Businesses will have more legal certainty over how to calculate overtime pay under a little-used alternate method reserved for workers with irregular schedules, the Labor Department said today in a proposed rule.
The regulation would update the Fair Labor Standards Act’s “fluctuating workweek” compensation method. That option is available for employers to pay certain workers whose hours vary widely each week at half their regular rates, instead of at one-and-a-half times, for any hours worked over 40 each week.
The new rule would include bonuses and other incentives in the regular rate calculation, rescinding language from an Obama-era rule. A 2011 regulation blocked employers from including bonuses and other forms of premium payments as part of the regular hourly rate of pay that is then cut in half for overtime calculations. That rule was meant to stop employers from reducing salaries by shifting large portions of compensation models to reflect performance and other incentives.
The new rule reverses course by re-introducing a similar regulation that the DOL Wage and Hour Division proposed in 2008, the final year of the George W. Bush White House. Specifically, the 2019 proposal states that “bonuses, premium payments, and other additional pay of any kind are compatible with the use of the fluctuating workweek method of compensation.”
The fluctuating method isn’t often utilized, but the department’s new rule could lead more companies to consider adopting it as a way to control payroll costs for workers whose hours vary significantly from week to week, while paying them on a partially incentive-based structure. Fearing a lawsuit, some employers have been playing it safe by not using the fluctuating workweek method at all or using it without including bonuses, management attorneys have said.
“For far too long, job creators have faced uncertainty regarding their ability to provide bonus pay for workers with fluctuating workweeks,” WHD Administrator Cheryl Stanton said in a statement. “This proposed rule will provide much-needed clarity for job creators who are looking for new ways to better compensate their workers.”
The rule, which will soon undergo a 30-day public comment period, is likely to draw criticism from worker advocates. They are expected to echo the Obama DOL’s concerns that the proposal could give employers an advantage.
“The proposed regulation could have had the unintended effect of permitting employers to pay a greatly reduced fixed salary and shift a large portion of employees’ compensation into bonus and premium payments, potentially resulting in wide disparities in employees’ weekly pay depending on the particular hours worked,” the Obama DOL said in justifying the 2011 decision not to finalize the 2008 proposal.
However, the Trump administration said in the proposal that it “is not aware of any evidence of problematic pay shifting.” The agency cited data from the Bureau of Labor Statistics showing that when employers are allowed to pay bonuses and other forms of pay outside of a fixed salary, the supplemental pay accounts for a “relatively small portion of employees’ overall compensation—no more than 5% for any occupation.”