The best answer to our October 8 Quick Quiz is, "Either Of The Above". There are two permissible ways to approach Sarah's overtime compensation under the federal Fair Labor Standards Act. In declining percentage order, the responses were:

"$802.50": (44.9%)

"Neither Of The Above": (30.8%)

"$808.50": (20.5%)

"Either Of The Above": (3.8%)

Basing Overtime On A "Weighted Average" Rate

One alternative is to calculate her overtime premium at one-half of the "weighted-average" regular rate of pay. See, e.g., 29 C.F.R. § 778.115. This approach is in a sense the standard one and is therefore probably the more-common computation.

It calls first for totaling all of Sarah's compensation figured at her hourly rates and then for dividing that sum by all of her hours worked (including the ones exceeding 40 in the workweek). The resulting weighted-average rate represents the "one" of the "one and one-half" overtime rate required by the FLSA. So she is due additional overtime premium pay equal to one-half of the weighted-average rate multiplied times her hours worked over 40 in the workweek:

[(45 Hrs. × $15.00) + (5 Hrs. × $12.00)] = $735.00 Total ST Wages
($735.00 ÷ 50 Hrs.) = $14.70 Per Hr. Weighted-Average Regular Rate
[($14.70 ÷ 2) × 10 OT Hrs.) = $73.50 OT Premium Pay
($735.00 + $73.50) = $808.50 Total FLSA Wages.

Of course, the weighted-average regular rate can never be lower than the FLSA's minimum wage, currently $7.25 per hour.

Figuring Overtime At The "Rate In Effect"

The other alternative is based upon the FLSA's Section 7(g)(2). It involves paying not less than 1.5 times the established, bona fide, straight-time hourly rate applying to each different kind of work that is being performed during the hours worked over 40 in the workweek. In our hypothetical, Sarah's total FLSA wages under this "rate in effect" calculation are:

(40 ST Hrs. × $15.00) = $600 ST Wages
(5 OT Hrs. × 1.5 × $15.00) = $112.50 OT Wages
(5 OT Hrs. × 1.5 × $12.00) = $90.00 OT Wages
($600 + $112.50 + $90.00) = $802.50 Total FLSA Wages.

Among the requirements for using this alternative are that:

♦ There must be an advance agreement or understanding with the employee that this method will be used;

♦ The kinds of work for which the different rates are paid must themselves be different;

♦ Each different rate must be a bona fide one, including that the rate is not less than the FLSA's minimum wage and is the rate actually paid for the work when it is performed in non-overtime hours;

♦ The overtime hours for which the overtime rates are paid qualify as overtime ones under the FLSA; and

♦ The number of overtime hours for which the overtime rates are paid is not less than the number of hours worked over 40 in the workweek.

See, e.g., 29 C.F.R. § 778.419.

In this particular scenario, the rate-in-effect approach produces a lower wage total. However, this will not always be so. Considerations such as which straight-time rates are paid for what kinds of work, and whether and to what extent particular kinds of work are performed in overtime hours, will affect the respective sums due under the two alternatives.

Of course, employers must always take into account the relevant requirements of different laws and the laws of other jurisdictions. It is therefore important to ensure that whatever overtime computation the employer uses complies with all of the applicable overtime provisions.

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Sarah is paid $15 an hour for work as a delivery driver, and $12 an hour for inventory-checking work in the warehouse.  In a particular workweek, she works her first 40 hours as a driver, performs five more hours of driver work, and does five additional hours of inventory work, for a total of 50 hours.

How much may the employer pay Sarah consistently with the requirements of the federal Fair Labor Standards Act?

Please use the poll buttons to the right to register your answer.

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The U.S. Labor Department's unfounded April fluctuating-workweek commentary (earlier post here) continues to complicate many pre-existing pay plans and to cause employers to narrow their views of the available compensation alternatives.  This is the foreseeable (and apparently intended) result of what DOL said.  Unfortunately, some observers are compounding the impact of DOL's commentary by suggesting that its ramifications are more dire than ought to be the case.

We have previously noted that the federal Fair Labor Standards Act grants no regulatory authority to DOL to make such pronouncements.  Probably for this reason, the commentary purported to draw substance from sprinkled-in references to the seminal U.S. Supreme Court case of Overnight Transportation Co. v. Missel, 316 U.S. 572 (1942), which embraced the concept underlying the fluctuating-workweek calculation.  But DOL's effort is an illusion.

For example, Missel does not support DOL's assertion that paying bonuses, incentive payments, or other additional amounts is "incompatible" with figuring overtime on a fluctuating-workweek basis.  The Court did not address this proposition at all; it simply proceeded from the facts as they were presented (which involved a weekly wage for whatever hours the employee worked) and explained how FLSA overtime was to be computed on those facts.  The Court did not say, or so much as even imply, that the fluctuating-workweek calculation was inappropriate where other forms of pay are in the picture.

DOL also opined that fluctuating-workweek overtime might create an incentive to work employees long hours because it "results in a regular rate that diminishes as the workweek increases . . .."  On this premise, DOL found it inappropriate "to expand the use of this method of computing overtime pay beyond the scope of the current regulation."  Of course, the FLSA does not prescribe and in fact does not even address any maximum number of hours that adult employees can be required to work.  Moreover, DOL is not authorized to decide whether to "expand" or contract the use of the fluctuating-workweek method for computing overtime.  The Supreme Court's reading of the FLSA trumps DOL's musings in this area, and DOL must have overlooked this statement in Missel:

It is true that the longer the hours, the less the rate and the pay per hour.  This is not an argument, however, against this method of determining the regular rate of employment for the workweek in question.

316 U.S. at 580.

Having thrown sand in the gears, DOL has offered no specific elaboration upon what the actual effects of its commentary might be.  Others have filled this gap with suppositions that are not anchored in first principles.

As an illustration, assume that an employee receives a salary of $500 each workweek as straight-time pay for all hours worked and is also paid commissions on her sales made during all her hours worked each workweek.  Assume also that, in one workweek, she works 50 hours and is due $100 in commissions, for total gross pay of ($500 + $100) = $600.  Even if her commission pay is supposedly "incompatible" with fluctuating-workweek overtime, how much FLSA overtime pay is she due for that workweek?

Some have suggested that her overtime must be computed this way:

($600 ÷ 40 hrs.) = $15 Per Hr. "Regular Rate"
($15 × 1.5 × 10 OT hrs.) = $225,

for total FLSA pay of ($600 + $225) = $825.  In our view, dividing by 40 hours and paying an extra 1.5 times the resulting rate for overtime hours is not required under the FLSA, notwithstanding what DOL said.

Under Missel, the FLSA "regular rate" is determined by dividing the employee's total compensation for a workweek by the total number of hours for which that compensation was paid.  This is so whether the straight-time wages are paid for a fixed number of hours or for a varying number of hours, and it remains the bedrock principle underlying FLSA overtime pay.  See, e.g., 29 C.F.R. § 778.109.  Where the straight-time wages were paid for all of the employee's hours worked, the proper FLSA overtime premium is one-half of a regular hourly rate that declines as the hours worked increase.  See, e.g., 29 C.F.R. § 778.118.

And, more to the immediate point, this is all still true even when a fluctuating-workweek approach is "invalid or otherwise inapplicable."  See, e.g., Opinion Letter of Wage-Hour Administrator No. 1016, 69-73 CCH-WH ¶30,563 (June 24, 1969)(discussed in our earlier post).  In other words, 40 is not automatically the default divisor, and 1.5 is not the inevitable multiplier, even if a fluctuating-workweek approach has been undercut for some reason.  Whatever the basis for the employee's pay is, and even if that basis is somehow legally flawed in whole or in part, the FLSA regular rate and the overtime due still depend upon the number of hours for which the compensation was paid.  Cf. Section 32g07(b), Field Operations Handbook (U.S. Labor Department, February 28, 1986)(40 hours not used as the default divisor even for an invalid "Belo" plan).

Because our hypothetical facts show that the employee's straight-time wages were paid for all of her hours worked, the correct FLSA calculation is:

($600 ÷ 50 hrs.) = $12 Per Hr. "Regular Rate"
[($12 ÷ 2) × 10 OT hrs.) = $60 OT Premium Pay
($600 + $60) = $660,

or $165 less than the first computation.  The principles leading to this approach are independent of whatever DOL's policy preference is, and DOL has no power to curtail them.

That said, unless and until DOL withdraws or repudiates its April statements, or until a court consensus rejecting them emerges, employers should expect investigators and plaintiff's lawyers to press those statements to the hilt.  Even so, the underlying FLSA overtime principles remain unchanged, and employers who are willing to do so should be ready to assert them.

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The answer to our November 4 Quick Quiz is "Yes":  Fair Labor Standards Act overtime must indeed be figured on the kind of bonus we described.  In fact, the U.S. Wage and Hour Division's Office of Enforcement Policy ("OEP") took this position with respect to such a bonus in a May 2006 opinion letter.

Under the FLSA, overtime for non-exempt employees must be calculated based upon the "regular rate" of pay.  The FLSA says that the regular rate includes "all remuneration for employment paid to, or on behalf of, the employee," with only limited exceptions.

Bonuses are not excluded from this definition simply because they are earned over an entire calendar year.  See, e.g., Opinion Letter of Deputy Wage-Hour Administrator FLSA2005-47 (November 4, 2005)("regular rate" included a retention payment designed to encourage employees to remain employed at a facility from June 6, 2002 through September 21, 2004).

Employers need not compute overtime on "discretionary" bonuses within the FLSA's meaning.  However, this exception applies only if both (a) whether the payments will be made, and (b) the amounts of any such payments:

•   Are within management's sole discretion;

•   Are decided at or near the end of the period for which the performance of services is being recognized; and

•   Are not made pursuant to any prior contract, agreement, or promise (either expressed or implied) causing the employee to expect such payments regularly.

29 U.S.C.A. 207(e)(3)(a).  OEP concluded that the kind of annual bonus we described did not fall within these parameters, in part because the benchmarks for whether a bonus would be due suggested that the payments were promised "as an incentive for increased or sustained productive efforts."  OEP also determined that the employer abandoned any discretion as to both whether payments would be made and what the amounts would be by announcing the criteria to employees well in advance, which in OEP's view appeared to be "a prior promise or agreement" to pay the bonus if those criteria were met.  And although OEP did not clearly say so in explaining its conclusion, the bonus's requirements relating to longevity and remaining employed at the time of payment also cut against its being viewed as discretionary.

Because the bonus is not excludable from the regular rate, Acme must determine whether any non-exempt employee receiving a bonus payment worked more than 40 hours in any workweek in the bonus period.  For any employee who did so, it must then figure the workweek-equivalent of the bonus and must calculate overtime on that equivalent for every workweek in which the employee worked overtime.