Fluctuating Overtime Rule Shields Employers From Litigation

Posted May 20th, 2020.

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Ben Penn
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  • DOL final rule clarifies fluctuating workweek method
  • Use of alternate overtime method projected to rise

The Labor Department has finalized a regulation to give employers more flexibility and legal clarity by allowing them to incorporate bonuses when using an alternate method to calculate overtime pay for workers with irregular schedules.

When it takes effect in 60 days, the final rule will give companies more protection from wage lawsuits. But there are concerns it could lead employers to abuse their newfound regulatory freedom by reducing salaries—an issue worker advocates have raised. The DOL framed the regulation, which revives a 2008 George W. Bush administration initiative that was quashed by the Obama administration, as a “final rule to expand American workers’ access to bonuses.”

The rule updates “fluctuating workweek” overtime calculations, an option available for employers under the Fair Labor Standards Act. The method allows businesses to pay certain workers whose hours vary widely each week at half their regular rate, instead of at one-and-a-half times, for any hours worked over 40 each week.

The rule states that bonuses, premium payments, hazard pay, and other incentives are compatible with the regular-rate calculation, rescinding language from the Obama-era rule intended to stop employers from reducing salaries by shifting large portions of compensation to other incentives.

Before the Trump administration rule change, companies using the fluctuating workweek method were advised to pay bonuses separately and on top of the regular rate calculation, which often made them avoid the method altogether. Now, businesses will be allowed to include perks, such as bonuses for meeting certain performance or time-based incentives, as part of the regular hourly wage equation, before cutting that rate in half for overtime hours.

“I am naturally skeptical of any revision that purports to make it easier for employers to satisfy the requirements of the rule and to remove conditions which could preclude its use,” said Andrew Melzer, partner and co-chair of plaintiff firm Sanford Heisler Sharp’s wage-and-hour practice, via email. “Nevertheless, it still falls on the employer to establish that each of the requisites for application of the fluctuating workweek rule are met.”

Sparking a Trend?

In a fluctuating workweek arrangement, employees working less than 40 hours in a week would still get their full salary, and if they work more than 40 hours, employers aren’t on the hook for as much in overtime wages as they would in a standard time-and-a-half calculation.

The fluctuating method isn’t utilized often. Historically, some employers, fearing lawsuits, played it safe by not using it at all, or using it without including bonuses, management attorneys have said.

But the new rule could lead more companies to consider adopting the method 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. It might also prove particularly enticing to businesses in the current uncertain economic climate, as they gradually reopen after being idled due to the Covid-19 pandemic.

“This rule comes at a time when millions of Americans are returning to work and will benefit from added flexibility in compensation,” Labor Secretary Eugene Scalia said in a prepared statement.

Jeff Brecher, who heads the national wage-hour practice at management-side firm Jackson Lewis in Long Island, N.Y., said he was previously reluctant to advise employers to use the method because of the uncertainty in the case law, but now he “certainly will be much more bullish” in recommending it.

“Right now, customer demand is very uncertain and a lot of employers don’t know how much they’re going to need employees, and maybe employees are reluctant to come back because they don’t know if they’re going to get a steady paycheck,” he said. “The fluctuating workweek method at least allows everybody to share the risk.”

Worker Worries

Worker-rights’ attorneys reject the notion that the rule benefits workers. They point to the fact that under this method, the more time an employee works above 40 hours in a week, the lower their overall hourly rate of pay.

“It’s absolutely shameful for Secretary Scalia to frame a cut in overtime pay as helpful to workers who are returning to work. It’s just the opposite,” said Justin Swartz, a partner at plaintiff firm Outten & Golden in New York. “We have great concerns that this type of action will encourage employers to engage in the scam that is fluctuating workweek.”

Democratic state attorneys general, the National Employment Law Project, and the plaintiffs’ bar all criticized the rule when it was proposed last year, echoing the Obama DOL’s justification for killing it in 2011.

“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.

The Bush administration proposed the rule too late in his second term, in 2008, to complete it. The Trump administration, likewise, is proposing it in an election year; but the rule is scheduled to take effect in July 2021, which may increase its chances of survival: A potentially new president would face the time-consuming challenge of killing it in his first year in office.

Republicans, and the business community, say concerns that the rule will cost workers are unwarranted.

“Empirically, there’s really no evidence for the claim that employers are going to start slashing salaries and, in their place, instituting bonuses,” said Paul DeCamp, who ran the Wage and Hour Division during the George W. Bush administration. “Neither employees nor employers really care about the form of the compensation. The focus is on the total dollars.”

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