the fluctuating workweek
method could not offer supplemental incentive pay in exchange for performing undesirable
duties. See Dacar, 914 F.3d at 926 (extra pay for “offshore” inspections invalidates fluctuating
workweek method). The prohibition against such beneficial exchanges imposes economic costs,
and the rule would eliminate such costs.
35
“[C]ost savings should include the full opportunity costs of the previously forgone activities.”
Office of Management and Budget, “Guidance Implementing Executive Order 13771, Titled
‘Reducing Regulation and Controlling Regulatory Costs,’” Apr. 5, 2017,
https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-
OMB.pdf. Some economists refer to this amount as deadweight loss or “the sum of consumer
and producer surplus.” Id.
71
In the NPRM, the Department evaluated the potential scope of opportunity costs as the
economic value of supplemental incentive pay prevented by current legal uncertainty. The
Department assumed that employers currently follow the holdings of an increasing number of
courts on the compatibility between supplemental payments and the fluctuating workweek
method. These courts have held that productivity based payments, such as commissions, are
compatible with the fluctuating workweek method. See Lalli, 814 F.3d at 8. The Department
therefore assumes employers are not currently deterred from paying productivity based bonuses
and premiums to employees under the fluctuating workweek method.
36
On the other hand, some
courts have held, and the 2011 preamble may have led employers to believe, that shift
differentials and hours-based payments—such as payments for holiday hours and hours spent
working offshore—are not compatible with the fluctuating workweek method. See Dacar, 914
F.3d at 926. The Department believes that employers were deterred from making these types of
payments to employees paid under the fluctuating workweek method. Finally, the Department
believes legal uncertainty further deters employers from making supplemental payments that are
neither productivity-based nor hours-based. This includes, for example, retention bonuses,
referral bonuses, and safety bonuses that BLS categorizes as “nonproduction bonuses.”
37
36
The Department understands that this assumption may not perfectly reflect reality because
many employers using the fluctuating workweek method may presently be deterred from paying
any bonus or premium, even production based bonuses and premiums, especially outside of
jurisdictions in which such supplemental pay have been expressly held to be compatible with the
fluctuating workweek method. By assuming all employers are paying production bonuses despite
this concern, the Department’s illustrative estimate may be understating the economic cost of
current legal uncertainty.
37
Bureau of Labor Statistics, Fact Sheet for the June 2000 Employment Cost Index Release
(2000), at 1, https://www.bls.gov/ncs/ect/sp/ecrp0003.pdf. As the name implies, nonproduction
bonuses do not include productivity based pay, such as commissions, that courts generally find to
be compatible with the fluctuating workweek method.
72
The Department lacks sufficient data to estimate the precise deadweight loss attributable
to legal uncertainty, including the economic value of work that fluctuating workweek employees
do not perform because their employers cannot provide certain supplemental pay. With the
publication of the NPRM, the Department published an appendix, which contained a detailed
illustrative analysis regarding possible ranges of potential opportunity cost eliminated and the
critical variables upon which these estimates depend. The appendix illustrated that even if 70,000
workers who presently are compensated under the fluctuating workweek method—i.e., one-tenth
of the Department’s estimate of 698,393—receive supplemental pay equal to approximately one-
third the national average of shift differential and nonproduction bonuses for work not presently
performed, the full annual opportunity cost of lost productivity that the proposed rule would
eliminate could exceed $60 million.
38
And if all workers compensated under the fluctuating
workweek method received such a bonus, the productivity savings from the elimination of this
opportunity cost would exceed $600 million. The Department received comments from some
employers indicating that the proposed change would result in more bonuses being paid to
workers, but those comments did not discuss the magnitude of such bonuses. The Department
received no comments or data specifically addressing the estimates presented in the appendix,
and has ultimately decided to continue to include those in the final analysis for illustrative
purposes only. The table below reflects the range of potential cost savings that were included in
the Appendix to the NPRM.
39
38
BLS estimates that average hourly shift differential and nonproduction bonuses are 3.4% of
hourly pay and the 698,393 workers that the Department estimates are paid under the fluctuating
workweek method earn an average annual salary of $49,282.
39
See 84 FR 59601 (Nov. 5, 2019).
73
TABLE 1: Opportunity Cost Eliminated
Scenario 1
Scenario 2
1% Suppl. Pay
2% Suppl. Pay
Scenario A
349,192
Workers
$305,121,551
$610,243,103
Scenario B
174,596
Workers
$152,560,776
$305,121,551
Scenario C
69,838
Workers
$61,024,310
$122,048,621
Second, the rule could reduce management costs for any employers that switch
employees from hourly pay to the fluctuating workweek method. As explained above, the
Department believes legal uncertainty caused some employers to stop paying employees using
the fluctuating workweek method, and instead to pay them on an hourly basis. SHRM affirmed
this belief in their comment, saying, “The Department’s statement in the 2011 Final Rule
preamble that the payment of any compensation in addition to the salary payment somehow
‘invalidated’ the fluctuating workweek method caused many employers to either (1) eliminate
bonuses for employees paid pursuant to the fluctuating workweek method; or (2) pay previously
salaried employees an hourly rate (and continue any bonus programs).” Since overtime pay
premiums for hourly employees who do not receive supplemental pay are constant (i.e., their
regular rate does not decrease as more overtime hours are worked), these employers may incur
increased managerial costs because they may spend more time developing work schedules and
closely monitoring an employee’s hours to minimize or avoid overtime pay. For example, the
manager of an hourly worker may have to assess whether the marginal benefit of scheduling the
worker for more than 40 hours exceeds the marginal cost of paying the overtime based on the
higher hourly rate. But such assessment is less necessary for an employee paid under the
74
fluctuating workweek method because the marginal cost to an employer of each hour of work
under the fluctuating workweek is lower than the marginal cost of an hourly employee.
40
There was little precedent or data to aid in evaluating these managerial costs, and the
Department did not receive any comments about this cost savings. With the exception of the
2016 and 2019 overtime rulemaking efforts, the Department has not estimated managerial costs
of avoiding overtime pay. See 81 FR 32391, 32477 (May 23, 2016); 84 FR 10900, 10932 (Mar.
29, 2019). Nor has the Department found such estimates after reviewing the literature. The
Department therefore refers to the methodology used in the 2019 overtime rulemaking to
produce a qualitative analysis of potential additional cost savings.
Under the overtime rulemaking methodology, the Department assumed a manager spends
ten minutes per week scheduling and monitoring a newly exempt employee to avoid or minimize
overtime pay. And employers may be able to avoid at least some of this effort if the employee
were instead paid under the fluctuating workweek method because the marginal cost of each
additional hour of work would be lower than an hourly employee. While the Department does
not estimate the precise number of hourly workers whose employers would switch from paying
hourly pay to the fluctuating workweek method following this rule, the Department believes that
management costs may be reduced for every worker who is switched because their managers can
spend less time managing their schedules if such schedule management is intended either to
optimize compensation levels or to ensure coverage for less desirable shifts or projects. If,
40
The fluctuating workweek marginal cost for hours 2-40 in a workweek is $0, and for hours
41+, the marginal cost is only the overtime premium, while marginal costs for hourly employees
during the same hours is the hourly rate plus any overtime premium for any hours over 40.
Conversely, when an hourly-paid employee works less than 40 hours in a workweek, the
employer is obligated to pay only the hours worked, while under the fluctuating workweek
method, the employer is obligated to pay the full salary for the workweek.
75
hypothetically, 150,000 workers were switched, employers might reduce their annual managerial
costs by over $66 million.
41
Third, the clarifying language and updated examples included in this rule may reduce the
amount of time employers spend attempting to understand their obligations under the law, after
an initial one-time rule familiarization. For example, employers interested in offering
supplemental payments to employees compensated under the fluctuating workweek method
would know immediately from the language in § 778.114 that such payments will be compatible
with the fluctuating workweek method, thereby obviating further legal research and analysis on
the issue. The Department does not have data to estimate the precise amount of cost savings
attributable to reduced need for legal research and analysis, and instead provides an example to
illustrate the potential for such savings.
If the additional legal clarity reduces the annual amount of legal review by just one hour
for each employer that pays or is interested in paying employees using the fluctuating workweek
method, the Department calculates potential cost savings of up to $3.3 million.
42
The Department
obtained this illustrative estimate by first calculating the hourly cost of a lawyer (Standard
Occupation Classification 23-1011). The median wage of a lawyer is $58.13,
43
and the
41
This illustrative analysis assumes: ten minutes per week per worker, fifty-two weeks per year,
multiplied by a hypothetical number of new employees paid under the fluctuating workweek
method, multiplied by the full-loaded median hourly wage for a manager ($31.18 + $31.18(0.46)
+ $31.18(0.17) = $50.92). This wage is calculated as the median hourly wage in the pooled
2018/19 CPS MORG data for workers in management occupations (excluding chief executives).
42
Although earlier in the economic analysis the Department estimates that it will take employers
anywhere from 5-30 minutes to familiarize themselves with the rule, it is likely that lawyers are
currently spending significantly more time annually advising their clients on issues related to the
fluctuating workweek method. The lawyers need not only be familiar with the rule but must also
apply the rule to specific compensation schemes used or proposed by their clients.
43
Bureau of Labor Statistics, May 2018 National Occupational Employment and Wage
Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm
76
Department adjusted this to $94.75 per hour to account for fringe benefits and overhead.
44
The
fully-loaded hourly compensation rate of $94.75 is then multiplied by the 35,100 establishments
that the Department estimates pay or may be interested in paying employees using the fluctuating
workweek method, resulting in $ 3.3 million per year.
45
As noted above, this figure is an
illustrative example of potential annual cost savings due to reducing legal-review burdens.
Even though the Department cannot quantify the precise amount of total cost savings, it
is expected that they will significantly outweigh regulatory familiarization costs. Unlike one-time
familiarization costs, the calculated and other potential cost savings described in this section
would continue into the future, saving employers valuable time and resources. This rule also
offers increased flexibility to employers in the way that they compensate their employees.
However, in the absence of additional data, the Department is unable to precisely quantify all
cost savings and other potential effects of the proposed rule.
E. Transfers
Transfer payments occur when income is redistributed from one party to another. The
Department believes this rule may cause transfer payments to flow from some employers to their
employees and also may cause transfer payments to flow from employees to some employers.
When discussing these transfers in the NPRM, the Department noted that the incidence,
magnitude, and ultimate beneficiaries of such transfers is unknown.
The Department expects some employers may begin to use other types of supplemental
pay, including nonproduction bonuses and shift differentials, to incentivize employees to
44
The Department used a fringe benefits rate of 46 percent of the base rate and an overhead rate
of 17 percent of the base rate, resulting in a fully loaded hourly compensation rate of $94.75 =
($58.13 + ($58.13 × 0.46) + ($58.13 × 0.17)).
45
This estimate of establishments is discussed in greater detail in the Costs section, above.
77
perform economically valuable tasks. If employers offer these new bonuses to employees already
paid under the fluctuating workweek method, it would constitute a transfer from employers to
employees.
Some commenters argued that employers will reduce their employees’ salaries paid under
the fluctuating workweek and shift compensation to non-guaranteed bonuses, essentially
reducing some of that employer’s workers’ earnings. See e.g., EPI, State Attorneys General,
Head Law Firm, IAFF, NELA. The commenters assume that employers look only to lower their
labor costs, and if they can use bonuses in conjunction with the fluctuating workweek method to
pay less for overtime, they are likely to do so. If such a shift were to occur, if the scope of such a
shift in comparison to the current fluctuating workweek wage is large, and if bonuses were small,
the commenters claim this reduction could constitute a transfer from employees to employers.
These comments do not cite any data to show the opposite effect from the 2011 perceived
prohibition on paying certain bonuses, nor do they cite data to indicate that employers who pay
their employees under the fluctuating workweek method would be willing to risk a drastic
downward change in total compensation.
The Department acknowledges that, for employees compensated under the fluctuating
workweek method, an employer and employee may now agree to a new allocation of
compensation between the fixed salary for all hours of work, bonuses, benefits, supplemental
pay, and other job perks. Some allocations could result in their salaries being augmented, but
employers could also decrease the fixed portion of the employee’s salary and shift compensation
to bonuses and incentive pay. These are merely two of a host of allocations not discussed in the
comments. However, even if the agreement could result in somewhat lower compensation, there
is a limit to how much employers are able to reduce employees’ total compensation. The
78
fluctuating workweek method still requires that an employee’s fixed salary be at or above the
minimum wage for all hours worked, so employers are unable to reduce compensation below the
minimum wage (plus overtime for all hours over 40).
This supplemental pay is also a way for employers to incentivize employees to do
undesirable tasks, or work undesirable shifts. As supplemental pay may be the most efficient
means to incentivize employees to perform this valuable work, many employers in such a
scenario will be more than willing to pay the extra amount for these valuable services without
decreasing employees’ base salaries. Absent data to the contrary, the Department disagrees with
commenters’ assertion that permitting new bonus payments to employees paid under the
fluctuating workweek method will generally result in those workers being paid less for the same
or more work.
These same commenters also assert that the proposed rule will encourage the use of
overtime because the fluctuating workweek regular rate of pay falls as hours increase. See, e.g.,
EPI, State Attorneys General, NELP, IAFF, NELA, Head Law Firm. These commenters posit
that the marginal cost to the employer of an hour of overtime is lower for employees who are
shifted to the fluctuating workweek method and assert that this creates incentives for employers
to overwork current employees instead of hiring additional staff, undermining job creation.
The Department acknowledges that this rule could encourage more employers to use the
fluctuating workweek method to compensate their employees, if they previously chose not to use
the fluctuating workweek method because they also wanted to provide incentive pay but believed
they were not permitted to do so. However, contrary to the commenters’ assertion, nothing in this
rule changes the basic rules for calculating fluctuating workweek wages, including overtime. As
such, any “disincentive” to requiring overtime work remains the same as the status quo other
79
than the potential increase in the marginal costs attributable to newly-permitted incentive and
bonus payments. Further, these commenters offered no data to support their contentions that,
merely because they are now permitted to pay bonuses, employers will increase fluctuating
workweek overtime hours and choose not to hire additional workers.
F. Benefits
The Department believes the rule could reduce avoidable disputes and litigation
regarding the compatibility between supplemental pay and the fluctuating workweek method. As
noted above, there is no uniform consensus among federal courts as to whether and what types of
supplemental pay is permitted. The Department believes this uncertain legal environment
generates a substantial amount of avoidable disputes and litigation. This rule will provide a
simple standard that permits all supplemental pay under the fluctuating workweek method, and
therefore should reduce unnecessary disputes and litigation.
46
The Department lacks data to
quantify this benefit.
The Department also believes that this rule will allow employers and employees to better
utilize flexible work schedules. This is especially important as workers return to work during the
COVID-19 pandemic. Some employers are likely to promote social distancing in the workplace
by having their employees adopt variable work schedules, possibly staggering their start and end
times for the day. This rule will make it easier for employers and employees to agree to unique
scheduling arrangements while allowing employees to retain access to the bonuses and
premiums, including hazard pay, they would otherwise earn.
G. Summary
46
The costs of such disputes and litigation are not insignificant, but are not estimated here nor
included in the projected regulatory cost savings.
80
This rule will result in a one-time rule-familiarization cost of $32,828,582. The
Department estimated average annualized costs of this rule over 10 years and in perpetuity. Over
ten years, this rule would have an average annualized cost of $3.7 million at a discount rate of 3
percent, or $4.4 million at a discount rate of 7 percent in 2018 dollars. When the Department
uses a perpetual time horizon to allow for cost comparisons under EO 13771, the perpetual
annualized cost is $1,569,905 at a discount rate of 7 percent in 2016 dollars.
VI. REGULATORY FLEXIBILITY ANALYSIS
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq., as amended by the
Small Business Regulatory Enforcement Fairness Act of 1996, Public Law 104-121 (March 29,
1996), requires federal agencies engaged in rulemaking to consider the impact of their proposals
on small entities, consider alternatives to minimize that impact, and solicit public comment on
their analyses. The RFA requires the assessment of the impact of a regulation on a wide range of
small entities, including small businesses, not-for-profit organizations, and small governmental
jurisdictions. Agencies must perform a review to determine whether a proposed or final rule
would have a significant economic impact on a substantial number of small entities. 5 U.S.C.
603 and 604.
This rule will not impose any new requirements on employers or require any affirmative
measures for regulated entities to come into compliance. Therefore, there are no other costs
attributable to this rule other than regulatory familiarization costs. As discussed above, the
Department calculated the familiarization costs for both the estimated 7.8 million private
establishments in the United States and for the estimated 50,064 establishments that pay or are
interested in paying employees using the fluctuating workweek method. The Department
estimated the one-time familiarization cost for each of the 7.8 million establishments—which
81
would give the proposed rule a cursory review—is $4.11. And the one-time familiarization cost
for each of the 35,100 establishments that employ or are interested in employing employees paid
under the fluctuating workweek method—which would closely review the proposed rule—is
$24.69. Estimated familiarization costs will be trivial for small business entities, and will be well
below one percent of their gross annual revenues, which is typically at least $100,000 per year
for the smallest businesses.
The Department believes that this rule will achieve long-term cost savings that outweigh
initial regulatory familiarization costs. For example, the Department believes that clarifying the
confusing fluctuating workweek regulation and adding updated examples should reduce
compliance costs and litigation risks that small business entities would otherwise continue to
bear. The rule will also reduce administrative costs of small businesses that respond by switching
hourly employees to the fluctuating workweek method. The rule further enables a small business
to offer employees paid under the fluctuating workweek method supplemental incentive pay in
exchange for certain productive behavior, such as working nightshifts or performing undesirable
duties. The business will offer such supplemental pay only if the benefits of the incentivized
behavior exceed the cost of payments. Because the vast majority of businesses, including small
businesses, do not pay workers using the fluctuating workweek method, the Department believes
such benefits will be limited to few small businesses.
47
Based on this determination, the
Department certifies that the rule will not have a significant economic impact on a substantial
number of small entities.
VII. UNFUNDED MANDATE REFORM ACT ANALYSIS
47
The Department of Labor estimates that only 0.45% of U.S. workers are compensated using
fluctuating workweek method.
82
The Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1532, requires that
agencies prepare a written statement, which includes an assessment of anticipated costs and
benefits, before proposing any federal mandate that may result in excess of $100 million
(adjusted annually for inflation) in expenditures in any one year by state, local, and tribal
governments in the aggregate, or by the private sector. While this rulemaking would affect
employers in the private sector, it is not expected to result in expenditures greater than $100
million in any one year. Please see Section VI for an assessment of anticipated costs and benefits
to the private sector.
VIII. EXECUTIVE ORDER 13132, FEDERALISM
The Department has reviewed this rule in accordance with Executive Order 13132
regarding federalism and determined that it does not have federalism implications. The rule will
not have substantial direct effects on the states, on the relationship between the national
government and the states, or on the distribution of power and responsibilities among the various
levels of government.
IX. EXECUTIVE ORDER 13175, INDIAN TRIBAL GOVERNMENTS
This rule will not have substantial direct effects on one or more Indian tribes, on the
relationship between the Federal Government and Indian tribes, or on the distribution of power
and responsibilities between the Federal Government and Indian tribes.
List of Subjects in 29 CFR Part 778
Wages.
Signed at Washington, D.C. this 15th day of May, 2020.
Cheryl M. Stanton,
83
Administrator, Wage and Hour Division.
For the reasons set out in the preamble, the Department of Labor amends title 29 of the
Code of Federal Regulations part 778 as follows:
PART 778—OVERTIME COMPENSATION
1. The authority citation for part 778 continues to read as follows:
AUTHORITY: 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq. Section
778.200 also issued under Pub. L. 106-202, 114 Stat. 308 (29 U.S.C. 207(e) and (h)).
2. Amend § 778.114 by revising paragraphs (a), (b), and (c); and adding paragraph
(d) to read as follows:
§ 778.114 Fluctuating Workweek Method of Computing Overtime.
(a) An employer may use the fluctuating workweek method to properly compute
overtime compensation based on the regular rate for a nonexempt employee under the following
circumstances:
(1) the employee works hours that fluctuate from week to week;
(2) the employee receives a fixed salary that does not vary with the number of hours
worked in the workweek, whether few or many;
(3) the amount of the employee’s fixed salary is sufficient to provide compensation to the
employee at a rate not less than the applicable minimum wage rate for every hour worked in
those workweeks in which the number of hours the employee works is greatest;
(4) the employee and the employer have a clear and mutual understanding that the fixed
salary is compensation (apart from overtime premiums and any bonuses, premium payments,
commissions, hazard pay, or other additional pay of any kind not excludable from the regular
84
rate under section 7(e)(l) through (8) of the Act) for the total hours worked each workweek
regardless of the number of hours, although the clear and mutual understanding does not need to
extend to the specific method used to calculate overtime pay; and
(5) the employee receives overtime compensation, in addition to such fixed salary and
any bonuses, premium payments, commissions, hazard pay, and additional pay of any kind, for
all overtime hours worked at a rate of not less than one-half the employee’s regular rate of pay
for that workweek. Since the salary is fixed, the regular rate of the employee will vary from
week to week and is determined by dividing the amount of the salary and any non-excludable
additional pay received each workweek by the number of hours worked in the workweek.
Payment for overtime hours at not less than one-half such rate satisfies the overtime pay
requirement because such hours have already been compensated at the straight time rate by
payment of the fixed salary and non-excludable additional pay. Payment of any bonuses,
premium payments, commissions, hazard pay, and additional pay of any kind is compatible with
the fluctuating workweek method of overtime payment, and such payments must be included in
the calculation of the regular rate unless excludable under section 7(e)(1) through (8) of the Act.
(b) The application of the principles stated above may be illustrated by the case of an
employee whose hours of work do not customarily follow a regular schedule but vary from week
to week, whose work hours never exceed 50 hours in a workweek, and whose salary of $600 a
week is paid with the understanding that it constitutes the employee’s compensation (apart from
overtime premiums and any bonuses, premium payments, commissions, hazard pay, or other
additional pay of any kind not excludable from the regular rate under section 7(e)(1) through (8))
for all hours worked in the workweek.
85
(1) Example. If during the course of 4 weeks this employee receives no additional
compensation and works 37.5, 44, 50, and 48 hours, the regular rate of pay in each of these
weeks is $16, $13.64, $12, and $12.50, respectively. Since the employee has already received
straight time compensation for all hours worked in these weeks, only additional half-time pay is
due for overtime hours. For the first week the employee is owed $600 (fixed salary of $600, with
no overtime hours); for the second week $627.28 (fixed salary of $600, and 4 hours of overtime
pay at one-half times the regular rate of $13.64 for a total overtime payment of $27.28); for the
third week $660 (fixed salary of $600, and 10 hours of overtime pay at one-half times the regular
rate of $12 for a total overtime payment of $60); for the fourth week $650 (fixed salary of $600,
and 8 overtime hours at one-half times the regular rate of $12.50 for a total overtime payment of
$50).
(2) Example. If during the course of 2 weeks this employee works 37.5 and 48 hours and
4 of the hours the employee worked each week were nightshift hours compensated at a premium
rate of an extra $5 per hour, the employee’s total straight time earnings would be $620 (fixed
salary of $600 plus $20 of premium pay for the 4 nightshift hours). In this case, the regular rate
of pay in each of these weeks is $16.53 and $12.92, respectively, and the employee’s total
compensation would be calculated as follows: For the 37.5 hour week the employee is owed
$620 (fixed salary of $600 plus $20 of non-overtime premium pay, with no overtime hours); and
for the 48 hour week $671.68 (fixed salary of $600 plus $20 of non-overtime premium pay, and
8 hours of overtime at one-half times the regular rate of $12.92 for a total overtime payment of
$51.68). This principle applies in the same manner regardless of the reason for the hourly
premium rate (e.g., weekend hours).
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(3) Example. If during the course of 2 weeks this employee works 37.5 and 48 hours and
the employee received a $100 productivity bonus each week, the employee’s total straight time
earnings would be $700 (fixed salary of $600 plus $100 productivity bonus). In this case, the
regular rate of pay in each of these weeks is $18.67 and $14.58, respectively, and the employee’s
total compensation would be calculated as follows: For the 37.5 hour week the employee is owed
$700 (fixed salary of $600 plus $100 productivity bonus, with no overtime hours); and for the 48
hour week $758.32 (fixed salary of $600 plus $100 productivity bonus, and 8 hours of overtime
at one-half times the regular rate of $14.58 for a total overtime payment of $58.32).
(c) Typically, such fixed salaries are paid to employees who do not customarily work a
regular schedule of hours and are in amounts agreed on by the parties as adequate compensation
for long workweeks as well as short ones, under the circumstances of the employment as a
whole. Where the conditions for the use of the fluctuating workweek method of overtime
payment are present, the Act, in requiring that “not less than” the prescribed premium of 50
percent for overtime hours worked be paid, does not prohibit paying more. On the other hand,
where all the facts indicate that an employee is being paid for overtime hours at a rate no greater
than that which the employee receives for nonovertime hours, compliance with the Act cannot be
rested on any application of the fluctuating workweek overtime formula.
(d) The fixed salary described in paragraph (a) of this section does not vary with the
number of hours worked in the workweek, whether few or many. However, employers using the
fluctuating workweek method of overtime payment may take occasional disciplinary deductions
from the employee’s salary for willful absences or tardiness or for infractions of major work
rules, provided that the deductions do not cut into the minimum wage or overtime pay required
by the Act.
