Certain executive and administrative employees are exempt from being paid for overtime under the federal Fair Labor Standards Act (“FLSA”). One of the requirements is that the executive and administrative employee must be paid a minimum fixed salary. Effective December 1, 2016, the minimum salary requirement will be increased from $23,600 to $47,476. As an example, consider a manager who is paid an annual salary of $37,500. Simply paying for five hours of overtime each week would increase the manager’s pay by over $7,000 under the new rule to $44,531.25.
There is an alternative. The retailer may also consider paying the new non-exempt employees under the fluctuating workweek (FWW) regulations. This regulation creates an alternative method for calculating overtime that generally results in lower overtime pay than other methods of calculating for non-exempt salaried employees. To qualify: (1) the employee must be paid a fixed salary each week that does not vary based on the number of hours worked; (2) the employee’s hours must fluctuate from week-to-week; (3) the company and the employee have a “clear mutual understanding” that the employer will pay this fixed salary regardless of the number of hours worked; (4) the fixed salary must be sufficiently large to provide compensation that at least equals the minimum wage for all hours worked; and (5) the employee receives a 50 percent overtime premium in addition to the fixed weekly salary for all hours worked in excess of 40 during the week.
To determine the hourly rate, divide the fixed salary by the total hours worked in a week. This calculated hourly rate is then used to determine if the employee is paid at least minimum wage and to calculate the pay for any overtime hours. To illustrate, take the manager who is paid an annual salary of $37,500, or $721.15 a week.
Consider the situation where the employee, over a four-week period works 40, 37.5, 52, and 48 hours, which averages the five hours a week of overtime in this example. Each week’s hourly rate would then vary by the total hours worked that week. Accordingly, the hourly rate is:
- $18.03 (721.15 ÷ 40 hours) for the first week
- $19.23 (721.15 ÷ 37.5 hours) for the second week
- $13.87 (721.15 ÷ 52 hours) for the third week, and
- $15.02 (721.15 ÷ 48 hours) for the fourth week
The calculations show the employee is paid at least minimum wage. However, the employee is owed overtime for the two weeks he or she worked over 40 hours. Since the calculations included straight-time compensation on all hours worked, only an additional half-time pay is due for the hours over 40. For the first two weeks, the employee is entitled to be paid $721.15 since the employee did not work any overtime. For the third week, however, the employee is owed half pay for the 12 hours of overtime, that is 12 hours times $6.93 (50% of $13.87) for an additional $69.34 Similarly, the employee is due an additional $60.10 in the fourth week for the eight hours of overtime ($8 hours time $7.51—half of the calculated rate of $15.02).
Extrapolated for a full year, the total increase over the current $37,500 salary is only $1,683, as compared to the $7,000 increase where the retailer simply pays overtime for the excess hours.
While the FWW can save significant money, it creates some accounting problems for payroll; every week a new hourly rate must be calculated and used for any overtime. Moreover, FWW pay calculations are not allowed in every state, including California, New Mexico, and Pennsylvania. Given the complications and legal issues, a retailer would be well advised to consult with legal and accounting professionals before implementing a FWW pay program.
*For more information, please see the article, “Legal Matters: Do You Pay Your Managers Overtime?” which appeared in the July/August issue of Premier Flooring Retailer.