02 Oct The Fluctuating Workweek
I was recently approached by a client who has an interesting issue related to employee classification. When I talk about employee classification, I am talking about whether the person is exempt or nonexempt under the Fair Labor Standards Act. Broadly, the Fair Labor Standards Act presupposes that every employee is subject to or eligible to receive overtime and minimum wage protections. An employer may classify an employee as exempt from those requirements if they meet certain criteria. As a reminder, a non-exempt employee is eligible for overtime and minimum wage protections under the FLSA. An exempt employee is, as the word implies, exempt from overtime and minimum laws.
One of the difficult parts of dealing with employees is ensuring that you have the proper classification as exempt or nonexempt. Functionally, it could be a very gray area. Sometimes you have employees that have some exempt functions, such as managerial, creative, or professional responsibilities, but they may also have nonexempt functions, for example they may not supervise enough employees or they don’t have the necessary discretion in the operation of the business.
How do you classify these kinds of employees? The default position under the FLSA is that an employee is non-exempt. But managing non-exempt status employees when their workweek is difficult to predict is very difficult and can impact both payroll predictability and company work completion. Today I’d like to talk about the concept of the fluctuating workweek.
Back to the client struggling with this issue because they have a couple of employees they want on salary, but they may not be classified properly as exempt salary employees or nonexempt hourly employees.
The U.S. Department of Labor has a structure called the fluctuating workweek. While it’s not right for everybody, it is definitely worth discussing. I’ll be honest, I had to look for this information with another labor attorney. It does provide an interesting way of managing a particular employee’s compensation.
The fluctuating workweek allows to you to have a fixed minimum payment that an employee will receive, regardless of the number of hours that they work because it is difficult to determine what their work week will look like. They are expected to complete a certain number of functions, which could take anywhere let’s say from 35 to 50 hours of work per week. The fluctuating work week allows an employer and employee to agree to a set minimum payment. Let’s say that minimum payment is $1,000 per week. If you have a 40-hour work week, that hourly rate would come to $25. If an employee works fewer than 40 hours, their effective hourly rate goes up. For example, if they work 37 hours then they would have an hourly rate that week of $27. If they work more than 40 hours in order to get the work done, they still receive that minimum payment, and the extra time put in is paid out at half the amount of their regular pay. Instead of a typical overtime policy where employees get time and a half, in this case they would get half of their effective hourly rate. You can use an online calculator to help you calculate this value with ease.
Think of it this way. Let’s assume that an employee will receive $1,000 per week. In a month, they work 40 hours, 37 hours, 43 hours, and 50 hours in the four work weeks. The right hand column shows what you would pay an employee who is a traditional hourly employee paid time and a half for over time and what that payroll cost would be. Under this scenario, they have an effective hourly rate of:
|Hours||Effective Rate||Straight time pay||“overtime”||Total compensation||Compensation if Hourly at $25/hr.|
As you can see, with a fluctuating work week type of payment, an employer could same nearly $300 per month for this hypothetical employee. Multiplied across many employees with an unknown workweek, the FWW could save significant money. However, a FWW is NOT a salary that an exempt employee is paid. The FWW method helps accommodate for working hours that are sometimes outside the employer’s ability to accurately predict the necessary time.
This is a particularly useful mechanism for employers that have employees with an irregular work schedule. That could be due to client behavior or customer cycles, or even due to the employee’s personal life and how much time they can dedicate to work.
There are a few caveats that companies should be mindful of when using FWW. First, you can’t let the employee work so many hours that their effective hourly rate drops below minimum wage for your jurisdiction. For example, in Maryland, you can’t pay an employee $750 per week and let them work 75 hours per week because their effective hourly rate of $10,00 would be below the minimum wage). Additionally, there are seven states that do not allow a fluctuating work week (in the mid-Atlantic region Pennsylvania does not allow it). The state of Maryland has not officially ruled on this (it is not permitted nor prohibited).
The drawback to this scenario for the employee is that they would not be eligible for bonuses or commissions in the fluctuating work week. It is possible that an employee only works 35-37 per week for the month and still get their weekly pay. This is not a salary, but rather a guaranteed base payment and their overtime is compensated differently.
There are benefits for the employer and employee, but at the end of the day there is an extra burden in pay calculation. It may not be the most effective way, but it is a good way to provide a base pay and still pay a “overtime” for employees in certain situations. Often times this is a payment structure seen for salespeople (that do not receive bonuses/commissions) or positions that travel frequently (whether client services, trade shows, etc).
If you have questions on whether this structure could work for your company, get in touch with us. We’re happy to talk through the contributing factors alongside the pros and cons.