Defining Fixed Salary for Fluctuating Workweek Payroll

Fluctuating workweek payroll processing is an area that some of us might be familiar with.  This is a formula that I have not used in the past for payroll processing.  “An employee employed on a salary basis may have hours of work which fluctuate from week to week and the salary may be paid him pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many.” (Cornell Law School) What does this mean for employees?  “Since the salary in such a situation is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the regular rate of the employee will vary from week to week and is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week. Payment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate, under the salary arrangement.” (Cornell Law School)

Fluctuating Workweek Method Additional Information:

1. “Under this method, employees who are entitled to overtime pay receive a fixed weekly salary, which is divided by the actual number of hours an employee worked in the week to determine the week’s base hourly rate. The employees will then receive an additional 0.5 times their base rate for each hour worked beyond 40 in the workweek.”
2. “First, the employees’ hours actually have to fluctuate on a week-to-week basis, and employees must receive the fixed salary even when they work less than their regularly scheduled hours.
3. Second, there must be a clear mutual understanding between the business and employees about how workers are paid.” (SHRM)
4. “Currently, Alaska, California, New Mexico and Pennsylvania do not permit its use.” (SHRM)
5. This option will not work for every position, generally organizations implement this formula for higher compensated individuals that are still eligible for overtime.
6. “The application of the principles above stated may be illustrated by the case of an employee whose hours of work do not customarily follow a regular schedule but vary from week to week, whose total weekly hours of work never exceed 50 hours in a workweek, and whose salary of $600 a week is paid with the understanding that it constitutes the employee’s compensation, except for overtime premiums, for whatever hours are worked in the workweek.
7. The “fluctuating workweek” method of overtime payment may not be used unless the salary is sufficiently large to assure that no workweek will be worked in which the employee’s average hourly earnings from the salary fall below the minimum hourly wage rate applicable under the Act, and unless the employee clearly understands that the salary covers whatever hours the job may demand in a particular workweek and the employer pays the salary even though the workweek is one in which a full schedule of hours is not worked.” (Cornell Law School)

Additional Information:
29 CFR § 778.114 – Fixed salary for fluctuating hours.
SHRM Article: Should Employers Use the Fluctuating Workweek Method?

Prior to implementing the fluctuating workweek method of payment, research and understand the rules and regulations within the FLSA, state and local legislation.  We should also review current jobs and descriptions to fully understand which positions will consistently work for this formula driven payroll calculation.  Review with your payroll provider and ask questions, to ensure they can accurately and efficiently process the change.  It is rare a process to use, but can be an effective pay option for organizations to implement and use.