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Fluctuating Pay Method May Cut Overtime Costs

September 1, 1999
Related Topics: Wages and Hours, Featured Article
When it comes to nonexempt employees, you can boost productivity and discourage abuse of overtime by using a fluctuating workweek pay structure. This structure also helps encourage work/life balance, and increases employees' sense of responsibility and ownership in their jobs. On top of that, it may help you avoid the illegalities of not paying overtime when you should.

The fluctuating workweek pay structure provides pay stability to employees who are traditionally paid at an hourly rate, and it can be calculated using a straightforward formula. There are several modifications to the fluctuating workweek payroll method that make calculation much simpler and more straightforward for employers. And, yes, these methods meet with Department of Labor approval.

Using the fluctuating workweek pay structure, employees receive a guaranteed weekly salary. For overtime hours (more than 40 per week), the weekly salary is divided by total hours worked, that number is halved and paid for each overtime hour worked.

For example, Bob makes $400 per week at a company that has a fluctuating workweek policy. He works 10 overtime hours in one week. His employer divides his weekly pay ($400) by the total hours he worked (50), then divides that number in half for a total of $4.00, which is then paid to Bob for each of his overtime hours. Therefore, Bob's total pay for that week is $440.

For employers, this creative compensation approach is much more cost-effective than traditional time-and-a-half overtime pay. Furthermore, the pay system provides employees with the pay stability and status of being compensated with a salary similar to professional and management employees. The approach also saves employers overtime costs and can result in a healthier work/life balance, since it encourages employees to go home before working too much overtime.

Sound Too Good To Be True?
If the fluctuating workweek pay structure sounds too good to be true, consider that, with your salaried employees, you may already be taking advantage of a much sweeter—but illegal deal. Many employers think that just because their employees are paid a salary, they are exempt from overtime. This is far from the truth. According to Richard Clougherty of the U.S. Department of Labor, there are only four exemptions from overtime compensation:

  • Executive exemption: This exemption is for the "boss," or the person who oversees large portions of activity in the company. If "executive" is part of an employee's title (i.e. executive secretary), that does not mean he or she falls into this category of exemption. He or she still deserves overtime compensation for working more than 40 hours per week.
  • Administrative exemption: This includes the controller, the chief financial officer, the purchasing agent, or any employee who does internal work for the business and whose mistakes could result in the demise of the company. (It does not include administrative" assistants.)
  • Professional exemption: Lawyers, architects, engineers and other professionals are included in this exemption.
  • Outside salesperson exemption.

The Department of Labor regulations are not always easy to decipher. Many employers misclassify employees as exempt from overtime when they aren't. It makes sense for employers to take a good look at their overtime structure before a disgruntled employee prompts a Department of Labor audit, or hires an attorney to bring a claim.

Why Should Anyone Stick With Time-and-a-Half?
Selecting the most appropriate pay structure depends first and foremost on analyzing how frequently your company uses overtime. If you work more short weeks than overtime weeks, or if you want to deduct pay for hours missed, then hourly is the way to go. However, if you frequently encounter the need for overtime weeks, then the fluctuating workweek pay structure may make sense because it reduces overtime costs while still remaining in compliance with wage and hour laws.

If you work more short weeks than overtime weeks, or if you want to deduct pay for hours missed, then hourly is the way to go.

Use of the fluctuating workweek also depends on how tight the labor market is in a particular field. Some companies use time-and-a-half as a recruiting tool. If the labor market is tight and it's difficult to find good people, then you may have no choice but to pay time-and-a-half. But, in many cases—like nursing, for example—there are more job seekers than positions, and time-and-a-half may be unnecessary.

In some cases, time-and-a-half may even be a barrier to productivity. In today's tight labor market, retaining top performers has become increasingly important. Top performers may appreciate the implementation of the fluctuating workweek because it encourages productivity among the employees who may not be pulling their weight. While employees may view the fluctuating workweek as a "take away" rather than a benefit, fewer overtime hours mean more time at home for employees to engage in family and leisure activities.

But Is It Legal?
Many employers are surprised to learn that the fluctuating workweek pay method has been legal for more than 60 years, and has been in existence for as long as overtime laws have—since 1938. During the New Deal, overtime policies were developed to "spread the work" to the 30 percent of the population that was unemployed. The fluctuating workweek was a form of this overtime legislation, designed for those salaried employees who were nevertheless nonexempt from overtime pay.

Employers are within their legal rights to establish this salaried overtime system for all, or designated, groups of their employees. Hourly pay isn't always the best method, and employers are not always obligated to pay time and a half. But very few employers seem to take advantage of the fluctuating workweek approach.

Many employers think that just because their employees are paid a salary, they're exempt from overtime. This is far from the truth.

Wage and hour law is little known—and, frankly, tedious—so many employers and lawyers avoid it. The danger is that this avoidance frequently means companies are in violation of wage and hour laws, and can face liability and Department of Labor penalties for their violations.

Clougherty agrees that the law is relatively unknown. His department has taken complaints that have led to awards of overtime back wages to employees. Sometimes those rewards result in payment based on a fluctuating workweek, instead of traditional overtime. "Those employees are pretty surprised to receive this half rate instead of time-and-a-half they thought they had coming," he said.

Be Sure You're Paying Overtime In Accordance with the Law
Perhaps you've avoided paying overtime to employees who don't fall into the above exemptions. Can you continue to do so? Many times, a disgruntled employee will discover that he or she has been doing work that doesn't fall into overtime exemption categories, and will report the employer to the Department of Labor, or will obtain a private lawyer to bring suit.

Upon investigation, violations that have been uncovered will result in the employer's obligation to pay back wages for two to three years to all employees in the company who haven't been compensated correctly.

There are few employees who are truly exempt from overtime pay, whether you provide them with a salary or not. Since that's the case, you might consider the benefits to your bottom line and productivity of making the fluctuating workweek a part of your compensation policy. Of course, it's always important to learn the nuances of the wage and hour laws in your state.

It's much more beneficial than paying time-and-a-half. And, if done correctly, the fluctuating workweek is perfectly legal. Avoiding overtime, altogether, however, is not in many cases.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion.

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