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New Restrictions Imposed on Fluctuating Workweek Payment Systems

Posted April 28, 2011

By T. Scott Gilligan, NFDA general counsel

The Wage and Hour Division of the Department of Labor (DOL) recently approved a new policy that significantly restricts an employer's ability to pay bonuses to employees who are being compensated under a fluctuating workweek method of payment. It is critical that funeral homes which use the fluctuating workweek compensation system understand the new bonus payment restrictions so as not to jeopardize their fluctuating workweek status with the DOL.

As background, the fluctuating workweek arrangement is a compensation method for hourly employees that is sanctioned by DOL regulations. Basically, this compensation system permits an employer to pay an hourly employee who works overtime by half-time (50%) instead of time and one-half (150%). The trade-off for the employee is that the fluctuating workweek arrangement provides a guaranteed base salary regardless of the number of hours worked by the employee in a particular workweek. For example, if the employee is guaranteed a weekly wage of $500, he or she receives that base pay regardless of whether they worked 30 hours, 35 hours, or 40 hours. The compensation for any particular week cannot go below the guaranteed weekly pay.

For the employer, the benefit of the fluctuating workweek arrangement is that the employee receives only half time for hours worked in excess of 40 hours each week. Funeral homes interested in knowing more about the arrangement can obtain information on NFDA's Faxback system.

The DOL recently updated a number of its regulations including the fluctuating workweek regulation. As part of that overhaul, the DOL was asked to expand the regulation to explain how employee bonuses should be treated in calculating employee overtime. In somewhat of a surprise move, the DOL declined to expand the regulation as requested, and instead, announced that the payment of employee bonuses is inconsistent with a fluctuating workweek compensation system.

In adopting this position, the DOL acknowledged that paying employees bonus or premiums payments for certain activities such as working undesirable hours is a common and beneficial practice. However, despite the fact that employees benefit from such bonuses, the DOL felt that bonuses are incompatible with the fundamental concept of a guaranteed weekly wage. The DOL was concerned that employers can set the guaranteed weekly wage at a low level and shift a large portion of the employee's compensation into bonus and premiums payments. That could result in wide disparities in employee's weekly pay, thereby undermining the primary benefit of the fluctuating workweek arrangement for the employee.

What are the dangers in paying bonuses to employees who are under a fluctuating workweek arrangement? If the employer is audited, the DOL could take the position that the employer, by paying bonuses, has not been properly compensating hourly employees under the fluctuating workweek arrangement. The DOL could then order that all past overtime received by the employees must be re-calculated at time and one-half (150%) instead of half time (50%).

To avoid this possibility, employers paying hourly employees on a fluctuating workweek basis must eliminate all future bonus and premium payments to employees. To the extent that those bonus and premium payments were an expected part of the employee's pay, the employer may need to increase the employee's weekly base pay to compensate them for the loss of the bonuses in the future. Please note that while the new DOL policy covers bonuses and premiums for work provided by the employee, it does not prohibit discretionary bonuses such as Christmas bonuses.

Because the fluctuating workweek payment method has the capability of significantly reducing the compensation paid to employees for overtime work, its use by employers is closely scrutinized by the DOL. Funeral homes utilizing the fluctuating workweek arrangement must insure that they undertake all of the following steps to avoid a challenge by the DOL to their use of the fluctuating workweek compensation method:

  1. While the employee does not have to agree to the fluctuating workweek arrangement, the employee must have a clear understanding that he or she will be paid using the fluctuating workweek method. To verify that the employee received an explanation of the payment system, the employer should provide the employee with a written explanation of how the fluctuating workweek arrangement operates and have the employee confirm in writing that the explanation has been received and understood. Sample explanations and confirmations are available on NFDA's Faxback system.
  2. The lengths of the workweeks for the employee must truly fluctuate. If an employee works the same number of hours each week, the fluctuating workweek payment system cannot be used. The fluctuating workweek arrangement works best when the employee is on a fixed schedule which requires them to work a certain number of hours one week and a different number of hours the next week. For example, an employee who is scheduled to work 42 hours the first week and 46 hours the next week of a two week work schedule could be compensated by a fluctuating workweek arrangement.
  3. The guaranteed amount that the employee receives each week must provide compensation at a rate not less than the minimum wage (currently $7.25 per hour under federal law).
  4. The employee must receive an overtime premium equal to half time of the employee's hourly rate for each hour worked in excess of 40 hours per week. The employee's hourly wage will fluctuate depending upon how many hours the employee worked in a particular week. For example, if an employee is guaranteed a weekly wage of $500 and works 50 hours in a particular week, the hourly rate for that workweek would be $10 ($500 divided by 50). As compensation for that workweek, the employee would receive the $500 guaranteed weekly wage plus overtime compensation equal to one-half of the hourly wage for the 10 overtime hours. In this case, the overtime compensation would be $5 per hour or $50 in total for the ten hours of overtime. Thus, the gross pay for that week would be $550.
  5. Other than the overtime premium the employee receives for hours worked in excess of 40 per week (see section 4 above), the employer must not pay the employee any other bonus or premium payment that will vary the guaranteed weekly amount. This prohibition on bonus payments does not include discretionary payments such as a Christmas bonus.

A fluctuating workweek arrangement can be beneficial to both the funeral home employer and the funeral home employee. However, since the DOL closely scrutinizes the arrangement, it is critical that employers adhere to each of the above requirements. NFDA members with questions regarding the fluctuating workweek arrangement may contact NFDA General Counsel Scott Gilligan at (513) 871-6332 for a complimentary consultation.