Overtime Expenses Method to Reduce
Content
Proceedings of ASBBS
Volume 13 Number 1
Using the Fluctuating Workweek Compensation
Method to Reduce Overtime Expenses
Von Bergen, C. W.
Southeastern Oklahoma State University
[email protected]
Chong, J. K. S.
Southeastern Oklahoma State University
[email protected]
ABSTRACT
New modifications to the Fair Labor Standards Act recently promulgated by the Department of
Labor as the FairPay Overtime Initiative will produce an increasing number of workers subject
to overtime payments and a concomitant increase in labor costs for public sector organizations.
To adapt to this changing environment and to control employee overtime expenditures
organizations may wish to examine the applicability of a relatively obscure provision of the Fair
Labor Standards Act labelled the fluctuating workweek scheme. This approach becomes
increasingly attractive to employers as worker overtime increases because a feature of this
method is that the overtime rate due employees under this plan decreases as the number of
overtime hours worked increases.
INTRODUCTION
The Fair Labor Standards Act1 (hereinafter referred to as the FLSA or Act) requires that most
employees in the U.S. be paid at least the federal minimum wage for all hours worked and receive
overtime pay at one and one-half times the regular rate for all hours worked over 40 hours in a
workweek. The FLSA became law for the private sector in 1938. It was not until 1985 that the
U.S. Supreme Court ruled that FLSA applied to local and state governments in the now-famous
case of Garcia v. San Antonio Metropolitan Transit Authority (1985).2
Defined within the Act are certain types of employees who are exempt from both minimum wage
and overtime pay. These exempt categories are cumulatively referred to as the white collar
exemption and the workers are called white collar employees. To qualify for such exemptions the
job description must meet certain salary and job duties tests. The last major revision to the FLSA
occurred some fifty years ago and during this time these duties tests became outdated resulting in
uncertainty and vagueness in their application. Such ambiguity was exploited by some
organizations because exempt employees did not have to be paid overtime and could work
unlimited hours. Consequently, organizations began to classify employees as exempt from
overtime pay under the FLSA when, in fact and by law, the employees should have been
classified as non-exempt.3 In response to such organizational action, increasing numbers of
managerial, administrative, and professional employees along with significant numbers of
previously classified non-exempt workers began filing high-visibility class-action lawsuits
against employers for unpaid overtime claiming mis-classification under the FLSA.
As a result of this increase in lawsuits and these decades-old exemption descriptions, the Wage
and Hour Division of the DOL developed new regulations relating to white collar exemptions of
the Act called the FairPay Overtime Initiative (hereinafter referred to as FPOI). The purpose of
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the new FLSA regulations which went into effect on August 23, 2004 was to modernize, update,
and clarify the criteria for these exemptions and to eliminate legal problems that the prior
regulations caused. More specifically, the regulations were said to strengthen overtime benefits
and provide overtime protection for an additional 6.7 million American employees.4
Pragmatically, this meant that there were more employees subject to overtime payments within
organizations and a concomitant increase in labor costs. This paper discusses the impact of the
FPOI on overtime for public sector organizations and suggests the fluctuating workweek (FWW)
scheme as an approach public service employers may wish to consider to reduce increased
overtime costs resulting from the implementation of the FPOI.
New Overtime Regulations Impact Public Sector
These new regulations pose hardships for state and local governments with respect to labor costs.5
Wages and salaries of personnel represent a substantial proportion of costs in most public
employers and cost containment in this human resources area continues to be a key challenge in
the current environment of tight budgets.6
Organizations have tried a number of approaches to lower labor costs including downsizing,
outsourcing and employee leasing, and productivity enhancements. More recently, organizations
have initiated efforts to reduce employee labor expenditures through better control of overtime.7
Overtime pay for current employees is often the least costly option for employers to exercise in
scheduling work assignments and has been viewed as a key “survival strategy” by many
organizations.8 This is because it is often less expensive to schedule longer hours and pay
overtime premiums rather than hire, train, and provide benefits for additional employees.9 These
factors have lowered the point at which it is more cost effective to schedule longer hours and pay
the overtime premium rather than employ additional workers.10 Consequently, organizations
expanded the workweek well beyond the normal 40-hour boundary requiring overtime payments
to workers not exempt from the FLSA provisions.
A number of items in the FPOI impact public sector organizations with respect to overtime
considerations.11 First, the changes made to the executive exemption are likely to have a serious
negative impact on public employers because many supervisors and managers are classified as
exempt and earn less than $100,000 per year requiring state and local governments to reclassify
them as non-exempt and subject to overtime provisions of the FLSA. Second, the change made to
the provision concerning first responders is causing concern for many public sector organizations.
Specifically, the new rules indicated that:
Police officers, detectives, deputy sheriffs, state troopers, highway
patrol officers, investigators, inspectors, correctional officers, parole
or probation officers, park rangers, fire fighters, paramedics, emergency
medical technicians, ambulance personnel, rescue workers, hazardous
materials workers and similar employees (“first responders”} … are protected by
the minimum wage and overtime provisions of the FLSA.12
The unease generated in public employers arose because the new regulations are less equivocal
regarding such public safety employees who in some governmental units were previously
classified as exempt from overtime with respect to the FLSA. Such clarification will undoubtedly
guarantee overtime to an expanded number of workers and raise labor costs for public sector
organizations.
Third, in the preamble to the newly instituted regulations the DOL said “Police sergeants, for
example, are entitled to overtime pay even if they direct the work of other police officers because
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their primary duty is not management or directly related to management or general business
operations.”13 The DOL’s position on the issue is basically that sergeants can never be exempt.
However, this position is greatly at odds with how courts have previously treated the subject.14
The courts have traditionally been more willing to find police sergeants to be exempt from
overtime under the FLSA. The leading case, Auer v. Robbins (1997)15, found that several classes
of police sergeants were exempt executive employees. Consequently, the new regulations may
cost public employers considerably more money. Indeed, the Albany Democrat-Herald reported
that “...Albany police sergeants to be paid for overtime at a potential additional cost of up to
$100,000 this budget year.”16 And this budget increase reflects just one position in a city’s
budget!
Fourth, certain first responders will not be eligible for exemption under the highly compensated
provision (earning more than $100,000 per year) because the highly compensated test applies
only to employees whose primary duty includes performing office or non-manual work. Once
again, this could lead to increased labor costs in the event of overtime for these high paid
workers.
In summary, there appear to be a number of reasons why public employers should experience
increased labor costs from the FPOI. This is due primarily to a greater number of positions that
will be considered eligible for overtime. Thus, faced with increasing overtime costs,
organizations may want to consider approaches to reducing these expenditures. One such
approach which may demand further scrutiny by public service employers involves what is called
a FWW scheme. This “out of the ordinary wage plan”17 becomes increasingly attractive to
employers as worker overtime increases because a key feature of this approach is that the
overtime rate due employees under this plan decreases as the number of hours worked increases.
This paper discusses the FWW method and compares it to the traditional method of calculating
overtime rates and premiums. The article concludes with a discussion of limitations regarding this
approach and a set of recommendations for public employers wishing to explore this relatively
obscure overtime determination format.
TRADITIONAL OVERTIME PAYMENT
Unless specifically exempted, employees covered by the FLSA must receive overtime pay for
hours worked in excess of 40 in a workweek at a rate not less than time and one-half (1.5) their
regular hourly rates of pay.18 For example, if an employee is paid $600 a week as compensation
and works a work schedule of 40 hours a week, the employee’s overtime rate of pay is computed
by dividing $600 by 40 (= $15.00). Thus, for each hour of overtime over 40 hours a week, the
employee is entitled to receive 1.5 times $15.00, which equals $22.50 an hour.19
There is no limit in the Act on the number of hours employees aged 16 and older may work in
any workweek. Additionally, the Act does not require overtime pay for work on Saturdays,
Sundays, holidays, or regular days of rest.20 The Act applies on a purely workweek basis. An
employee’s workweek is a fixed and regularly recurring period of 168 hours—seven consecutive
24-hour periods. It need not coincide with the calendar week, and may begin on any day and at
any hour of the day. Different workweeks may be established for different employees or groups
of employees. Averaging of hours over two or more weeks, however, is not permitted—each
workweek stands on its own and not by pay period or by month or by any other period of
time. Therefore, an employer cannot base the overtime hours on the total hours worked in a biweekly or a semi-monthly pay period. Normally, overtime pay earned in a particular workweek
must be paid on the regular pay day for the pay period in which the wages were earned.21
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The regular rate of pay cannot be less than the minimum wage. The regular rate includes all
remuneration for employment except certain payments excluded by the Act itself. Payments
which are not part of the regular rate include pay for expenses incurred on the employer’s behalf,
premium payments for overtime work or the true premiums paid for work on Saturdays, Sundays,
and holidays, discretionary bonuses, gifts and payments in the nature of gifts on special
occasions, and payments for occasional periods when no work is performed due to vacation,
holidays, or illness.22
Earnings may be determined on a piece-rate, salary, commission, or some other basis, but in all
such cases the overtime pay due must be computed on the basis of the average hourly rate derived
from such earnings. This is calculated by dividing the total pay for employment (except for the
noted statutory exclusions) in any workweek by the total number of hours actually worked.23
Fluctuating Workweek Approach
The FLSA regulations allow employers to pay non-exempt employees a fixed salary for 1)
personnel scheduled to work a standard or preset number of hours each week, or 2) for
individuals whose work week fluctuates in the number of hours required. More specifically, with
respect to fluctuating hours, the Department of Labor’s regulations provide that:
An employee employed on a salary basis may have hours of work
which fluctuate from week to week and the salary may be paid to
him pursuant to an understanding with his employer that he will
receive such fixed amount at a straight time pay for whatever hours
he is called upon to work in a workweek, whether few or many.24
Employees scheduled to work a predetermined set of hours each week receive an overtime
premium of time-and-one-half (1.5) of the employee’s regular rate of pay for all hours worked in
excess of 40 hours. On the other hand, employees whose work week hours vary or fluctuate can
be paid in weeks in which they work more than 40 hours at a rate of half-time (.5) the employee’s
regular rate of pay for the extra hours “since the employee has already received straight-time
compensation on a salary basis for all hours worked.”25
The employer can save money in contexts where there are fluctuating work hours because it is
paying the employee a salary that involves fewer administrative costs, and any overtime
premiums are paid at 50% of the employee’s regular rate of pay. Thus, organizations consistently
having salaried non-exempt employees regularly working over 40 hours in a workweek, thereby
incurring overtime liability, can realize substantial labor savings by implementing a FWW pay
scheme. This pay system has been referred to as “Chinese Overtime.” 26
This method of calculating overtime has been upheld as a valid interpretation of the Act.27 The
regulations permitting this method of calculation were promulgated by DOL’s interpretive
bulletins. Although these bulletins are not legally binding their legal importance was established
by the Supreme Court in 1942. In the case, Overnight Motor Transport Company v. Missel, the
Supreme Court stated: “While the interpretive bulletins are not issued as regulations under
statutory authority, they do carry persuasiveness as an expression of the view of those
experienced in the administration of the Act [FLSA] and acting with the advice of a staff
specializing in its interpretation and application.”28 Additionally, at least one court case has
upheld this use of the FWW method. In the case of Kelli K. Goodrow v. Lane Bryant, Inc. (2000)
the court ruled in favor of the employer.29 In this case the employer (Lane Bryant, Inc.) had relied
on the DOL’s Field Operations Handbook in implementing their FWW plan in 1992. Section
32b04b(a) of that Handbook states: “If the employer to avoid weekly computations chooses to
pay extra half-time based on the salary divided by 40 hours, such a method is permissible.”30
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GUIDELINES IN IMPLEMENTING FWW SCHEMES
Nevertheless, to ensure that actions relating to FWW are legally defensible in court the following
conditions must be met.31 These rules are summarized in Table 1 and discussed in more detail
below.
Table 1. Summary of Fluctuating Workweek Rules (after 29 CFR 778.114).
1. Non-exempt employees must be paid a salary. Employees who are paid an hourly
wage do not qualify.
2. The employee must be paid a fixed salary regardless of the number of hours
worked each week.
3. In addition to their salary, employees must be paid overtime premiums for hours worked
over 40 in the workweek at the rate of 50% of the regular rate of pay for the workweek.
4. The workweek of the employee must be a fluctuating one.
5. The salary must be sufficiently large enough so that the regular rate of pay will never
drop below the minimum wage.
6. There must be an understanding between the employer and the employee that the
employee will be paid using the fluctuating workweek method.
1. Non-exempt employees must be paid a salary. Employees who are paid an hourly wage do
not qualify.
It is perhaps a little known fact that the FLSA does not require that employers pay non-exempt
employees by the hour. It only mandates that non-exempt employees receive overtime, after forty
hours of actual work. Employers may pay non-exempt employees by a salary, or per diem, or by
piece rate. The overriding constant remains payment of overtime following forty hours of
work. Employees who are paid an hourly wage cannot be paid using the FWW method. An
hourly employee is paid at a fixed regular rate of pay (or multiple rates of pay) so his or her
hourly rate of pay is never less than a stated minimum. But an employee who is paid using the
FWW method has a regular rate of pay that varies. Thus, the first requirement for implementing a
FWW pay system is that employees be paid a salary.
2. The employee must be paid a fixed salary regardless of the number of hours worked each
week.
A second provision for adopting a legally valid FWW system is that the employee must be paid a
fixed salary regardless of the number of hours worked each week. The employee has to
understand that the salary is for all hours worked, whether few or many: “[T]he 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.”32 Since an employee who works fluctuating hours for a fixed rate of pay is
supposed to get the same pay whether he works short or long weekly hours, the government does
not permit deductions for absences of less than a week, whether for illness, personal business or
other reasons. Indeed, the disadvantage to such a system is that employees must be paid their full
salary even if they work but a single hour during the week. Since a fixed salary for a FWW
covers short, as well as long, weekly working hours, advantage cannot be taken of the statutory
regular-rate exclusions allowed for occasional paid absences due to vacation, holiday, illness,
failure to provide sufficient work, or other similar cause. For instance, if an organization decides
to close on a holiday, and on the day after the holiday it also decides to close, the organization
must pay employees if they are paid on a FWW basis.33
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The importance of a fixed salary was reinforced in O’Brien v. Town of Agawam (2003), in which
the First Circuit Court of Appeals ruled that the FWW method may not be used when employers
compensate workers amounts in addition to their normal pay.34 In this case, employees were paid
night shift differentials, additional pay for every hour worked beyond eight hours a day, and
additional pay for every hour worked during off-duty time. The Court held that because
supplementary compensation was paid, the employees’ salaries were not truly “fixed” as required
by the regulations. Therefore, the employer was not entitled to use the FWW method.
3. In addition to their salary, employees must be paid overtime premiums for hours worked
over 40 in the workweek at the rate of 50% of the regular rate of pay for the workweek.
A third stipulation in effecting a FWW pay method addresses compensation for work in excess of
40 hours in a workweek. Naturally, in a week in which an employee works forty (40) hours, he or
she simply receives the agreed-upon fixed salary. In addition to this salary, the employee must be
paid overtime premiums for any hours worked over 40 in the workweek. The overtime premium
rate is 50% of the regular rate of pay for the workweek. The rationale behind this regulation is
that the employee has already been paid a straight hourly rate for each hour in excess of 40, and is
only due the additional ½ pay.
Consider for example an employee who receives a fixed wage of $450.00 per week and who
works 45 hours in one week and 50 hours in the next. In the first week the individual’s regular
rate is $10.00 ($450 / 45). The employee is entitled to receive $5.00 per hour (.5 x $10.00) for the
five hours worked in excess of 40 since the worker has already received straight time of $10.00
per hour for those hours. In the next week the employee’s regular rate is $9.00 ($450 / 50). In that
week the employee is entitled to receive $4.50 for each of the 10 hours worked in excess of 40.
Note that for working 45 hours per week the employee received an overtime rate of $5.00 per
hour and a $4.50 per hour overtime premium for working 50 hours. Paradoxically, then, the more
overtime hours worked per week the lower the actual overtime pay rate. Thus, in workweeks in
which the overtime is high, the regular rate will be low, and the employer will benefit from a
lower per-hour overtime cost. Some employees, however, feel that such a system is inequitable
because it makes employees “work overtime at a ‘discounted rate.’”35
A more sophisticated example is now appropriate. Take the case of an Emergency Medical
Technician (EMT) employee who worked alternating weeks of 48 hours and 72 hours and is paid
a salary of $500 per week. For this individual the calculation of the biweekly pay would be as
follows:
First Week:
Regular rate of pay ($500 / 48 hr = $10.42/hr).
Overtime premium (0.5 x 8 x $10.42 = $41.68).
Total pay ($500 + $41.68 = $541.68).
Second Week: Regular rate of pay ($500 / 72 hr = $6.94/hr).
Overtime premium (0.5 x 32 x $6.94 = $111.04).
Total pay ($500 + $111.04 = $611.04).
Thus, the employee’s gross pay for the biweekly payroll period would be
$1,152.72 ($541.68 + $611.04).
The cost savings to the employer in this scenario are substantial. Suppose the above employee is
paid at $10.42/hr (the worker’s regular rate of pay in the above example) on an hourly basis. Then
the calculation would be as follows:
First Week:
Total regular wages ($10.42/hr x 40 hr = $416.80).
Overtime premium (1.5 x 8 x $10.42 = $125.04).
Total pay ($416.80 + $125.04 = $541.84).
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Second Week: Total regular wages ($10.42/hr x 40 hr = $416.80).
Overtime premium (1.5 x 32 x $10.42 = $500.16).
Total pay ($416.80 + $500.16 = $916.96).
Thus, the total gross pay for the biweekly payroll period would be $1,458.80 ($541.84 +
$916.96). An employer that uses the FWW method for this employee saves $306.08 ($1458.80 $1152.72) every two weeks, or a total of $7,958.08 per year—a considerable savings to the
employer!
4. The workweek of the employee must be a fluctuating one.
A fourth demand for adopting a legally defensible FWW program is that the workweek indeed be
one that fluctuates. The federal regulations do not establish a requirement as to the degree of
fluctuation in hours that must occur, but they do state that typically the salary is paid to
employees who do not customarily work a regular schedule of hours. Under this method, the
salary is intended to compensate the employee at a straight time rate for whatever hours are
worked during the workweek. The interpretation of the requirement that the workweek be a
fluctuating one has been addressed in the courts. The CFR states the following: “[T]he 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. Typically, such salaries are paid to employees who do not
customarily work a regular schedule of hours and are in amounts agreed to by the parties as
adequate straight-time compensation for long workweeks as well as short ones, under the
circumstances of the employment as a whole.”36
There are, however, several incorrect assumptions with respect to a FWW.37 The first assumption
that is often made regarding FWWs is that the employee has to work both long and short
workweeks. In fact, the method is most often used in situations where that occurs. EMT workers
frequently work short weeks as well as long ones, depending on the circumstances. The method
has also been used to pay country club workers who are employed year-round and work long
hours during the summer and shorter hours during the winter. In those cases, the employer pays
overtime premiums during the summer when activity is higher and avoids paying any overtime at
all during the winter when play is slower.38
This assumption, however, is incorrect. In the case of Flood v. New Hanover County (1997) the
court cited a May 16, 1966, opinion letter of the DOL’s Wage and Hour Division that had
determined that where employees worked fixed, alternating workweeks of 43 and 41-hour
schedules, the workweek was a fluctuating one.39 Therefore, the FWW method can be used in
cases where employees always work overtime but the workweek fluctuates.
A second incorrect assumption is that the workweeks have to be irregular.40 In Flood v. New
Hanover County (1997) the workers were actually on a fixed schedule. They worked alternating
days, 24 hours on and 24 hours off, with 4 days off at the end of the cycle. This meant that an
employee worked 48 hours during one workweek and 72 hours in the next workweek. The court
ruled that although the schedule was fixed, the workweek still fluctuated, and, therefore, the
FWW method could be used.
Similarly, the District Court for South Carolina found in Roy v. County of Lexington, S.C. (1998)
that it “is not necessary for regular hours to be sporadic for the regulation to be applied; it is
sufficient that the regular hours vary from one workweek to another.”41 In this case EMT
employees’ schedule of 24.5 hours on-duty followed by 47.5 hours off-duty was deemed a
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fluctuating number of hours. Additionally, Griffin v. Wake County (1998) established that work
hours must fluctuate but does not require an unpredictable schedule.42
A third erroneous assumption asserts that if employees’ workweeks are always in excess of forty
hours the FWW does not apply.43 The argument is that if an employer pays a salary to employees
who never work less than forty hours, then the methodology should not apply because it allows
the circumvention of the time and on-half provisions in 29 U.S.C. § 207. However, two court
cases, Evans et al. v. Lowe’s Home Centers, Inc. (2004) and Condo v. Sysco Corp. (1993),
disagreed with such an argument.44 Finally, as determined in Aiken v. County of Hampton (1997),
there is no requirement that the hours worked actually fluctuate above and below forty.45
5. The salary must be sufficiently large enough so that the regular rate of pay will never
drop below the minimum wage.
A fifth prerequisite for a FWW compensation procedure is stated in the CFR as follows: “The
‘fluctuating workweek’ method of overtime payment may not be used unless the salary is
sufficiently large to assure that no workweek will be worked in which the employee’s average
hourly earnings from the salary fall below the minimum hourly wage rate applicable under the
Act.”46 For instance, in the case of Flood v. New Hanover County (1997) the workers were
actually scheduled to work 72 hours in one workweek.47 Based on the current federal minimum
wage of $5.15 an hour, the minimum salary would have to be $370.80. It should be noted that the
Code refers to the employee’s earnings from the “salary”, not his or her total pay. Consequently,
the overtime premium cannot be included in determining whether or not the salary is sufficient.
With the exception of California, the FWW method can be used in all other states. Employers,
therefore, must be sure that the salary is sufficiently large that the employee’s regular rate of pay
is never less than the state minimum wage.
6. There must be an understanding between the employer and the employee that the
employee will be paid using the fluctuating workweek method.
A final condition for a FWW pay design is the mutual understanding between the employer and
worker regarding the FWW procedure that will be used for paying the employee. It has to be
made clear to the employee that the salary is meant to pay for all hours worked. That means that
the employee’s regular rate of pay will fluctuate each workweek depending on the number of
hours worked. If the employee is paid a salary of $350 per week and works only 35 hours, then
the regular rate of pay for that week is $10 per hour. If, however, the employee works 48 hours in
the next week, then the regular rate of pay for that week would be $7.29 per hour. Since the
regular rate of pay changes each week, the employee is, in effect, paid straight time for all hours
worked.
Although the CFR does not require that the understanding between the employer and employee
be in writing, a written statement to employees is preferable because it provides the employer
with a basis for defending the use of the method. For instance, in the case of Kelli K. Goodrow v.
Lane Bryant, Inc. (2000), the plaintiff argued that she had not been properly informed of how the
method of payment worked.48 The defendant, however, was able to show that they had provided
each new employee a memorandum explaining the method of payment.
It should also be noted that the word “understanding” is used rather than “agreement.” In one
case, Griffin v. Wake County (1998), involving EMT workers the plaintiffs argued that they had
not agreed with the use of the FWW method of payment.49 The court, though, agreed with the
defendant that mere employee notification, not agreement, was all that was required to implement
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a FWW plan. The county had held mandatory meetings with all of their workers to explain the
plan, and all employees had to sign statements that they understood the plan.
ADDITIONAL ISSUES—THE NEED FOR A SIGNED AGREEMENT
Under the DOL regulations, a written acknowledgement between the employee(s) and an
organization is not required. The most crucial element is that there be a “clear and mutual
understanding” between the employee and the organization. Distribution of a FWW policy
coupled with the signing of an acknowledgement form that indicates the employee has received
the policy will constitute a sufficient “understanding” between the employer and the employees.
The signed acknowledgement form in and of itself should be “prima facia” evidence of the
requirement of “understanding”.
By unilateral action, an employer can therefore institute an arrangement which by words or
conduct may be impliedly accepted by an employee. Thus, an employee who continues to work
after a FWW arrangement as been instituted may imply his or her acceptance by continuing to
work and thus may enter into an implied-in-fact agreement.50
It is crucial that employers who wish to utilize this mechanism examine any offer letters that may
have been given to affected employees and/or review the agreement between the organization and
the employee(s) at the time of hire. If, for example, an offer letter specifies that the employee is
being hired at a certain salary “for a forty hour week,” then that agreement, made at the time of
hire, has “converted” that employee into an hourly worker and the employer may not avail itself
of the FWW method. To the contrary, if the offer letter contains language stating that the
employee is hired at a certain salary for any and all hours worked during the week, then the
employer is able to use the FWW method.
ADDITIONAL ISSUES—DEDUCTIONS
As stated above, the quid pro quo that enables employers to pay overtime at half-time (0.5)
instead of time and one-half (1.5) is that the employee receives his or her full salary in any week
in which he or she does some work. Clearly, non-exempt hourly paid employees who take a day
off for sickness or personal business (or who come in late or leave early) may be docked. There is
a key difference on this issue for employees paid under the FWW method. The DOL’s Wage and
Hour division has issued several opinion letters addressing the issue of absence from work and
deductions in a situation where an employer is using the FWW method of payment. The agency
has consistently stated that an employer may charge partial or full day absences against paid timeoff allotments without invalidating its fixed pay/FWW arrangement, but cannot make actual
deductions from the guaranteed salary.51 The FLSA provides that a worker’s regular rate of pay is
determined based upon “all remuneration” paid to the employee for work performed during a
given week (U.S.C. § 207(e)). Payments for shift differentials, hazardous duty pay, bilingual pay,
special assignment pay, educational incentive pay, sick pay buy back, and meal allowances are
examples of specialty pay types that must be included in the regular rate of pay Acton v. City of
Columbia, MO (2004).52 However, § 207(e) excludes certain types of bonus payments from this
calculation:
Furthermore, under the Family and Medical Leave Act of 1993 (FMLA) employers that pay
according to the FWW rule,
“… during the period in which intermittent or reduced schedule
FMLA leave is scheduled to be taken, may compensate employees
on an hourly basis and pay only for the hours worked, including
time and one-half the employee’s regular rate for overtime hours.
The change to payment on an hourly basis would include the entire
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period during which the employee is taking intermittent leave,
including weeks in which no leave is taken. The hourly rate shall
be determined by dividing the employee’s weekly salary by the
employee’s normal or average schedule of hours worked during
weeks in which FMLA leave is not being taken. If an employer
chooses to follow this exception from the FWW method of payment,
the employer must do so uniformly, with respect to all employees paid
on a FWW basis for whom FMLA leave is taken on an intermittent or
reduced leave schedule basis. If an employer does not elect to convert
the employee’s compensation to hourly pay, no deduction may be taken
for FMLA leave absences.”53
After the FMLA leave period ends, the employer is free to restore the employee’s original FWW
pay practice.
Recently, however, the DOL has modified its position on the deductions issue. Now, an employer
may deduct hours from an employee’s bank of vacation or sick hours and charge an FWW
employee for absences from work for such hours. Significantly, should an employee exhaust his
or her banks of vacation or sick hours, the employer may not make a cash deduction from a FWW
employee for a partial or full-day work absence.54
ADDITIONAL ISSUES—STATE LAW CONCERNS
Nearly every state has its own wage-hour and overtime statutes. Employers must always comply
with both the federal and state law and is bound by whichever is stricter (i.e. more favorable to
workers). For example, New Jersey, by opinion letter, recognizes the validity of the FWW
method.55 In contrast, a California appeals court ruled in Skyline Homes, Inc., etc. et al. v.
Department of Industrial Relations, et al. (1985) that this method of paying overtime was not
valid.56 Thus, the employer must research the law of the particular state(s) in which it is located,
to ascertain the legality of this method in a particular jurisdiction.
Bonus and On-Call Considerations
The FLSA provides that a worker’s regular rate of pay is determined based upon “all
remuneration” paid to the employee for work performed during a given week.57 Payments for
shift differentials, hazardous duty pay, bilingual pay, special assignment pay, and educational
incentive pay are examples of specialty pay that must be included in the regular rate of pay.
However, certain types of bonus payments are excluded from this calculation:
As used in this section, the “regular rate” at which an employee is
employed shall be deemed to include all remuneration for employment
paid to, or on behalf of, the employee, but shall not be deemed to include—
(3) sums paid in recognition of services performed during a given period
if either, (a) both the fact that the payment is to be made and the amount
of the payment are determined at the sole discretion of the employer at or
near the end of the period and not pursuant to any prior contract, agreement,
or promise causing the employee to expect such payments regularly; or
(b) the payments are made pursuant to a bona fide profit sharing plan …,
meeting the requirements of the Administrator set forth in the appropriate
regulations which he shall issue, having due regard among other relevant
factors, to the extent to which the amounts paid to the employee are
determined without regard to hours of work, production or efficiency….58
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Standby or on-call pay is common in public agencies, particularly among police officers who get
called to testify in court and public works employees who need to be available for repairs at any
hour of the day. Payments made to employees for being on unrestricted standby or on call time
must be included in the employees’ regular rate of pay.59 Correct computation of the regular rate
of pay requires that the on-call amount be included with the compensation for normally scheduled
hours for that workweek to determine the regular rate of pay. Whether an employer must pay for
on-call time depends on the facts. Factors that are considered in determining whether on-call time
must be treated as compensable work hours include the following: the average number of
emergency calls the employee responds to during the on-call period; the time in which the
employee has to be at the work site after being called in; whether an employee is subject to
discipline for missing or being late to a call-back; the extent to which an employee is able to
engage in other activities while on-call; and geographical restrictions on employee movements. 60
Employees do not have to be paid if they simply are asked to provide information on where they
can be reached if the employer needs them.
ADDITIONAL ISSUES—NON-EXEMPT SALARIED EMPLOYEES PAID ONCE OR
TWICE A MONTH
While there is no federal provision requiring employers pay workers on a certain frequency, state
laws may order a prescribed occurrence. For example, under the Texas Payday Law non-exempt
employees must be paid at least twice per month, i.e., biweekly or semimonthly.61 Thus, the
discussion about monthly salaries will not apply to non-exempt employees in Texas or other
states with a similar provision. Notwithstanding such prohibitive state regulations for non-exempt
salaried employees who are paid either twice per month or monthly, the payments must be
reduced to their workweek equivalents in order to arrive at the regular rate of pay. Once the
workweek equivalent is known, then the general rule for weekly salaries can be applied. There
are two main ways for an employer to compute overtime pay for salaried employees paid once or
twice per month.62 The first method involves computing the workweek equivalents:
1) Semimonthly salary—multiply the salary times 24 to get the annual equivalent, then
divide that figure by 52 to get the workweek equivalent. Then apply the general rule of
29 C.F.R. § 778.113(a) to arrive at the regular rate. Or,
2) Monthly salary—multiply the salary by 12 for the annual equivalent, then divide that
figure by 52 to get the workweek equivalent. Then apply the general rule of 29 C.F.R.
§ 778.113(a) to arrive at the regular rate.
The other main way to pay overtime based on semimonthly or monthly salaries is to calculate it
on the basis of an established basic rate.63 29 C.F.R. 548.3(a) provides that the employer and
employee may agree that the regular rate shall be determined by dividing the monthly salary (or
semimonthly salary times 2) by the number of regular working days in the month and then by the
number of hours of the normal or regular workday. Of course, the resultant rate in such a situation
may not be below the statutory minimum wage. Further requirements for such an established
regular rate are found in 29 C.F.R. 548.2.
SUMMARY AND CONCLUSIONS
The thrust of this paper is that a FWW scheme can be a significant labor cost-saving tool for
public sector employers. Notwithstanding the potential benefits of this method, FWW has not
been utilized as often as might be expected. There are several reasons. In order to implement this
system, the federal regulations require that the employee be informed that his or her base salary is
meant to cover all hours worked and that he or she will be compensated at a half-time rate for
overtime. In addition, this system penalizes employers who have employees that work less than
40 hours in a week because the employee is due a fixed base salary each week regardless of hours
worked. If work is slow, and the employee is only working 25 or 30 hours per week, the fixed
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salary must still be paid. Thus, the FWW scheme is only a cost-saving method for those
organizations that regularly have employees work more than 40 hours in a week. Additionally,
because employees have to be informed of the payment method, many employers shy away from
the FWW system because of the problems it sometimes causes with employee morale and
employee retention.64 Perhaps the derisive term, “Chinese Overtime”, as the FWW method is
commonly called, connotes this less than enthusiastic response from employees. Furthermore, the
calculation of the “regular rate” upon which all overtime is based will change every week.
Therefore, the employer must either assign these computational tasks to an employee or
buy/devise a software program to accommodate the necessary calculations. These administrative
challenges sometimes cause employers to shy away from implementing this method.
Balanced against these problematic concerns is the distinct advantage of being able to pay halftime, instead of time and one-half, overtime. Additionally, by classifying employees as nonexempt salaried workers public service employers may lower their exposure to high-visibility
class-action lawsuits for unpaid overtime that increasingly result in significant amounts of bad
publicity, jury awards, and multimillion-dollar settlements. Such suits are particularly expensive
because there is a strong presumption in favor of doubling damages and in many cases Courts
apply provisions allowing for double damages.65 Finally, positive employee relations can be
gained through employee perception of their job as a “white collar,” as opposed to a blue collar,
position.66 Nevertheless, because of the complex and “out of the ordinary” nature of the FWW
rules, organizations should obtain professional legal and human resources guidance if they are
considering this method of determining employee pay.
REFERENCES
1
Fair Labor Standards Act of 1938 (as Amended), 29 U.S.C. § 201, et seq.
2
Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985).
3
Von Bergen, C.W., W.T. Mawer, and P.W. Pool (in press). “To be or not to be: That is the
question: Whether ‘tis nobler to implement the FairPay Overtime Initiative or not?.”
Southern Law Journal.
4
U.S. Department of Labor (n.d.). FairPay: DOL’s FairPay Overtime Initiative, http://www.dol.
gov/esa/regs/compliance/whd/FairPay/main.htm
5
International Public Management Association for Human Resources. (2004). New Overtime
Regulations Impact Public Sector. Retrieved at http://www.ipmahr.org/index.cfm?navid
=139& id =3537&tcode=nws3
6
Bohlander, G., and S. Snell (2004). Managing Human Resources (13th ed.). Mason, Ohio:
South-Western.
7
Von Bergen, C.W., and W.T. Mawer (in press). “The U.S. fairpay overtime initiative.”
Managerial Law.
8
Hetrick, R.L. (2000, February). “Analyzing the Recent Upward Surge in Overtime Hours”,
Monthly Labor Review, 30-33.
9
Milkovich, G.T., and J.M. Newman (1999). Compensation (6th ed.). Burr Ridge, IL: McGrawHill.
February 2006
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Volume 13 Number 1
10
Martin, C.L., R.J. Aalberts, and L.S. Clark (1993). “The Fair Labor Standards Act and the
Fluctuating Workweek Scheme: Competitive Compensation Strategy or Worker
Exploitation?” Labor Law Journal, Volume 25, 92-100.
11
International Public Management Association for Human Resources (2004). New Overtime
Regulations Impact Public Sector, http://www.ipmahr.org/index.cfm?navid=139&id = 35
37&tcod de=nws3
12
29 CFR § 541.3(b).
13
Federal Register (2004, April 23). “Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales and Computer Employees; Final Rule.”
Volume 69, Number 79, 22121-22274; See also 29 CFR Part 541 Subpart A., p. 22129.
14
National Public Employer Labor Relations Association (n. d.). Legislative & Legal Updates:
Sergeants’ Exempt Status Questions Under The FLSA, http://www.npelra.org/legal/tedc
lark0305.asp
15
Auer v. Robbins (95-897), 519 U.S. 452 (1997).
16
Albany Democrat-Herald (2004, August 17). Police Sergeants to Get Overtime, http://www.d
honline.com/articles/2004/08/17/news/local/news04.txt.
17
Immel, O.W. (2003). Out of the Ordinary Wage Plan Rules under the Fair Labor Standards
Act, http://64.233.179.104/search?q=cache:kZV8jTnL3S0J
18
Most states have laws expanding the basic coverage of the FLSA. Courts look at the state
standard if it is most favorable to the employee.
19
U.S. Department of Labor (n.d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whdfs23.htm
20
U.S. Department of Labor (n.d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whd/ whdfs23.htm
21
U.S. Department of Labor (n.d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whd/ whdfs23.htm
22
U.S. Department of Labor (n.d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whd/ whdfs23.htm
23
U.S. Department of Labor (n. d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whd/ whdfs23.htm
24
29 C.F.R. § 778.114.
25
29 C.F.R. § 778.114(b).
26
Evans et al. v. Lowe’s Home Centers, Inc., Lexis 15716 (June 17, 2004). U.S. Mid District
Penn; Condo v. Sysco Corp 1 F.3d 599, 603 (7th Cir. 1993).
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27
Condo v. Sysco Corp, supra 27; Dufrene v. Browning-Ferris, Inc., 994 F.Supp. 748 (E.D. La.
1998).
28
Overnight Motor Transport Company v. Missel, U.S. 572 (1942).
29
Kelli K. Goodrow v. Lane Bryant, Inc., 732 N.E. 2d 289 (Mass. S. Jud. Ct., 2000).
30
Field Operations Handbook (1967). Section 32b04b(a).
31
29 CFR § 778.114(c).
32
29 CFR § 778.114(c).
33
34
35
36
37
American Payroll Association (2004, June 11). “Payroll Currently”. Volume 12, Issue 12,
http://www.americanpayroll.org/pdfs/pc2004/PCELEC0412.pdf
O’Brien v. Town of Agawam, 350 F.3d 279, 291 n.22 1st Cir. (2003).
Chinese Overtime (2003), http://www.youareworthmore.org/node/8168node/8168
29 CFR § 778.114(c).
Ditmer, R.W. (n.d.). The Fluctuating Workweek Method, http://www.payroll-taxes.com/
articles/fluctuatingWorkweeks.html
38
North Carolina Department of Labor (2003). Fluctuating Workweek Overtime, http://www.
nclabor.com/wh/fwohand.htm
39
Flood v. New Hanover County, 125 F. 3d 249, (4th Cir., 1997).
40
Ditmer, R.W. (n.d.). The Fluctuating Workweek Method, http://www.payroll-taxes.com/articl
es/fluctuatingWorkweeks.html
41
Roy v. County of Lexington, S.C., 948 F.Supp. 529 (D.S.C. 1996) aff’d, 141 F.3d 533 (4th Cir.
1998).
42
Griffin v. Wake County, 142 F.3d 712 (4th Cir. 1998).
43
Ditmer, R.W. (n.d.). The Fluctuating Workweek Method, http://www.payroll-taxes.com/
articles/fluctuatingWorkweeks.html
44
Evans et al. v. Lowe’s Home Centers, Inc., Lexis 15716 (June 17, 2004). U.S. Mid District
Penn.; Condo v. Sysco Corp 1 F.3d 599, 603 (7th Cir. 1993).
45
Aiken v. County of Hampton, 977 F.Supp. 390, 398 (D.S.C. 1997).
46
29 CFR 778.114(c).
47
Flood v. New Hanover County, 125 F. 3d 249, (4th Cir., 1997).
48
Kelli K. Goodrow v. Lane Bryant, Inc., 732 N.E. 2d 289 (Mass. S. Jud. Ct., 2000).
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49
Griffin v. Wake County, 142 F.3d 712 (4th Cir. 1998).
50
General Electric v. Porter, 208 F.2d 805 (9th Cir. 1954) cert. denied, 347 U.S. 975
(1954); Zoltek v. Safelite Glass Corp., 884 F.Supp. 283 (N.D. Ill. 1995).
51
Wage and Hour Opinion Letter No. 1977 (March 28, 1996). U.S. Department of Labor, Wirtz
Labor Library, at http://www.dol.gov/oasam/library/; Wage and Hour Opinion Letter No.
1994 (July 25, 1996). U.S. Department of Labor, Wirtz Labor Library, http://www.dol.go
v/oasam/library/; Wage and Hour Opinion Letter No. 2161 (May 28, 1999). U.S.
Department of Labor, Wirtz Labor Library, at http://www.dol.gov/oasam/library/; Wage
and Hour Opinion Letter No. 2065 (December 24, 1997). U.S. Department of Labor,
Wirtz Labor Library, at http://www.dol.gov/oasam/library/
52
Acton v. City of Columbia, Mo., 2004 WL 2152297, 150 Lab.Cas. P 34,912, 9 Wage & Hour
Cas.2d (BNA) 1773, W.D. Mo. Sep 10, 2004.
53
29 CFR § 825.206.
54
Wage and Hour Opinion Letter No. 2065 (December 24, 1997). U.S. Department of Labor,
Wirtz Labor Library, http://www.dol.gov/oasam/library/
55
Tabakman, M.E. (2005). The Fluctuating Work Week Method of Paying Overtime: The
Employer’s Friend (or Foe), http://www.gghlaw.com/fluctwork.htm
56
Skyline Homes, Inc., etc. et al. v. Department of Industrial Relations, et al. (1985) 165
Cal.App.3rd 239, 166 Cal.App.3rd 232 (Hrg.den.May26, 1985).
57
U.S.C. § 207(e).
58
U.S.C. § 207(e).
59
29 C.F.R. § 778.223.
60
Overtime Issues for Fire and Rescue Personnel—The Fair Labor Standards Act, http://www.
mpffu.0rg/members/forms_etc/OverTime%20FLSA.pdf
61
Texas Payday Law, Labor Code Title 2, § 61.011(b) (Tex 1993).
62
29 C.F.R. 778.113(b).
63
See U.S.C. § 207(g)(3); 29 C.F.R. § 548.
64
Feldman, D. (2002). More than One Way to Pay Overtime, http://www.imakenews.com/emplo
ymentlaw/e_article000053371.cfm
65
Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942), at 581; Walton v. United
Consumers Club, Inc., 786 F.2d 303, 310 (7th Cir. 1986).
66
Martin, C.L., and J. Newman (1992). “The FLSA Overtime Provision: A New Controversy?”
Compensation and Benefits Review, Volume 24, 60-63.
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Using the Fluctuating Workweek Compensation
Method to Reduce Overtime Expenses
Von Bergen, C. W.
Southeastern Oklahoma State University
[email protected]
Chong, J. K. S.
Southeastern Oklahoma State University
[email protected]
ABSTRACT
New modifications to the Fair Labor Standards Act recently promulgated by the Department of
Labor as the FairPay Overtime Initiative will produce an increasing number of workers subject
to overtime payments and a concomitant increase in labor costs for public sector organizations.
To adapt to this changing environment and to control employee overtime expenditures
organizations may wish to examine the applicability of a relatively obscure provision of the Fair
Labor Standards Act labelled the fluctuating workweek scheme. This approach becomes
increasingly attractive to employers as worker overtime increases because a feature of this
method is that the overtime rate due employees under this plan decreases as the number of
overtime hours worked increases.
INTRODUCTION
The Fair Labor Standards Act1 (hereinafter referred to as the FLSA or Act) requires that most
employees in the U.S. be paid at least the federal minimum wage for all hours worked and receive
overtime pay at one and one-half times the regular rate for all hours worked over 40 hours in a
workweek. The FLSA became law for the private sector in 1938. It was not until 1985 that the
U.S. Supreme Court ruled that FLSA applied to local and state governments in the now-famous
case of Garcia v. San Antonio Metropolitan Transit Authority (1985).2
Defined within the Act are certain types of employees who are exempt from both minimum wage
and overtime pay. These exempt categories are cumulatively referred to as the white collar
exemption and the workers are called white collar employees. To qualify for such exemptions the
job description must meet certain salary and job duties tests. The last major revision to the FLSA
occurred some fifty years ago and during this time these duties tests became outdated resulting in
uncertainty and vagueness in their application. Such ambiguity was exploited by some
organizations because exempt employees did not have to be paid overtime and could work
unlimited hours. Consequently, organizations began to classify employees as exempt from
overtime pay under the FLSA when, in fact and by law, the employees should have been
classified as non-exempt.3 In response to such organizational action, increasing numbers of
managerial, administrative, and professional employees along with significant numbers of
previously classified non-exempt workers began filing high-visibility class-action lawsuits
against employers for unpaid overtime claiming mis-classification under the FLSA.
As a result of this increase in lawsuits and these decades-old exemption descriptions, the Wage
and Hour Division of the DOL developed new regulations relating to white collar exemptions of
the Act called the FairPay Overtime Initiative (hereinafter referred to as FPOI). The purpose of
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the new FLSA regulations which went into effect on August 23, 2004 was to modernize, update,
and clarify the criteria for these exemptions and to eliminate legal problems that the prior
regulations caused. More specifically, the regulations were said to strengthen overtime benefits
and provide overtime protection for an additional 6.7 million American employees.4
Pragmatically, this meant that there were more employees subject to overtime payments within
organizations and a concomitant increase in labor costs. This paper discusses the impact of the
FPOI on overtime for public sector organizations and suggests the fluctuating workweek (FWW)
scheme as an approach public service employers may wish to consider to reduce increased
overtime costs resulting from the implementation of the FPOI.
New Overtime Regulations Impact Public Sector
These new regulations pose hardships for state and local governments with respect to labor costs.5
Wages and salaries of personnel represent a substantial proportion of costs in most public
employers and cost containment in this human resources area continues to be a key challenge in
the current environment of tight budgets.6
Organizations have tried a number of approaches to lower labor costs including downsizing,
outsourcing and employee leasing, and productivity enhancements. More recently, organizations
have initiated efforts to reduce employee labor expenditures through better control of overtime.7
Overtime pay for current employees is often the least costly option for employers to exercise in
scheduling work assignments and has been viewed as a key “survival strategy” by many
organizations.8 This is because it is often less expensive to schedule longer hours and pay
overtime premiums rather than hire, train, and provide benefits for additional employees.9 These
factors have lowered the point at which it is more cost effective to schedule longer hours and pay
the overtime premium rather than employ additional workers.10 Consequently, organizations
expanded the workweek well beyond the normal 40-hour boundary requiring overtime payments
to workers not exempt from the FLSA provisions.
A number of items in the FPOI impact public sector organizations with respect to overtime
considerations.11 First, the changes made to the executive exemption are likely to have a serious
negative impact on public employers because many supervisors and managers are classified as
exempt and earn less than $100,000 per year requiring state and local governments to reclassify
them as non-exempt and subject to overtime provisions of the FLSA. Second, the change made to
the provision concerning first responders is causing concern for many public sector organizations.
Specifically, the new rules indicated that:
Police officers, detectives, deputy sheriffs, state troopers, highway
patrol officers, investigators, inspectors, correctional officers, parole
or probation officers, park rangers, fire fighters, paramedics, emergency
medical technicians, ambulance personnel, rescue workers, hazardous
materials workers and similar employees (“first responders”} … are protected by
the minimum wage and overtime provisions of the FLSA.12
The unease generated in public employers arose because the new regulations are less equivocal
regarding such public safety employees who in some governmental units were previously
classified as exempt from overtime with respect to the FLSA. Such clarification will undoubtedly
guarantee overtime to an expanded number of workers and raise labor costs for public sector
organizations.
Third, in the preamble to the newly instituted regulations the DOL said “Police sergeants, for
example, are entitled to overtime pay even if they direct the work of other police officers because
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their primary duty is not management or directly related to management or general business
operations.”13 The DOL’s position on the issue is basically that sergeants can never be exempt.
However, this position is greatly at odds with how courts have previously treated the subject.14
The courts have traditionally been more willing to find police sergeants to be exempt from
overtime under the FLSA. The leading case, Auer v. Robbins (1997)15, found that several classes
of police sergeants were exempt executive employees. Consequently, the new regulations may
cost public employers considerably more money. Indeed, the Albany Democrat-Herald reported
that “...Albany police sergeants to be paid for overtime at a potential additional cost of up to
$100,000 this budget year.”16 And this budget increase reflects just one position in a city’s
budget!
Fourth, certain first responders will not be eligible for exemption under the highly compensated
provision (earning more than $100,000 per year) because the highly compensated test applies
only to employees whose primary duty includes performing office or non-manual work. Once
again, this could lead to increased labor costs in the event of overtime for these high paid
workers.
In summary, there appear to be a number of reasons why public employers should experience
increased labor costs from the FPOI. This is due primarily to a greater number of positions that
will be considered eligible for overtime. Thus, faced with increasing overtime costs,
organizations may want to consider approaches to reducing these expenditures. One such
approach which may demand further scrutiny by public service employers involves what is called
a FWW scheme. This “out of the ordinary wage plan”17 becomes increasingly attractive to
employers as worker overtime increases because a key feature of this approach is that the
overtime rate due employees under this plan decreases as the number of hours worked increases.
This paper discusses the FWW method and compares it to the traditional method of calculating
overtime rates and premiums. The article concludes with a discussion of limitations regarding this
approach and a set of recommendations for public employers wishing to explore this relatively
obscure overtime determination format.
TRADITIONAL OVERTIME PAYMENT
Unless specifically exempted, employees covered by the FLSA must receive overtime pay for
hours worked in excess of 40 in a workweek at a rate not less than time and one-half (1.5) their
regular hourly rates of pay.18 For example, if an employee is paid $600 a week as compensation
and works a work schedule of 40 hours a week, the employee’s overtime rate of pay is computed
by dividing $600 by 40 (= $15.00). Thus, for each hour of overtime over 40 hours a week, the
employee is entitled to receive 1.5 times $15.00, which equals $22.50 an hour.19
There is no limit in the Act on the number of hours employees aged 16 and older may work in
any workweek. Additionally, the Act does not require overtime pay for work on Saturdays,
Sundays, holidays, or regular days of rest.20 The Act applies on a purely workweek basis. An
employee’s workweek is a fixed and regularly recurring period of 168 hours—seven consecutive
24-hour periods. It need not coincide with the calendar week, and may begin on any day and at
any hour of the day. Different workweeks may be established for different employees or groups
of employees. Averaging of hours over two or more weeks, however, is not permitted—each
workweek stands on its own and not by pay period or by month or by any other period of
time. Therefore, an employer cannot base the overtime hours on the total hours worked in a biweekly or a semi-monthly pay period. Normally, overtime pay earned in a particular workweek
must be paid on the regular pay day for the pay period in which the wages were earned.21
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The regular rate of pay cannot be less than the minimum wage. The regular rate includes all
remuneration for employment except certain payments excluded by the Act itself. Payments
which are not part of the regular rate include pay for expenses incurred on the employer’s behalf,
premium payments for overtime work or the true premiums paid for work on Saturdays, Sundays,
and holidays, discretionary bonuses, gifts and payments in the nature of gifts on special
occasions, and payments for occasional periods when no work is performed due to vacation,
holidays, or illness.22
Earnings may be determined on a piece-rate, salary, commission, or some other basis, but in all
such cases the overtime pay due must be computed on the basis of the average hourly rate derived
from such earnings. This is calculated by dividing the total pay for employment (except for the
noted statutory exclusions) in any workweek by the total number of hours actually worked.23
Fluctuating Workweek Approach
The FLSA regulations allow employers to pay non-exempt employees a fixed salary for 1)
personnel scheduled to work a standard or preset number of hours each week, or 2) for
individuals whose work week fluctuates in the number of hours required. More specifically, with
respect to fluctuating hours, the Department of Labor’s regulations provide that:
An employee employed on a salary basis may have hours of work
which fluctuate from week to week and the salary may be paid to
him pursuant to an understanding with his employer that he will
receive such fixed amount at a straight time pay for whatever hours
he is called upon to work in a workweek, whether few or many.24
Employees scheduled to work a predetermined set of hours each week receive an overtime
premium of time-and-one-half (1.5) of the employee’s regular rate of pay for all hours worked in
excess of 40 hours. On the other hand, employees whose work week hours vary or fluctuate can
be paid in weeks in which they work more than 40 hours at a rate of half-time (.5) the employee’s
regular rate of pay for the extra hours “since the employee has already received straight-time
compensation on a salary basis for all hours worked.”25
The employer can save money in contexts where there are fluctuating work hours because it is
paying the employee a salary that involves fewer administrative costs, and any overtime
premiums are paid at 50% of the employee’s regular rate of pay. Thus, organizations consistently
having salaried non-exempt employees regularly working over 40 hours in a workweek, thereby
incurring overtime liability, can realize substantial labor savings by implementing a FWW pay
scheme. This pay system has been referred to as “Chinese Overtime.” 26
This method of calculating overtime has been upheld as a valid interpretation of the Act.27 The
regulations permitting this method of calculation were promulgated by DOL’s interpretive
bulletins. Although these bulletins are not legally binding their legal importance was established
by the Supreme Court in 1942. In the case, Overnight Motor Transport Company v. Missel, the
Supreme Court stated: “While the interpretive bulletins are not issued as regulations under
statutory authority, they do carry persuasiveness as an expression of the view of those
experienced in the administration of the Act [FLSA] and acting with the advice of a staff
specializing in its interpretation and application.”28 Additionally, at least one court case has
upheld this use of the FWW method. In the case of Kelli K. Goodrow v. Lane Bryant, Inc. (2000)
the court ruled in favor of the employer.29 In this case the employer (Lane Bryant, Inc.) had relied
on the DOL’s Field Operations Handbook in implementing their FWW plan in 1992. Section
32b04b(a) of that Handbook states: “If the employer to avoid weekly computations chooses to
pay extra half-time based on the salary divided by 40 hours, such a method is permissible.”30
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GUIDELINES IN IMPLEMENTING FWW SCHEMES
Nevertheless, to ensure that actions relating to FWW are legally defensible in court the following
conditions must be met.31 These rules are summarized in Table 1 and discussed in more detail
below.
Table 1. Summary of Fluctuating Workweek Rules (after 29 CFR 778.114).
1. Non-exempt employees must be paid a salary. Employees who are paid an hourly
wage do not qualify.
2. The employee must be paid a fixed salary regardless of the number of hours
worked each week.
3. In addition to their salary, employees must be paid overtime premiums for hours worked
over 40 in the workweek at the rate of 50% of the regular rate of pay for the workweek.
4. The workweek of the employee must be a fluctuating one.
5. The salary must be sufficiently large enough so that the regular rate of pay will never
drop below the minimum wage.
6. There must be an understanding between the employer and the employee that the
employee will be paid using the fluctuating workweek method.
1. Non-exempt employees must be paid a salary. Employees who are paid an hourly wage do
not qualify.
It is perhaps a little known fact that the FLSA does not require that employers pay non-exempt
employees by the hour. It only mandates that non-exempt employees receive overtime, after forty
hours of actual work. Employers may pay non-exempt employees by a salary, or per diem, or by
piece rate. The overriding constant remains payment of overtime following forty hours of
work. Employees who are paid an hourly wage cannot be paid using the FWW method. An
hourly employee is paid at a fixed regular rate of pay (or multiple rates of pay) so his or her
hourly rate of pay is never less than a stated minimum. But an employee who is paid using the
FWW method has a regular rate of pay that varies. Thus, the first requirement for implementing a
FWW pay system is that employees be paid a salary.
2. The employee must be paid a fixed salary regardless of the number of hours worked each
week.
A second provision for adopting a legally valid FWW system is that the employee must be paid a
fixed salary regardless of the number of hours worked each week. The employee has to
understand that the salary is for all hours worked, whether few or many: “[T]he 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.”32 Since an employee who works fluctuating hours for a fixed rate of pay is
supposed to get the same pay whether he works short or long weekly hours, the government does
not permit deductions for absences of less than a week, whether for illness, personal business or
other reasons. Indeed, the disadvantage to such a system is that employees must be paid their full
salary even if they work but a single hour during the week. Since a fixed salary for a FWW
covers short, as well as long, weekly working hours, advantage cannot be taken of the statutory
regular-rate exclusions allowed for occasional paid absences due to vacation, holiday, illness,
failure to provide sufficient work, or other similar cause. For instance, if an organization decides
to close on a holiday, and on the day after the holiday it also decides to close, the organization
must pay employees if they are paid on a FWW basis.33
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The importance of a fixed salary was reinforced in O’Brien v. Town of Agawam (2003), in which
the First Circuit Court of Appeals ruled that the FWW method may not be used when employers
compensate workers amounts in addition to their normal pay.34 In this case, employees were paid
night shift differentials, additional pay for every hour worked beyond eight hours a day, and
additional pay for every hour worked during off-duty time. The Court held that because
supplementary compensation was paid, the employees’ salaries were not truly “fixed” as required
by the regulations. Therefore, the employer was not entitled to use the FWW method.
3. In addition to their salary, employees must be paid overtime premiums for hours worked
over 40 in the workweek at the rate of 50% of the regular rate of pay for the workweek.
A third stipulation in effecting a FWW pay method addresses compensation for work in excess of
40 hours in a workweek. Naturally, in a week in which an employee works forty (40) hours, he or
she simply receives the agreed-upon fixed salary. In addition to this salary, the employee must be
paid overtime premiums for any hours worked over 40 in the workweek. The overtime premium
rate is 50% of the regular rate of pay for the workweek. The rationale behind this regulation is
that the employee has already been paid a straight hourly rate for each hour in excess of 40, and is
only due the additional ½ pay.
Consider for example an employee who receives a fixed wage of $450.00 per week and who
works 45 hours in one week and 50 hours in the next. In the first week the individual’s regular
rate is $10.00 ($450 / 45). The employee is entitled to receive $5.00 per hour (.5 x $10.00) for the
five hours worked in excess of 40 since the worker has already received straight time of $10.00
per hour for those hours. In the next week the employee’s regular rate is $9.00 ($450 / 50). In that
week the employee is entitled to receive $4.50 for each of the 10 hours worked in excess of 40.
Note that for working 45 hours per week the employee received an overtime rate of $5.00 per
hour and a $4.50 per hour overtime premium for working 50 hours. Paradoxically, then, the more
overtime hours worked per week the lower the actual overtime pay rate. Thus, in workweeks in
which the overtime is high, the regular rate will be low, and the employer will benefit from a
lower per-hour overtime cost. Some employees, however, feel that such a system is inequitable
because it makes employees “work overtime at a ‘discounted rate.’”35
A more sophisticated example is now appropriate. Take the case of an Emergency Medical
Technician (EMT) employee who worked alternating weeks of 48 hours and 72 hours and is paid
a salary of $500 per week. For this individual the calculation of the biweekly pay would be as
follows:
First Week:
Regular rate of pay ($500 / 48 hr = $10.42/hr).
Overtime premium (0.5 x 8 x $10.42 = $41.68).
Total pay ($500 + $41.68 = $541.68).
Second Week: Regular rate of pay ($500 / 72 hr = $6.94/hr).
Overtime premium (0.5 x 32 x $6.94 = $111.04).
Total pay ($500 + $111.04 = $611.04).
Thus, the employee’s gross pay for the biweekly payroll period would be
$1,152.72 ($541.68 + $611.04).
The cost savings to the employer in this scenario are substantial. Suppose the above employee is
paid at $10.42/hr (the worker’s regular rate of pay in the above example) on an hourly basis. Then
the calculation would be as follows:
First Week:
Total regular wages ($10.42/hr x 40 hr = $416.80).
Overtime premium (1.5 x 8 x $10.42 = $125.04).
Total pay ($416.80 + $125.04 = $541.84).
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Second Week: Total regular wages ($10.42/hr x 40 hr = $416.80).
Overtime premium (1.5 x 32 x $10.42 = $500.16).
Total pay ($416.80 + $500.16 = $916.96).
Thus, the total gross pay for the biweekly payroll period would be $1,458.80 ($541.84 +
$916.96). An employer that uses the FWW method for this employee saves $306.08 ($1458.80 $1152.72) every two weeks, or a total of $7,958.08 per year—a considerable savings to the
employer!
4. The workweek of the employee must be a fluctuating one.
A fourth demand for adopting a legally defensible FWW program is that the workweek indeed be
one that fluctuates. The federal regulations do not establish a requirement as to the degree of
fluctuation in hours that must occur, but they do state that typically the salary is paid to
employees who do not customarily work a regular schedule of hours. Under this method, the
salary is intended to compensate the employee at a straight time rate for whatever hours are
worked during the workweek. The interpretation of the requirement that the workweek be a
fluctuating one has been addressed in the courts. The CFR states the following: “[T]he 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. Typically, such salaries are paid to employees who do not
customarily work a regular schedule of hours and are in amounts agreed to by the parties as
adequate straight-time compensation for long workweeks as well as short ones, under the
circumstances of the employment as a whole.”36
There are, however, several incorrect assumptions with respect to a FWW.37 The first assumption
that is often made regarding FWWs is that the employee has to work both long and short
workweeks. In fact, the method is most often used in situations where that occurs. EMT workers
frequently work short weeks as well as long ones, depending on the circumstances. The method
has also been used to pay country club workers who are employed year-round and work long
hours during the summer and shorter hours during the winter. In those cases, the employer pays
overtime premiums during the summer when activity is higher and avoids paying any overtime at
all during the winter when play is slower.38
This assumption, however, is incorrect. In the case of Flood v. New Hanover County (1997) the
court cited a May 16, 1966, opinion letter of the DOL’s Wage and Hour Division that had
determined that where employees worked fixed, alternating workweeks of 43 and 41-hour
schedules, the workweek was a fluctuating one.39 Therefore, the FWW method can be used in
cases where employees always work overtime but the workweek fluctuates.
A second incorrect assumption is that the workweeks have to be irregular.40 In Flood v. New
Hanover County (1997) the workers were actually on a fixed schedule. They worked alternating
days, 24 hours on and 24 hours off, with 4 days off at the end of the cycle. This meant that an
employee worked 48 hours during one workweek and 72 hours in the next workweek. The court
ruled that although the schedule was fixed, the workweek still fluctuated, and, therefore, the
FWW method could be used.
Similarly, the District Court for South Carolina found in Roy v. County of Lexington, S.C. (1998)
that it “is not necessary for regular hours to be sporadic for the regulation to be applied; it is
sufficient that the regular hours vary from one workweek to another.”41 In this case EMT
employees’ schedule of 24.5 hours on-duty followed by 47.5 hours off-duty was deemed a
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fluctuating number of hours. Additionally, Griffin v. Wake County (1998) established that work
hours must fluctuate but does not require an unpredictable schedule.42
A third erroneous assumption asserts that if employees’ workweeks are always in excess of forty
hours the FWW does not apply.43 The argument is that if an employer pays a salary to employees
who never work less than forty hours, then the methodology should not apply because it allows
the circumvention of the time and on-half provisions in 29 U.S.C. § 207. However, two court
cases, Evans et al. v. Lowe’s Home Centers, Inc. (2004) and Condo v. Sysco Corp. (1993),
disagreed with such an argument.44 Finally, as determined in Aiken v. County of Hampton (1997),
there is no requirement that the hours worked actually fluctuate above and below forty.45
5. The salary must be sufficiently large enough so that the regular rate of pay will never
drop below the minimum wage.
A fifth prerequisite for a FWW compensation procedure is stated in the CFR as follows: “The
‘fluctuating workweek’ method of overtime payment may not be used unless the salary is
sufficiently large to assure that no workweek will be worked in which the employee’s average
hourly earnings from the salary fall below the minimum hourly wage rate applicable under the
Act.”46 For instance, in the case of Flood v. New Hanover County (1997) the workers were
actually scheduled to work 72 hours in one workweek.47 Based on the current federal minimum
wage of $5.15 an hour, the minimum salary would have to be $370.80. It should be noted that the
Code refers to the employee’s earnings from the “salary”, not his or her total pay. Consequently,
the overtime premium cannot be included in determining whether or not the salary is sufficient.
With the exception of California, the FWW method can be used in all other states. Employers,
therefore, must be sure that the salary is sufficiently large that the employee’s regular rate of pay
is never less than the state minimum wage.
6. There must be an understanding between the employer and the employee that the
employee will be paid using the fluctuating workweek method.
A final condition for a FWW pay design is the mutual understanding between the employer and
worker regarding the FWW procedure that will be used for paying the employee. It has to be
made clear to the employee that the salary is meant to pay for all hours worked. That means that
the employee’s regular rate of pay will fluctuate each workweek depending on the number of
hours worked. If the employee is paid a salary of $350 per week and works only 35 hours, then
the regular rate of pay for that week is $10 per hour. If, however, the employee works 48 hours in
the next week, then the regular rate of pay for that week would be $7.29 per hour. Since the
regular rate of pay changes each week, the employee is, in effect, paid straight time for all hours
worked.
Although the CFR does not require that the understanding between the employer and employee
be in writing, a written statement to employees is preferable because it provides the employer
with a basis for defending the use of the method. For instance, in the case of Kelli K. Goodrow v.
Lane Bryant, Inc. (2000), the plaintiff argued that she had not been properly informed of how the
method of payment worked.48 The defendant, however, was able to show that they had provided
each new employee a memorandum explaining the method of payment.
It should also be noted that the word “understanding” is used rather than “agreement.” In one
case, Griffin v. Wake County (1998), involving EMT workers the plaintiffs argued that they had
not agreed with the use of the FWW method of payment.49 The court, though, agreed with the
defendant that mere employee notification, not agreement, was all that was required to implement
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a FWW plan. The county had held mandatory meetings with all of their workers to explain the
plan, and all employees had to sign statements that they understood the plan.
ADDITIONAL ISSUES—THE NEED FOR A SIGNED AGREEMENT
Under the DOL regulations, a written acknowledgement between the employee(s) and an
organization is not required. The most crucial element is that there be a “clear and mutual
understanding” between the employee and the organization. Distribution of a FWW policy
coupled with the signing of an acknowledgement form that indicates the employee has received
the policy will constitute a sufficient “understanding” between the employer and the employees.
The signed acknowledgement form in and of itself should be “prima facia” evidence of the
requirement of “understanding”.
By unilateral action, an employer can therefore institute an arrangement which by words or
conduct may be impliedly accepted by an employee. Thus, an employee who continues to work
after a FWW arrangement as been instituted may imply his or her acceptance by continuing to
work and thus may enter into an implied-in-fact agreement.50
It is crucial that employers who wish to utilize this mechanism examine any offer letters that may
have been given to affected employees and/or review the agreement between the organization and
the employee(s) at the time of hire. If, for example, an offer letter specifies that the employee is
being hired at a certain salary “for a forty hour week,” then that agreement, made at the time of
hire, has “converted” that employee into an hourly worker and the employer may not avail itself
of the FWW method. To the contrary, if the offer letter contains language stating that the
employee is hired at a certain salary for any and all hours worked during the week, then the
employer is able to use the FWW method.
ADDITIONAL ISSUES—DEDUCTIONS
As stated above, the quid pro quo that enables employers to pay overtime at half-time (0.5)
instead of time and one-half (1.5) is that the employee receives his or her full salary in any week
in which he or she does some work. Clearly, non-exempt hourly paid employees who take a day
off for sickness or personal business (or who come in late or leave early) may be docked. There is
a key difference on this issue for employees paid under the FWW method. The DOL’s Wage and
Hour division has issued several opinion letters addressing the issue of absence from work and
deductions in a situation where an employer is using the FWW method of payment. The agency
has consistently stated that an employer may charge partial or full day absences against paid timeoff allotments without invalidating its fixed pay/FWW arrangement, but cannot make actual
deductions from the guaranteed salary.51 The FLSA provides that a worker’s regular rate of pay is
determined based upon “all remuneration” paid to the employee for work performed during a
given week (U.S.C. § 207(e)). Payments for shift differentials, hazardous duty pay, bilingual pay,
special assignment pay, educational incentive pay, sick pay buy back, and meal allowances are
examples of specialty pay types that must be included in the regular rate of pay Acton v. City of
Columbia, MO (2004).52 However, § 207(e) excludes certain types of bonus payments from this
calculation:
Furthermore, under the Family and Medical Leave Act of 1993 (FMLA) employers that pay
according to the FWW rule,
“… during the period in which intermittent or reduced schedule
FMLA leave is scheduled to be taken, may compensate employees
on an hourly basis and pay only for the hours worked, including
time and one-half the employee’s regular rate for overtime hours.
The change to payment on an hourly basis would include the entire
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period during which the employee is taking intermittent leave,
including weeks in which no leave is taken. The hourly rate shall
be determined by dividing the employee’s weekly salary by the
employee’s normal or average schedule of hours worked during
weeks in which FMLA leave is not being taken. If an employer
chooses to follow this exception from the FWW method of payment,
the employer must do so uniformly, with respect to all employees paid
on a FWW basis for whom FMLA leave is taken on an intermittent or
reduced leave schedule basis. If an employer does not elect to convert
the employee’s compensation to hourly pay, no deduction may be taken
for FMLA leave absences.”53
After the FMLA leave period ends, the employer is free to restore the employee’s original FWW
pay practice.
Recently, however, the DOL has modified its position on the deductions issue. Now, an employer
may deduct hours from an employee’s bank of vacation or sick hours and charge an FWW
employee for absences from work for such hours. Significantly, should an employee exhaust his
or her banks of vacation or sick hours, the employer may not make a cash deduction from a FWW
employee for a partial or full-day work absence.54
ADDITIONAL ISSUES—STATE LAW CONCERNS
Nearly every state has its own wage-hour and overtime statutes. Employers must always comply
with both the federal and state law and is bound by whichever is stricter (i.e. more favorable to
workers). For example, New Jersey, by opinion letter, recognizes the validity of the FWW
method.55 In contrast, a California appeals court ruled in Skyline Homes, Inc., etc. et al. v.
Department of Industrial Relations, et al. (1985) that this method of paying overtime was not
valid.56 Thus, the employer must research the law of the particular state(s) in which it is located,
to ascertain the legality of this method in a particular jurisdiction.
Bonus and On-Call Considerations
The FLSA provides that a worker’s regular rate of pay is determined based upon “all
remuneration” paid to the employee for work performed during a given week.57 Payments for
shift differentials, hazardous duty pay, bilingual pay, special assignment pay, and educational
incentive pay are examples of specialty pay that must be included in the regular rate of pay.
However, certain types of bonus payments are excluded from this calculation:
As used in this section, the “regular rate” at which an employee is
employed shall be deemed to include all remuneration for employment
paid to, or on behalf of, the employee, but shall not be deemed to include—
(3) sums paid in recognition of services performed during a given period
if either, (a) both the fact that the payment is to be made and the amount
of the payment are determined at the sole discretion of the employer at or
near the end of the period and not pursuant to any prior contract, agreement,
or promise causing the employee to expect such payments regularly; or
(b) the payments are made pursuant to a bona fide profit sharing plan …,
meeting the requirements of the Administrator set forth in the appropriate
regulations which he shall issue, having due regard among other relevant
factors, to the extent to which the amounts paid to the employee are
determined without regard to hours of work, production or efficiency….58
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Standby or on-call pay is common in public agencies, particularly among police officers who get
called to testify in court and public works employees who need to be available for repairs at any
hour of the day. Payments made to employees for being on unrestricted standby or on call time
must be included in the employees’ regular rate of pay.59 Correct computation of the regular rate
of pay requires that the on-call amount be included with the compensation for normally scheduled
hours for that workweek to determine the regular rate of pay. Whether an employer must pay for
on-call time depends on the facts. Factors that are considered in determining whether on-call time
must be treated as compensable work hours include the following: the average number of
emergency calls the employee responds to during the on-call period; the time in which the
employee has to be at the work site after being called in; whether an employee is subject to
discipline for missing or being late to a call-back; the extent to which an employee is able to
engage in other activities while on-call; and geographical restrictions on employee movements. 60
Employees do not have to be paid if they simply are asked to provide information on where they
can be reached if the employer needs them.
ADDITIONAL ISSUES—NON-EXEMPT SALARIED EMPLOYEES PAID ONCE OR
TWICE A MONTH
While there is no federal provision requiring employers pay workers on a certain frequency, state
laws may order a prescribed occurrence. For example, under the Texas Payday Law non-exempt
employees must be paid at least twice per month, i.e., biweekly or semimonthly.61 Thus, the
discussion about monthly salaries will not apply to non-exempt employees in Texas or other
states with a similar provision. Notwithstanding such prohibitive state regulations for non-exempt
salaried employees who are paid either twice per month or monthly, the payments must be
reduced to their workweek equivalents in order to arrive at the regular rate of pay. Once the
workweek equivalent is known, then the general rule for weekly salaries can be applied. There
are two main ways for an employer to compute overtime pay for salaried employees paid once or
twice per month.62 The first method involves computing the workweek equivalents:
1) Semimonthly salary—multiply the salary times 24 to get the annual equivalent, then
divide that figure by 52 to get the workweek equivalent. Then apply the general rule of
29 C.F.R. § 778.113(a) to arrive at the regular rate. Or,
2) Monthly salary—multiply the salary by 12 for the annual equivalent, then divide that
figure by 52 to get the workweek equivalent. Then apply the general rule of 29 C.F.R.
§ 778.113(a) to arrive at the regular rate.
The other main way to pay overtime based on semimonthly or monthly salaries is to calculate it
on the basis of an established basic rate.63 29 C.F.R. 548.3(a) provides that the employer and
employee may agree that the regular rate shall be determined by dividing the monthly salary (or
semimonthly salary times 2) by the number of regular working days in the month and then by the
number of hours of the normal or regular workday. Of course, the resultant rate in such a situation
may not be below the statutory minimum wage. Further requirements for such an established
regular rate are found in 29 C.F.R. 548.2.
SUMMARY AND CONCLUSIONS
The thrust of this paper is that a FWW scheme can be a significant labor cost-saving tool for
public sector employers. Notwithstanding the potential benefits of this method, FWW has not
been utilized as often as might be expected. There are several reasons. In order to implement this
system, the federal regulations require that the employee be informed that his or her base salary is
meant to cover all hours worked and that he or she will be compensated at a half-time rate for
overtime. In addition, this system penalizes employers who have employees that work less than
40 hours in a week because the employee is due a fixed base salary each week regardless of hours
worked. If work is slow, and the employee is only working 25 or 30 hours per week, the fixed
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salary must still be paid. Thus, the FWW scheme is only a cost-saving method for those
organizations that regularly have employees work more than 40 hours in a week. Additionally,
because employees have to be informed of the payment method, many employers shy away from
the FWW system because of the problems it sometimes causes with employee morale and
employee retention.64 Perhaps the derisive term, “Chinese Overtime”, as the FWW method is
commonly called, connotes this less than enthusiastic response from employees. Furthermore, the
calculation of the “regular rate” upon which all overtime is based will change every week.
Therefore, the employer must either assign these computational tasks to an employee or
buy/devise a software program to accommodate the necessary calculations. These administrative
challenges sometimes cause employers to shy away from implementing this method.
Balanced against these problematic concerns is the distinct advantage of being able to pay halftime, instead of time and one-half, overtime. Additionally, by classifying employees as nonexempt salaried workers public service employers may lower their exposure to high-visibility
class-action lawsuits for unpaid overtime that increasingly result in significant amounts of bad
publicity, jury awards, and multimillion-dollar settlements. Such suits are particularly expensive
because there is a strong presumption in favor of doubling damages and in many cases Courts
apply provisions allowing for double damages.65 Finally, positive employee relations can be
gained through employee perception of their job as a “white collar,” as opposed to a blue collar,
position.66 Nevertheless, because of the complex and “out of the ordinary” nature of the FWW
rules, organizations should obtain professional legal and human resources guidance if they are
considering this method of determining employee pay.
REFERENCES
1
Fair Labor Standards Act of 1938 (as Amended), 29 U.S.C. § 201, et seq.
2
Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985).
3
Von Bergen, C.W., W.T. Mawer, and P.W. Pool (in press). “To be or not to be: That is the
question: Whether ‘tis nobler to implement the FairPay Overtime Initiative or not?.”
Southern Law Journal.
4
U.S. Department of Labor (n.d.). FairPay: DOL’s FairPay Overtime Initiative, http://www.dol.
gov/esa/regs/compliance/whd/FairPay/main.htm
5
International Public Management Association for Human Resources. (2004). New Overtime
Regulations Impact Public Sector. Retrieved at http://www.ipmahr.org/index.cfm?navid
=139& id =3537&tcode=nws3
6
Bohlander, G., and S. Snell (2004). Managing Human Resources (13th ed.). Mason, Ohio:
South-Western.
7
Von Bergen, C.W., and W.T. Mawer (in press). “The U.S. fairpay overtime initiative.”
Managerial Law.
8
Hetrick, R.L. (2000, February). “Analyzing the Recent Upward Surge in Overtime Hours”,
Monthly Labor Review, 30-33.
9
Milkovich, G.T., and J.M. Newman (1999). Compensation (6th ed.). Burr Ridge, IL: McGrawHill.
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Volume 13 Number 1
10
Martin, C.L., R.J. Aalberts, and L.S. Clark (1993). “The Fair Labor Standards Act and the
Fluctuating Workweek Scheme: Competitive Compensation Strategy or Worker
Exploitation?” Labor Law Journal, Volume 25, 92-100.
11
International Public Management Association for Human Resources (2004). New Overtime
Regulations Impact Public Sector, http://www.ipmahr.org/index.cfm?navid=139&id = 35
37&tcod de=nws3
12
29 CFR § 541.3(b).
13
Federal Register (2004, April 23). “Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales and Computer Employees; Final Rule.”
Volume 69, Number 79, 22121-22274; See also 29 CFR Part 541 Subpart A., p. 22129.
14
National Public Employer Labor Relations Association (n. d.). Legislative & Legal Updates:
Sergeants’ Exempt Status Questions Under The FLSA, http://www.npelra.org/legal/tedc
lark0305.asp
15
Auer v. Robbins (95-897), 519 U.S. 452 (1997).
16
Albany Democrat-Herald (2004, August 17). Police Sergeants to Get Overtime, http://www.d
honline.com/articles/2004/08/17/news/local/news04.txt.
17
Immel, O.W. (2003). Out of the Ordinary Wage Plan Rules under the Fair Labor Standards
Act, http://64.233.179.104/search?q=cache:kZV8jTnL3S0J
18
Most states have laws expanding the basic coverage of the FLSA. Courts look at the state
standard if it is most favorable to the employee.
19
U.S. Department of Labor (n.d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whdfs23.htm
20
U.S. Department of Labor (n.d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whd/ whdfs23.htm
21
U.S. Department of Labor (n.d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whd/ whdfs23.htm
22
U.S. Department of Labor (n.d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whd/ whdfs23.htm
23
U.S. Department of Labor (n. d.). Fact Sheet #23: Overtime Pay Requirements of the FLSA,
http://www.dol.gov/esa/regs/compliance/whd/ whdfs23.htm
24
29 C.F.R. § 778.114.
25
29 C.F.R. § 778.114(b).
26
Evans et al. v. Lowe’s Home Centers, Inc., Lexis 15716 (June 17, 2004). U.S. Mid District
Penn; Condo v. Sysco Corp 1 F.3d 599, 603 (7th Cir. 1993).
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Proceedings of ASBBS
Volume 13 Number 1
27
Condo v. Sysco Corp, supra 27; Dufrene v. Browning-Ferris, Inc., 994 F.Supp. 748 (E.D. La.
1998).
28
Overnight Motor Transport Company v. Missel, U.S. 572 (1942).
29
Kelli K. Goodrow v. Lane Bryant, Inc., 732 N.E. 2d 289 (Mass. S. Jud. Ct., 2000).
30
Field Operations Handbook (1967). Section 32b04b(a).
31
29 CFR § 778.114(c).
32
29 CFR § 778.114(c).
33
34
35
36
37
American Payroll Association (2004, June 11). “Payroll Currently”. Volume 12, Issue 12,
http://www.americanpayroll.org/pdfs/pc2004/PCELEC0412.pdf
O’Brien v. Town of Agawam, 350 F.3d 279, 291 n.22 1st Cir. (2003).
Chinese Overtime (2003), http://www.youareworthmore.org/node/8168node/8168
29 CFR § 778.114(c).
Ditmer, R.W. (n.d.). The Fluctuating Workweek Method, http://www.payroll-taxes.com/
articles/fluctuatingWorkweeks.html
38
North Carolina Department of Labor (2003). Fluctuating Workweek Overtime, http://www.
nclabor.com/wh/fwohand.htm
39
Flood v. New Hanover County, 125 F. 3d 249, (4th Cir., 1997).
40
Ditmer, R.W. (n.d.). The Fluctuating Workweek Method, http://www.payroll-taxes.com/articl
es/fluctuatingWorkweeks.html
41
Roy v. County of Lexington, S.C., 948 F.Supp. 529 (D.S.C. 1996) aff’d, 141 F.3d 533 (4th Cir.
1998).
42
Griffin v. Wake County, 142 F.3d 712 (4th Cir. 1998).
43
Ditmer, R.W. (n.d.). The Fluctuating Workweek Method, http://www.payroll-taxes.com/
articles/fluctuatingWorkweeks.html
44
Evans et al. v. Lowe’s Home Centers, Inc., Lexis 15716 (June 17, 2004). U.S. Mid District
Penn.; Condo v. Sysco Corp 1 F.3d 599, 603 (7th Cir. 1993).
45
Aiken v. County of Hampton, 977 F.Supp. 390, 398 (D.S.C. 1997).
46
29 CFR 778.114(c).
47
Flood v. New Hanover County, 125 F. 3d 249, (4th Cir., 1997).
48
Kelli K. Goodrow v. Lane Bryant, Inc., 732 N.E. 2d 289 (Mass. S. Jud. Ct., 2000).
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Proceedings of ASBBS
Volume 13 Number 1
49
Griffin v. Wake County, 142 F.3d 712 (4th Cir. 1998).
50
General Electric v. Porter, 208 F.2d 805 (9th Cir. 1954) cert. denied, 347 U.S. 975
(1954); Zoltek v. Safelite Glass Corp., 884 F.Supp. 283 (N.D. Ill. 1995).
51
Wage and Hour Opinion Letter No. 1977 (March 28, 1996). U.S. Department of Labor, Wirtz
Labor Library, at http://www.dol.gov/oasam/library/; Wage and Hour Opinion Letter No.
1994 (July 25, 1996). U.S. Department of Labor, Wirtz Labor Library, http://www.dol.go
v/oasam/library/; Wage and Hour Opinion Letter No. 2161 (May 28, 1999). U.S.
Department of Labor, Wirtz Labor Library, at http://www.dol.gov/oasam/library/; Wage
and Hour Opinion Letter No. 2065 (December 24, 1997). U.S. Department of Labor,
Wirtz Labor Library, at http://www.dol.gov/oasam/library/
52
Acton v. City of Columbia, Mo., 2004 WL 2152297, 150 Lab.Cas. P 34,912, 9 Wage & Hour
Cas.2d (BNA) 1773, W.D. Mo. Sep 10, 2004.
53
29 CFR § 825.206.
54
Wage and Hour Opinion Letter No. 2065 (December 24, 1997). U.S. Department of Labor,
Wirtz Labor Library, http://www.dol.gov/oasam/library/
55
Tabakman, M.E. (2005). The Fluctuating Work Week Method of Paying Overtime: The
Employer’s Friend (or Foe), http://www.gghlaw.com/fluctwork.htm
56
Skyline Homes, Inc., etc. et al. v. Department of Industrial Relations, et al. (1985) 165
Cal.App.3rd 239, 166 Cal.App.3rd 232 (Hrg.den.May26, 1985).
57
U.S.C. § 207(e).
58
U.S.C. § 207(e).
59
29 C.F.R. § 778.223.
60
Overtime Issues for Fire and Rescue Personnel—The Fair Labor Standards Act, http://www.
mpffu.0rg/members/forms_etc/OverTime%20FLSA.pdf
61
Texas Payday Law, Labor Code Title 2, § 61.011(b) (Tex 1993).
62
29 C.F.R. 778.113(b).
63
See U.S.C. § 207(g)(3); 29 C.F.R. § 548.
64
Feldman, D. (2002). More than One Way to Pay Overtime, http://www.imakenews.com/emplo
ymentlaw/e_article000053371.cfm
65
Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942), at 581; Walton v. United
Consumers Club, Inc., 786 F.2d 303, 310 (7th Cir. 1986).
66
Martin, C.L., and J. Newman (1992). “The FLSA Overtime Provision: A New Controversy?”
Compensation and Benefits Review, Volume 24, 60-63.
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