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DOL Issues Final Rule Clarifying Bonus Payments and the Fluctuating Workweek Method of Compensation

May 22, 2020 Posted in Legal Updates Share

On May 20, 2020, the U.S. Department of Labor (“DOL”) issued a final rule that clarified that bonuses, premium payments, commissions, and hazard pay on top of fixed salaries are compatible with the fluctuating workweek method of compensation (“FWW”). Employers, however, must include these supplemental payments when calculating the regular rate of pay to determine overtime compensation as appropriate under the FLSA.

Employers may use the FWW to compensate employees who work fluctuating hours from week to week and receive, pursuant to a clear and mutual agreement, a fixed salary as straight-time compensation for whatever hours the employee is called to work in a workweek regardless of how few or many. Employers, however, still owe FWW employees overtime compensation at half time (i.e., half the employee’s regular rate of pay) for any hour worked over 40 in a week. Because the employee’s hours fluctuate from week to week, the regular rate must be determined separately each week based on the number of hours actually worked.

The DOL, until 2011, had never explicitly forbidden the payment of bonuses and premiums beyond the fixed salary to employees compensated under the FWW. In 2011, the DOL issued a final rule making no substantive changes to the FWW but stating in its preamble that all straight-time bonus and premium payments were incompatible with the FWW. This 2011 rule created significant confusion and presented challenges for courts and employers when interpreting the FWW.

The DOL’s new rule adds clarifying language to the regulations expressly allowing for supplemental payments including bonuses, premium pay, commissions, and hazard pay. The rule also provides two examples illustrating how supplemental payments and the FWW might work together. In those examples, employees were respectively paid a premium payment for working a night shift and a productivity bonus. The regulations calculate those employees’ regular rate of pay by taking the employees’ total compensation, including the premium payment or productivity bonus, and dividing that by the hours worked in the week.

This clarifying rule gives employers a better ability to develop flexible workweeks that employees might agree to. Employees can now retain access to bonuses and premiums that they might have earned under other work schedule arrangements. This is especially important as employers bring workers back to work following the COVID-19 pandemic where employers might adopt variable work schedules and stagger start and end times to promote responsible social distancing. If you would like to have a more in-depth discussion on this rule and the ramifications for you, please contact us at your convenience.