One approach employers can take to minimize the variable effect of overtime payments is to pay non-exempt employees on a salary basis. This approach is known as the fluctuating workweek (FWW) method and is permitted by the federal Fair Labor Standards Act (FLSA) regulations. In particular, the FLSA regulations allow an employer to compensate a non-exempt employee on a salary basis by providing straight-time compensation for all hours worked in a week and additionally paying only 0.5 times (rather than 1.5 times) the regular rate for all hours worked in excess of 40 for that week. 29 C.F.R. § 778.114.
To use the FWW method the employer must demonstrate: (a) the employee’s hours fluctuate from week to week; (b) the employee must receive a fixed salary that does not vary with the number of hours worked during the week (exclusive of overtime pay); (c) the fixed salary must provide a regular hourly rate for each week that is at least the minimum wage; and (d) the employee and the employer must share a clear understanding that the fixed salary applies regardless of the number of hours worked. 29 C.F.R. § 778.114. Although not required by the FLSA regulations, employers usually place these terms in writing to the employee to ensure clear communication.
It is important to note that the fixed salary is a guaranteed rate for any week in which the employee works. Thus, an employee’s salary cannot be reduced due to sickness, holiday, or lack of work in such weeks. DOL Opinion Letter, FLSA 2006-15 (May 12, 2006) (“Therefore, it is our opinion that your client may not make full day deductions from the salary of its fluctuating workweek employees when the employee has exhausted his or her sick leave bank or has not yet earned enough leave to cover the absence.”). As implied by the DOL opinion letter, however, it is permissible to substitute paid time off under an employer’s PTO policies for such absences. See, e.g., Griffin v. Wake County, 142 F.3d 712 (4th Cir. 1998).
