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U.S. Department of Labor Issues Final Rule on Bonuses for Nonexempt Employees

Introduction

The Fair Labor Standards Act of 1938 (“FLSA”) is a federal law that establishes minimum wage, overtime pay, recordkeeping, and youth employment standards that affect employees in the private sector and in federal, state, and local governments. Since its enactment, the FLSA has seen many interpretations, changes, and amendments as current events and various societal factors have impacted its provisions. Recently, the Department of Labor (“DOL”) issued a Final Rule allowing employers to pay bonuses or other incentive-based pay to salaried nonexempt employees whose hours vary week to week. The Final Rule clarifies that these supplemental payments are compatible with the “fluctuating workweek method” under the FLSA, which is used to calculate overtime for certain employees.

Calculating overtime for nonexempt salaried employees

The FLSA generally requires covered employers to pay nonexempt employees overtime compensation for time worked in excess of 40 hours per workweek. Currently, when an employee’s compensation is based on an hourly rate, overtime compensation is calculated by taking the regular rate of pay plus 50 percent of the regular rate for that hour and applying that to all hours worked in excess of 40 hours. However, when an employee’s compensation is based on a fixed salary for fluctuating hours, an employer may use the “fluctuating workweek method” to compute overtime compensation owed, if certain conditions are met. The “fluctuating workweek method” looks at how many hours the employee actually worked during a work week and divides that number into the fixed salary for that week. This number represents the regular rate of pay for that week. The overtime owed is then calculated by adding 50 percent of that regular rate to all hours worked in excess of 40 hours. Thus, this calculation must be done for each week overtime is owed as the regular rate will fluctuate between week to week, depending on the number of hours actually worked.

How do employers calculate bonus payments for nonexempt salaried employees?

The DOL recently issued a final rule addressing how bonus payments for nonexempt salaried employees are factored into overtime payments. First, employers can pay their nonexempt salaried employees bonuses and other additional pay, such as commission, to employees compensated using the “fluctuating workweek method.” Any additional payment provided to an employee will be included in the calculation for the regular rate of pay, unless excluded by another provision of the FLSA. The DOL hopes that this rule will allow employers and employees to better utilize flexible work schedules. The final rule is also expected to eliminate any disincentives for employers to pay additional compensation to employees.
Also included in the DOL’s final rule are three examples that illustrate the fluctuating workweek method of calculating overtime, where an employee is paid, which include: a nightshift differential; a productivity bonus in addition to a fixed salary; and premium pay for weekend work.

These illustrations should help both employers and employees alike determine the different overtime compensation calculation requirements in such situations.

If you feel your rights under the Fair Labor Standards Act have been violated, or if you have any questions regarding your employment rights, please contact the experienced Birmingham employment law attorneys at Wrady Michel & King. You can contact us online or by calling us at (205) 319-9724.