New FLSA fluctuating option explained
May 9, 2016
By Tonda Rush
Q Our company is looking at our alternatives if the new Fair Labor Standards rules for exempt employees go into effect. We are hearing we may be able to put some people on a salary basis under a “fluctuating” workweek rule. Our newsroom people definitely have fluctuating workweeks, and we are reluctant to have them all on hourly rates because some will have very meager paychecks during slow weeks. Can you explain this “fluctuating” option?
A Yes, there is a provision under the Fair Labor Standards Act, section 778.114, that provides for variable compensation in which part of the pay is a straight time salary. Before explaining it, here is the situation for the proposed new rule.
The Obama administration has stated its desire to increase the required salary level for exempt employees by 113 percent later this year. Whereas today, people earning greater than $23,660 a year can be considered salaried and exempt (not eligible for overtime pay) if they also meet the exempt duties test, under the new rule, the minimum salary would have to be $50,440. If an employee’s annual salary did not exceed $50,440, the employee would be overtime-eligible, regardless of the job description.
Many businesses and industries have protested the unfairness of the rapid escalation of salary levels. The National Newspaper Association and the Newspaper Association of America are actively seeking a more reasonable adjustment, particularly one that recognizes regional differences in cost of living and salary expectations. NNA was represented by its vice president, Matt Paxton, and public policy adviser Richard Karpel in April in a joint meeting with NAA to address the Obama Office of Management and Budget to urge a revision in the proposed rule. But NNA recognizes that the president has already stated his intention to take meaningful steps to shore up middle class wages and salaries. Whether he will recognize that the current proposal is more likely to cost jobs than to improve salaries remains to be seen.
The new rule is expected in May. The Department of Labor will provide for some period of adjustment before enforcement sets in, possibly as little as 60 days.
So, if the new rule dramatically increases exempt salary thresholds that an employer cannot reach for people previously over $23,600 but under the new threshold, what are the options for full-time employees?
They are limited. Remember that “comp” time is not allowed under this law for non-exempt employees.
Pay overtime at a rate of time-and-a-half for hours worked over 40.
Limit work to 40 hours a week.
Use the fluctuating hours method.
Here is how it works. First, the employer and employee have to have a clear understanding that the fluctuating hour method will form the basis for compensation.
Then the employer must establish a weekly salary that will cover the straight time (40 hours) worked in a week and will be in excess of the minimum state and federal wage. If the employee works less than 40 hours, the employee receives the weekly salary. If the employee works more than 40 hours, the employer must calculate the hourly rate for all hours worked and pay the worker an additional half-time rate for all hours over 40.
So, for example, if the employee is promised a $500 salary and works 40 hours, the employee receives $500. The hourly rate is $12.50. If the employee works 38 hours, the employee receives $500, because the salary covers all hours up to 40, although the hourly rate in that case would be $13.15.
If the employee works 42 hours, the hourly rate becomes $11.90 on the basis of the $500 salary. The employee receives $500 plus 2 hours at halftime or an additional $11.90 x 2 ($23.80) divided in half, or $11.90. So the employee’s paycheck would be $511.90. But, caution! If that same employee were to work a 60-hour week, the hourly rate would fall to $10.42, which would be below minimum wage in many states.
Obviously, this method requires exceptionally careful record keeping, as well as the acceptance by both employer and employee that it will be the method used. The employer has to use the same method consistently and be able to show how the extra hours are being compensated at a rate greater than the hourly rate covered by the flat salary. Confusing? Yes, that is why this method is not popular with small businesses. But if you have only one or two employees affected by widely-variant hours as they cover the news and you have a diligent bookkeeper who keeps reliable files, this method may be worth examining.
The Department of Labor offers guidance on application of the overtime rules at www.dol.gov/whd/overtime_pay.htm.