DOL Issues Opinion Letter Limiting Employers' Ability to Make Deductions from Pay of Salaried Nonexempt Employees Paid Using Fluctuating Hours Method

Lew Clark
June 12, 2006 — 2,186 views  
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An employer may be able to achieve a significant cost savings by using the fluctuating hours method of calculating overtime for nonexempt, salaried employees where the employee has hours of work which may fluctuate from week-to-week. The employer and employee must agree that the salary is to cover straight time for all hours actually worked, whether this amount is over or under 40 hours per week. The regular rate for overtime is calculated by dividing the salary by the actual hours worked and paying an additional one-half this rate for hours over 40. 29 C.F.R. § 778.114. The following example illustrates this calculation and illustrates the potential cost savings to employers. Example: If an employee receives a $400 salary and works 42 hours, his or her regular rate would be $9.52 per hour ($400/42 hours = $9.52/hour). The employee would be paid the $400 for 42 straight time hours plus 2 hours at $4.76 ($9.52 x ½) for total pay of $409.52. If the employee worked 50 hours, his or her regular rate would be $8.00 per hour ($400/50 hours = $8.00/hour). The employee would be paid the $400 for 50 straight time hours plus 10 hours at $4.00 ($8.00 x ½) for total pay of $440.00. If this same employee were not on the fluctuating hours plan, he or she would be paid $430.00 for working 42 hours. The regular rate would be $10.00 ($400/40). One and one-half times this regular rate would be paid as overtime. ($10.00 x 1.5 x 2 = $30.) $400.00 + $30.00 = $430.00. The employee would be paid $550 for working 50 hours. ($10.00 x 1.5 x 10 = $150.) $400.00 + $150.00 = $550.00. One disadvantage to using this method is that it might discourage employees from performing overtime work, since employees would actually be paid less per hour for each overtime hour they work. The DOL recently pointed out another disadvantage. On May 12, 2006, the DOL's Wage & Hour Division issued an opinion letter stating that employers using the fluctuating hours method could not make deductions from employees' pay in the event the employee exhausted the leave available to them. The Division explained that the regulation authorizing the payment method requires the employer to pay the fixed salary "for the hours worked each workweek, whatever their number." Therefore, "an employer utilizing the fluctuating workweek method of payment may not make deductions from an employees salary for absences occasioned by the employee." The DOL did explain an exception, stating that "an employer may take a disciplinary deduction from an employees salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions do not cut into the required minimum wage or overtime compensation." Importantly, this opinion letter only applies to employers utilizing the fluctuating hours method of payment to salaried nonexempt employees. It does not apply to employers who pay salaried nonexempt employees a salary based upon 40 hours worked during a workweek and who pay the employees 1½ times their regular rate for hours over 40 during a workweek. Employers considering whether or not to use the fluctuating hours method for paying salaried, nonexempt employees should weigh the economic advantages against the noneconomic disadvantage described in the DOL's recent letter.

Lew Clark

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Lewis Clark concentrates his practice on counseling and advocacy for both private and public sector employers in all types of labor and employment matters and is an experienced mediator of employment and other civil litigation matters.