Fluctuating Workweek Method of Computing Overtime, 59590-59602 [2019-23860]
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Proposed Rules
Federal Register
Vol. 84, No. 214
Tuesday, November 5, 2019
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 778
RIN 1235–AA31
Fluctuating Workweek Method of
Computing Overtime
Wage and Hour Division,
Department of Labor.
ACTION: Notice of proposed rulemaking;
request for comments.
AGENCY:
This proposed rulemaking
would revise the Department of Labor’s
(Department) regulation for computing
overtime compensation for salaried
nonexempt employees who work hours
that vary each week (fluctuating
workweek) under the Fair Labor
Standards Act (FLSA or the Act). The
proposal will clarify that payments in
addition to the fixed salary are
compatible with the use of the
fluctuating workweek method of
compensation, and that such payments
must be included in the calculation of
the regular rate as appropriate under the
Act. The proposal would also add
examples and make minor revisions to
make the rule easier to understand.
DATES: Submit written comments on or
before December 5, 2019.
ADDRESSES: You may submit comments,
identified by Regulatory Information
Number (RIN) 1235–AA31, by either of
the following methods: Electronic
Comments: Submit comments through
the Federal eRulemaking Portal at
https://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Address written submissions to
Division of Regulations, Legislation, and
Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room
S–3502, 200 Constitution Avenue NW,
Washington, DC 20210. Instructions:
Please submit only one copy of your
comments by only one method. All
submissions must include the agency
name and RIN, identified above, for this
rulemaking. Anyone who submits a
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comment (including duplicate
comments) should understand and
expect that the comment will become a
matter of public record and will be
posted without change to http://
www.regulations.gov, including any
personal information provided. All
comments must be received by 11:59
p.m. on the date indicated for
consideration in this rulemaking.
Commenters should transmit comments
early to ensure timely receipt prior to
the close of the comment period, as the
Department continues to experience
delays in the receipt of mail. For
additional information on submitting
comments and the rulemaking process,
see the ‘‘Electronic Access and Filing
Comments’’ heading below. Docket: For
access to the docket to read background
documents or comments, go to the
Federal eRulemaking Portal at https://
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Amy DeBisschop. Director, Division of
Regulations, Legislation, and
Interpretation, Office of Policy, Wage
and Hour Division, U.S. Department of
Labor, Room S–3502, 200 Constitution
Avenue NW, Washington, DC 20210;
telephone: (202) 693–0406 (this is not a
toll-free number). Copies of this
proposed rule may be obtained in
alternative formats (Large Print, Braille,
Audio Tape or Disc), upon request, by
calling (202) 693–0675 (this is not a tollfree number). TTY/TDD callers may dial
toll-free 1–877–889–5627 to obtain
information or request materials in
alternative formats.
Questions of interpretation and/or
enforcement of the agency’s regulations
may be directed to the nearest WHD
district office. Locate the nearest office
by calling WHD’s toll-free help line at
(866) 4US–WAGE ((866) 487–9243)
between 8 a.m. and 5 p.m. in your local
time zone, or visit WHD’s website for a
nationwide listing of WHD district and
area offices at https://www.dol.gov/whd/
america2.htm. Electronic Access and
Filing Comments: This proposed rule
and supporting documents are available
through the Federal Register and the
https://www.regulations.gov website.
You may also access this document via
WHD’s website at https://www.dol.gov/
whd/. To comment electronically on
Federal rulemakings, go to the Federal
eRulemaking Portal at https://
www.regulations.gov, which will allow
you to find, review, and submit
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comments on Federal documents that
are open for comment and published in
the Federal Register. You must identify
all comments submitted by including
‘‘RIN 1235–AA31’’ in your submission.
Commenters should transmit comments
early to ensure timely receipt prior to
the close of the comment period (11:59
p.m. on the date identified above in the
DATES section); comments received after
the comment period closes will not be
considered. Submit only one copy of
your comments by only one method.
Anyone who submits a comment
(including duplicate comments) should
understand and expect that the
comment will become a matter of public
record and will be posted without
change to https://www.regulations.gov,
including any personal information
provided.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The FLSA guarantees a minimum
wage for all hours worked and limits to
40 the number of hours per week a
covered nonexempt employee can work
without additional compensation. See
29 U.S.C. 206, 207. Payment of a fixed
salary for fluctuating hours, also called
the ‘‘fluctuating workweek method,’’ is
one way employers may meet their
overtime pay obligations to nonexempt
employees, if certain conditions are met.
Under 29 CFR 778.114, an employer
may use the fluctuating workweek
method for computing overtime
compensation for a nonexempt
employee if the employee works
fluctuating hours from week to week
and receives, pursuant to an
understanding with the employer, a
fixed salary as straight time
‘‘compensation (apart from overtime
premiums)’’ for whatever hours the
employee is called upon to work in a
workweek, whether few or many. 29
CFR 778.114(a). In such cases, because
the salary ‘‘compensate[s] the employee
at straight time rates for whatever hours
are worked in the workweek,’’ an
employer satisfies the overtime pay
requirement of section 7(a) of the FLSA
if it compensates the employee, in
addition to the salary amount, at a rate
of at least one-half of the regular rate of
pay for the hours worked each
workweek in excess of 40. 29 CFR
778.114(a). Because the employee’s
hours of work fluctuate from week to
week, the regular rate must be
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determined separately each week based
on the number of hours actually worked
each week. Id.
The payment of additional bonus and
premium payments to employees
compensated under the fluctuating
workweek method has presented
challenges to employers and the courts
alike, as set forth in more detail below.
The proposed regulation would clarify
that bonus payments, premium
payments, and other additional pay are
consistent with using the fluctuating
workweek method of compensation, and
that such payments must be included in
the calculation of the regular rate unless
they may be excluded under FLSA
sections 7(e)(1)–(8). See 29 U.S.C.
207(e)(1)–(8).
The Department proposed a similar
clarification through a Notice of
Proposed Rulemaking (NPRM) in 2008.
See 73 FR 43654, 43662, 43669–70 (July
28, 2008). However, the Final Rule
issued in 2011 did not adopt this
proposal because the Department, at the
time, believed that courts had ‘‘not been
unduly challenged’’ in applying the
current regulatory text, that the
proposed clarification ‘‘would have
been inconsistent’’ with the Supreme
Court’s decision in Overnight Motor
Transportation Co. v. Missel, 316 U.S.
572 (1942), and that the proposed
clarifying language ‘‘may create an
incentive’’ for employers ‘‘to require
employees to work long hours.’’ 76 FR
18832, 18848–50 (Apr. 5, 2011).
However, since 2011, courts have
reached inconsistent holdings based on
a judicially crafted distinction between
certain types of bonuses that the
Department has never recognized. As
explained below, the Department has
reconsidered the need for a clarification,
particularly in light of the 2011 Final
Rule and its interpretation by courts,
now finds these reasons articulated in
2011 to be unpersuasive, and is
therefore re-proposing substantially
similar revisions to those initially
proposed in 2008.
Specifically, the Department proposes
to add language to § 778.114(a)
clarifying that bonuses, premium
payments, and other additional pay of
any kind are compatible with the use of
the fluctuating workweek method of
compensation. The Department also
proposes to add examples to
§ 778.114(b) to illustrate the fluctuating
workweek method of calculating
overtime where an employee is paid (1)
a nightshift differential and (2) a
productivity bonus in addition to a
fixed salary. The Department further
proposes minor revisions to § 778.114(a)
and (c) that were not proposed in the
2008 NPRM to improve
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comprehensibility. Specifically, revised
§ 778.114(a) would list each of the
requirements for using the fluctuating
workweek method, and duplicative text
would be removed from revised
§ 778.114(c). Finally, the Department
proposes to change the title of the
regulation from ‘‘Fixed salary for
fluctuating hours’’ to ‘‘Fluctuating
Workweek Method of Computing
Overtime.’’
This proposed rule is expected to be
an Executive Order (E.O.) 13771
deregulatory action. Details on the
estimated reduced burdens and cost
savings of this proposed rule can be
found in the rule’s economic analysis
and supplemental illustrative analysis
in Appendix A.
II. Background
The Department introduced the
fluctuating workweek method of
calculating overtime pay in its 1940
Interpretive Bulletin No. 4. See
Interpretative Bulletin No. 4 ¶ ¶ 10, 12
(Nov. 1940). In 1942, the U.S. Supreme
Court upheld the fluctuating workweek
method in Missel, 316 U.S. at 580. In
that case, the Court held that where a
nonexempt employee had received only
a fixed weekly salary (with no
additional overtime pay) for working
irregular hours that frequently exceeded
40 per week and fluctuated from week
to week, the employer was required to
retroactively pay an additional 50
percent of the employee’s regular rate of
pay multiplied by the overtime hours
worked to satisfy the FLSA’s time and
a half overtime pay requirement. Id. at
573–74, 580–81.1 The quotient of the
weekly salary divided by the number of
hours actually worked each week,
including the overtime hours,
determined the ‘‘regular rate at which
[the] employee [was] employed’’ under
the fixed salary arrangement. Id. at 580.
In 1968, informed by the Supreme
Court’s holding in Missel, the
Department issued 29 CFR 778.114,
which explains how to perform the
regular rate calculation under the FLSA
for salaried employees who work
fluctuating hours. See 29 CFR 778.1,
778.109, 778.114. The Supreme Court
has ‘‘interpreted the [FLSA] statute in a
manner that would ‘afford the fullest
possible scope to agreements’ that are
designed to address ‘the special
1 Half-time, rather than time-and-a-half pay, for
overtime is appropriate where the employee’s
weekly earnings constitute compensation for all
hours worked that week, including overtime hours.
Such a pay system already compensates the
employee for overtime hours at the regular rate, and
so the employee is entitled under the FLSA to an
additional half-time the regular rate for those hours.
See 29 U.S.C. 207(a).
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problems confronting employer and
employee in businesses where the work
hours fluctuate from week to week and
from day to day . . . .’ ’’ Hunter v.
Sprint Corp., 453 F. Supp. 2d 44, 56–57
(D.D.C. 2006) (quoting Walling v. A.H.
Belo Corp., 316 U.S. 624, 635 (1942)).2
Indeed, ‘‘[t]he [fluctuating workweek]
method was developed to permit FLSAcovered employees who work irregular
hours to negotiate a consistent
minimum salary with their employers.’’
Hunter, 453 F. Supp. 2d at 61 (emphasis
in original).
Consistent with this manner of
interpretation and purpose, the
Department, until 2011, had never
explicitly forbidden in rulemaking the
payment of bonuses and premiums
beyond the minimum salary to
employees compensated under the
fluctuating workweek method. As
explained more fully below, to the
contrary, in both a 2008 NPRM and in
a 2009 opinion letter, the Department
stated that such bonuses were consistent
with using the fluctuating workweek
method. However, in the Preamble to
the 2011 Final Rule, the Department
stated a different position. The
Department now seeks to add clarifying
language to 29 CFR 778.114 affirming its
current position that employers using
the fluctuating workweek method to
calculate overtime compensation may
pay bonuses and premiums in addition
to the minimum salary.
Early examples of Department
guidance and court decisions exemplify
interpretations of the FLSA that ‘‘afford
the fullest scope possible’’ to fluctuating
workweek arrangements. For example, a
1999 Wage and Hour Division (WHD)
opinion letter explained that an
employer using the fluctuating
workweek method may pay bonuses for
working holidays or vacations, broadly
instructing that ‘‘[w]here all the legal
prerequisites for the use of the
fluctuating workweek method of
overtime payment are present, the
2 Note that Belo concerned a different type of
flexible pay agreement, now codified under Section
7(f) of the FLSA, in which an employee was paid
on an hourly basis with a guaranteed weekly sum.
The Department only cites Belo here for the limited
purpose of recognizing the manner in which the
Court generally interprets work arrangements under
the FLSA when work hours vary from week to
week. In Hunter, the district court similarly
referenced Belo in analyzing the regular rate, and
found notable that the Court decided Belo and
Missel on the same day and that both cases
ultimately informed the promulgation of the
fluctuating workweek regulatory scheme. See
Hunter, 453 F. Supp. 2d at 56, 58 (‘‘With the
companion decisions of Missel and Belo as a
backdrop, the Department of Labor promulgated
regulations that provide ‘examples of the proper
method of determining the regular rate of pay in
particular instances,’ ’’ including the fluctuating
workweek method.) (quoting § 778.109).
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FLSA, in requiring that ‘not less than’
the prescribed premium of 50 percent
for overtime hours worked be paid, does
not prohibit paying more.’’ 3 As another
example, courts have applied and
endorsed the fluctuating workweek
method when employees received
additional bonus payments beyond
what was statutorily required. See, e.g.,
Cash v. Conn Appliances, Inc., 2 F.
Supp. 2d 884, 908 (E.D. Tex. 1997)
(applying fluctuating workweek method
where employee received incentive
bonuses in addition to fixed salary); see
id. at 893 n.17 (citing Parisi v. Town of
Salem, No. 95–67–JD, 1997 WL 228509,
at *3 (D.N.H. Feb. 20, 1997) (‘‘The rules
promulgated by the Secretary do not
change when base compensation
includes not only a salary but a bonus
payment; the bonus payment is simply
included in calculating the regular
rate.’’)).
However, in 2003, the First Circuit
held that certain types of additional pay
were incompatible with the fluctuating
workweek method. See O’Brien v. Town
of Agawam, 350 F.3d 279 (1st Cir. 2003).
In O’Brien, the First Circuit held that
police officers’ receipt of ‘‘bonus’’ pay
for working nights and long hours, was
contrary to the fluctuating workweek
method. Id. at 288. The O’Brien court
reasoned that an employer using the
method must pay a ‘‘ ‘fixed amount as
straight time pay for whatever hours
. . . work[ed],’ ’’ and any extra
compensation would violate this ‘‘ ‘fixed
amount’ ’’ requirement. Id. (quoting 29
CFR 778.114(a)).
The Department filed an amicus brief
in support of the ultimate overtimeback-pay result in O’Brien, reasoning
that the ‘‘base salary covered only 1950
hours of work annually’’ under the
specific officers’ agreement at issue, and
therefore, this ‘‘base salary was not
intended to compensate them for an
unlimited number of hours,’’ as required
by 29 CFR 778.114. Brief for the Sec’y
of Labor as Amicus Curiae, O’Brien, 350
F.3d 279, 2004 WL 5660200, at *11, 13
(Feb. 20, 2004). In other words, the
Department reasoned that the
fluctuating workweek method could not
be used because the officers’ fixed salary
was intended to compensate them for a
specific—rather than fluctuating—
number of hours each week. Id.4
3 WHD Opinion Letter, 1999 WL 1002399, at *2
(May 10, 1999) (emphasis added).
4 Id. at *16–18 (citing Valerio v. Putnam Assocs.
Inc., 173 F.3d 35, 39 (1st Cir. 1999) (holding that
fluctuating workweek method was inappropriate
where an employee was informed that her daily
hours were ‘‘8:30 to whenever,’’ she understood
that her salary would compensate her for
fluctuating hours, but she ‘‘routinely worked
without complaint more than 40 hours per week
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However, the Department’s brief did not
address whether bonus pay beyond the
‘‘fixed amount’’ required was
incompatible with the fluctuating
workweek method.5
Some courts followed O’Brien to hold
that certain types of bonuses were
incompatible with the fluctuating
workweek method,6 while others
continued to hold that bonuses were
compatible with that method.7 These
inconsistent decisions appear to have
created practical confusion for
employers.
The Department’s 2008 NPRM, in an
effort to ‘‘eliminate confusion over the
effect of paying bonus supplements and
premium payments to affected
employees,’’ proposed to add a sentence
to the end of § 778.114(a) providing that
payment of overtime premiums and
other bonus and non-overtime premium
payments will not invalidate the
‘‘fluctuating workweek’’ method of
overtime payment, but such payments
must be included in the calculation of
without extra pay’’); Martin v. Tango’s Restaurant,
Inc., 969 F.2d 1319, 1324 (1st Cir. 1992) (approving
use of fluctuating workweek method where
employee was paid a certain fixed salary each week,
regardless of the number of hours worked)).
5 In reflecting on Valerio and Tango’s Restaurant,
the Department stated that ‘‘[n]othing in either of
those decisions suggests that 29 CFR 778.114
extends, contrary to its terms, to a pay system in
which an employee, while receiving a fixed salary
for a certain minimum number of hours, is paid
more for additional straight time worked beyond a
regular schedule.’’ O’Brien Amicus Br. at *18 (citing
Valerio., 173 F.3d at 39; Tango’s Restaurant, 969
F.2d at 1324). While the brief did not address the
precise issue of whether bonus pay beyond the
‘‘fixed amount’’ required was incompatible with the
fluctuating workweek method, to the extent that the
brief could be read to suggest that this may have
been the Department’s position at the time, the
Department is making clear that this is not the
Department’s current position. The Department
instead seeks to clarify that bonus pay for extra
straight time work is compatible with the
fluctuating work week method. See, e.g., Black v.
Comdial Corp., Civ. A. No. 92–O81–C, 1994 WL
70113, at *2 (W.D. Va. Feb. 15, 1994) (‘‘The
provision of [straight time] bonus pay for hours 45–
61 changes neither the salary basis of [an
employee’s] pay, nor the applicability of the
fluctuating workweek method of 29 CFR 778.114.’’).
6 See, e.g., Ayers v. SGS Control Servs., Inc., No.
03 CIV. 9077 RMB, 2007 WL 646326, at *10
(S.D.N.Y. Feb. 27, 2007) (‘‘Plaintiff who received
sea pay or day-off pay did not have ‘fixed’ weekly
straight time pay, in violation of 29 CFR
778.114(a).’’); Dooley v. Liberty Mut. Ins. Co., 369
F. Supp. 2d 81, 87 (D. Mass. 2005) (bonus pay
arrangement for weekend work violated
requirement that ‘‘the employee must receive a
fixed salary that does not vary with the number of
hours worked during the week’’) (internal quotation
marks and citation omitted).
7 See, e.g., Clements v. Serco, Inc., 530 F.3d 1224,
1230 (10th Cir. 2008) (applying fluctuating
workweek method where employee received
recruitment bonus in addition to fixed salary); Perez
v. RadioShack Corp., No. 02 C 7884, 2005 WL
3750320, at *1 (N.D. Ill. Dec. 14, 2005) (applying
fluctuating workweek method where employee
received tenure pay, commissions, and other
bonuses in addition to fixed salary).
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the regular rate unless excluded under
section 7(e)(1) through (8) of the FLSA.
73 FR at 43670. The Department also
proposed to add ‘‘an example to
§ 778.114(b) to illustrate these
principles where an employer pays an
employee a nightshift differential in
addition to a fixed salary.’’ Id. at 43662;
see also id. at 43670. The proposed
clarifying language in the 2008 NPRM
reflected the Department’s position that
bonus and premium payments are
compatible with the fluctuating
workweek method.
On January 16, 2009, WHD reaffirmed
this same position when it issued an
opinion letter explaining that ‘‘[r]eceipt
of additional bonus payments does not
negate the fact that an employee
receives straight-time compensation
through the fixed salary for all hours
worked whether few or many, which is
all that is required under § 778.114(a).’’
WHD Opinion Letter FLSA2009–24 (Jan.
16, 2009) (withdrawn Mar. 2, 2009).
On May 5, 2011, the Department
issued a Final Rule, which did not
adopt the proposed clarifying language
to § 778.114. See 76 FR 18832. Instead,
in the Preamble, the Department stated
it would leave the text of § 778.114
unchanged except for minor revisions.
The Department expressly stated that
the decision not to implement the
proposed changes would avoid
‘‘expand[ing] the use of [the fluctuating
workweek] method of computing
overtime pay beyond the scope of the
current regulation,’’ and would ‘‘restore
the current rule.’’ 76 FR at 18850. The
same 2011 Preamble, however,
interpreted the ‘‘current rule’’ to mean
that bonus and premium payments ‘‘are
incompatible with the fluctuating
workweek method of computing
overtime under section 778.114.’’ 76 FR
at 18850.
The 2011 Preamble’s reference to the
‘‘current rule’’ appears to have
generated further confusion among
courts, as the ‘‘record indicate[d] that in
2008 and 2009, . . . DOL construed the
[fluctuating workweek] regulation to
permit bonus payments,’’ then ‘‘shifted
course’’ in 2011 in a manner ‘‘contrary
to its publicly-disseminated prior
position.’’ Switzer v. Wachovia Corp.,
No. CIV.A. H–11–1604, 2012 WL
3685978, at *4 (S.D. Tex. Aug. 24, 2012).
For example, one court stated that the
2011 Preamble ‘‘presents an about-face’’
that ‘‘alters the DOL’s interpretation’’ so
as to prohibit employers from using the
fluctuating workweek method for
workers who receive bonuses. Sisson v.
RadioShack Corp., No. 1:12CV958, 2013
WL 945372, at *6 (N.D. Ohio Mar. 11,
2013). Another court presented with
identical facts as Sisson reached an
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opposite conclusion because it
interpreted the 2011 Preamble as ‘‘a
decision to maintain the status quo’’
that ‘‘does not[ ] disturb the law
permitting employers to use the
[fluctuating workweek] method to
calculate the overtime pay of workers
who receive performance bonuses.’’
Wills v. RadioShack Corp., 981 F. Supp.
2d 245, 259 (S.D.N.Y. 2013). As another
example, a third court declined to give
any weight to the 2011 Preamble
because it rested on an ‘‘unconvincing’’
interpretation of Missel. Smith v. Frac
Tech Servs., LLC, No. 4:09CV00679 JLH,
2011 WL 11528539, at *2 (E.D. Ark.
June 15, 2011).
A growing number of courts, since
2011, have developed a dichotomy
between ‘‘productivity-based’’
supplemental payments, such as
commissions, and ‘‘hours-based’’
supplemental payments, such as nightshift premiums. Such courts hold that
productivity-based supplemental
payments are compatible with the
fluctuating workweek method, but not
hours-based supplemental payments.
See, e.g., Dacar v. Saybolt, L.P., 914 F.3d
917, 926 (5th Cir. 2018), as amended on
denial of rehearing (Feb. 1, 2019)
(‘‘Time-based bonuses, unlike
performance-based commissions, run
afoul of the [fluctuating workweek]
regulations’’); Lalli v. Gen. Nutrition
Ctrs., Inc., 814 F.3d 1, 10 (1st Cir. 2016)
(‘‘a compensation structure employing a
fixed salary still complies with section
778.114 when it includes additional,
variable performance-based
commissions’’). However, the
Department has never drawn this
distinction, and this distinction is in
tension with all of the Department’s
prior written guidance and statements
on the issue, such as the 2004 O’Brien
amicus brief (declining to support
application of fluctuating workweek
method to payment of additional
straight-time hours), the 2008 NPRM
and the 2009 opinion letter (permitting
bonuses as compatible with the
fluctuating workweek), and even the
2011 Final Rule (declining to implement
the 2008 NPRM and stating that the
current rule prohibits all bonuses as
compatible with the fluctuating
workweek).
As a result, the Department is
increasingly concerned that it may be
confusing and administratively
burdensome for employers to
distinguish between productivity- and
hours-based bonuses and premium
payments, particularly because the
Department itself does not distinguish
between such types of payment in
determining the regular rate. See 29 CFR
778.208–778.215. The Department is
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further concerned that the
‘‘productivity’’ versus ‘‘hours’’ based
distinction fails to provide adequate
guidance to employers because it has
not been adopted by all jurisdictions.8
The Department also believes that this
distinction is unhelpful for
supplemental pay that does not fall
neatly into either category, such as
retention bonuses, safety bonuses, and
referral bonuses.
The divergent views of the
Department and courts—and indeed,
even among courts—have created
considerable uncertainty for employers
regarding the compatibility of various
types of supplemental pay with the
fluctuating workweek method. As such,
the need for the Department to clarify its
fluctuating workweek rule is even
stronger now than in 2008, when it
proposed a substantially similar
clarification.
III. Discussion
As an initial matter, the Department is
making clear that employers and courts
should not rely on the statement in the
2011 Preamble that ‘‘bonus and
premium payments . . . are
incompatible with the fluctuating
workweek method of computing
overtime under section 778.114.’’ 76 FR
at 18850. The Department did not
modify the regulatory text in 2011 to
align with this statement. Further, the
Preamble affirmatively denied it was
making a change by insisting that the
Department was ‘‘restor[ing] the current
rule.’’ 76 FR at 18850. As the Supreme
Court has explained, ‘‘[w]hen an agency
changes its existing position . . . the
agency must at least display awareness
that it is changing position.’’ Encino
Motorcars, LLC v. Navarro, 136 S Ct.
2117, 2125–26 (2016) (internal
quotation marks and citations omitted).
Because, for example, the Switzer court
viewed the 2011 Preamble language as
‘‘shifting course’’ in a manner
‘‘contrary’’ to its prior position,9 it is
worth making clear that the Preamble
does not reflect a change from the
Department’s position that the 2008
NPRM sought to clarify.
8 Decisions holding that all bonus and
supplemental payments, including productivity
based commissions, are incompatible with the
fluctuating workweek remain good law in some
heavily populated jurisdictions, including the
Federal judicial districts for the Northern District of
Ohio and the Middle District of Florida. See Sisson,
2013 WL 945372, at *2–7; West v. Verizon Servs.
Corp., No. 8:08–CV–1325–T–33MAP, 2011 WL
208314, at *11 (M.D. Fla. Jan. 21, 2011) (fluctuating
workweek method invalid where employee
‘‘received various bonus payments and
commissions’’).
9 2012 WL 3685978, at *4.
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The 2011 Preamble reaffirmed that
‘‘the Department continues to believe
that the payment of bonus and premium
payments can be beneficial for
employees.’’ 76 FR at 18850. Yet it
declined to permit bonus and premium
payments under the fluctuating
workweek method because, in 2011, the
Department believed that the receipt of
premium and bonus payments ‘‘would
have been inconsistent with the
requirement of a fixed salary payment
set forth by the Supreme Court in
[Missel].’’ 76 FR at 18850. However, the
2011 Final Rule did not explain any
basis for the perceived inconsistency,
and at least one court has found that
belief to be ‘‘unconvincing’’ because
‘‘[n]othing in Missel prohibits the use of
the fluctuating work week method . . .
whenever an employer gives a bonus to
an employee.’’ Smith, 2011 WL
11528539, at *2.
Upon further review, the Department
is now similarly unconvinced of its
2011 position. The pre-2011 position
was not inconsistent with Missel; Missel
did not even address the issue of bonus
or incentive payments beyond the fixed
salary, let alone preclude certain types
of payments. The plaintiff in Missel had
a fixed weekly salary regardless of hours
worked, and the Court explained how to
compute overtime compensation under
those facts. As one court has explained,
‘‘[T]he message from the Supreme Court
in Missel . . . was that the employment
contracts of FLSA-covered workers must
guarantee that the regular rate of
compensation in any given week will
not fall below the statutory minimum
wage.’’ Hunter, 453 F. Supp. 2d at 57.10
The 2011 Final Rule also reflected the
Department’s concern, at the time, that
permitting employers that offer bonus
and premium payments to use the
fluctuating workweek method of
overtime payment could ‘‘shift a large
portion of employees’ compensation
into bonus and premium payments,
potentially resulting in wide disparities
in employees’ weekly pay depending on
the particular hours worked.’’ 76 FR at
18850. Upon reconsideration, the
Department is no longer concerned that
employers would shift large portions of
pay into bonus and premium payments
and is not aware of any evidence of
problematic pay shifting. To the
contrary, the Bureau of Labor Statistics
10 See also Smith, 2011 WL 11528539, at *2
(‘‘Nothing in Missel prohibits the use of the
fluctuating work week method for calculating
damages whenever an employer gives a bonus to an
employee. A bonus given wholly at the discretion
of the employer cannot be said to affect the mutual
understanding between the employer and the
employee that the employee’s fixed salary
comprises his entire compensation.’’).
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finds that in situations where employers
are permitted to pay bonuses and
premiums, such supplemental pay
constitutes a relatively small portion of
employees’ overall compensation—no
more than 5% for any occupation.11
Accordingly, the Department finds no
reason to believe that permitting
employers using the fluctuating
workweek method to pay bonuses
would result in large-scale pay shifting.
In fact, the Department now believes the
proposal would encourage employers to
pay these bonuses, premiums, and
additional pay to salaried nonexempt
employees who work fluctuating hours,
and the Department does not believe
that employers will shift large portions
of salaries into such supplemental
payments. Moreover, the Department’s
earlier concern that permitting
employers who offer bonus and
premium payments to use the
fluctuating workweek would permit
employers to pay a reduced fixed salary
would be addressed by retaining the
requirement that the fixed salary
amount must be sufficient to provide
compensation at a rate not less than the
minimum wage.
Finally, the 2011 Final Rule was
based on the Department’s view that
‘‘the courts have not been unduly
challenged in applying the current
regulation to additional bonus and
premium payments.’’ 76 FR at 18850.
However, as discussed in the
background section, courts applying the
language from the 2011 Preamble have
reached inconsistent holdings, even in
cases concerning the same types of
bonus and premium payments.
Compare Wills, 981 F. Supp. 2d at 256
(holding that RadioShack’s payment of
quarterly and annual performance based
bonuses is compatible with the
fluctuating workweek method) with
Sisson, 2013 WL 945372, at *1 (holding
that RadioShack’s payment of quarterly
and annual performance based bonuses
is not compatible with the fluctuating
workweek method). Moreover, a
growing number of courts, only through
the lens of a wholly judicially
developed distinction, now interpret the
current regulation, as interpreted in the
2011 Preamble, to distinguish between
productivity- and hours-based bonus
and premium payments, even though
the Department has never drawn that
distinction. See Dacar, 914 F.3d at 926;
Lalli, 814 F.3d at 10. Inconsistent
decisions and the development of case
11 Supplemental pay’s portion of total
compensation for any occupation ranges from 0.3%
(teachers) to 4.8% (production). See Bureau of
Labor Statistics, Employer Costs for Employee
Compensation, March 2019, Table 2, https://
www.bls.gov/news.release/pdf/ecec.pdf.
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law not reflecting any previous position
of the Department convinces the
Department that courts have been
unduly challenged in applying the
current regulation.
Accordingly, the Department is
proposing to clarify the current
regulation to allow employers who offer
both productivity and hours based
bonuses and premium payments to use
the fluctuating workweek method of
compensation; the proposed consistent
treatment of all bonuses and premium
payments that are included in the
regular rate will eliminate any such
confusion for employers. To further
eliminate confusion, the Department is
proposing to clarify that additional pay
of any kind on top of the fixed salary is
compatible with the fluctuating
workweek method. The proposed
inclusion of ‘‘additional pay of any
kind’’ is intended to prevent
disagreements over whether a payment
is a ‘‘bonus’’ or ‘‘premium.’’ Examples
of ‘‘additional pay of any kind’’ may
include commissions, compensation
falling within the FLSA’s section 3(m),
supplemental hourly or lump sum
payments, and incentive-related sums.
In summary, the Department no
longer finds persuasive the 2011 Final
Rule’s rationale for stating in the
Preamble that bonus and premium
payments are incompatible with the
fluctuating workweek method. Paying
employees bonus or premium payments
for certain activities, such as working
undesirable hours, is common 12 and, as
the 2011 Final Rule recognized, ‘‘can be
beneficial for employees.’’ 76 FR at
18850. The Department therefore
proposes to clarify that all bonus and
premium payments are compatible with
the fluctuating workweek method,
thereby eliminating any disincentives
for employers to make such payments.
Thus, employers that would meet the
conditions of § 778.114 would be able to
use the fluctuating workweek method
when paying nonexempt employees
bonuses and premiums as long as they
include such payments in the
calculation of the regular rate, unless
they may be otherwise excluded under
FLSA sections 7(e)(1)–(8).
IV. Proposed Regulatory Changes
The Department proposes to revise its
existing fluctuating workweek
regulation at § 778.114 to address these
12 The Bureau of Labor Statistics estimated in
2009 that 42.35 percent of workers receive bonuses
and 19.75 percent receive shift differentials. Bureau
of Labor Statistics, A Look at Supplemental Pay:
Overtime Pay, Bonuses, and Shift Differentials,
Table 2, Mar. 25, 2009, https://www.bls.gov/opub/
mlr/cwc/a-look-at-supplemental-pay-overtime-paybonuses-and-shift-differentials.pdf.
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issues. First, the proposed rulemaking
clarifies the regulation to expressly state
that any bonuses, premium payments,
or other additional pay of any kind are
compatible with the fluctuating
workweek method of compensation, and
that such payments must be included in
the calculation of the regular rate unless
they are excludable under FLSA
sections 7(e)(1)–(8). Second, the
proposal adds examples to § 778.114(b)
to illustrate these principles where an
employer pays an employee, in addition
to a fixed salary, (1) a nightshift
differential and (2) a productivity
bonus. Third, the proposed regulation
revises the rule in a minor way to make
it easier to read and understand.
Revised § 778.114(a) would list each of
the requirements for using the
fluctuating workweek method, and
duplicative text would be removed from
revised § 778.114(c). Finally, the
Department proposes to change the title
of the regulation from ‘‘Fixed salary for
fluctuating hours’’ to ‘‘Fluctuating
Workweek Method of Computing
Overtime’’ to better reflect the purpose
of the subsection and to improve the
ability of employers to locate the
applicable rules.
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA), 44 U.S.C. 3501 et seq., and its
attendant regulations, 5 CFR part 1320,
require the Department to consider the
agency’s need for its information
collections and their practical utility,
the impact of paperwork and other
information collection burdens imposed
on the public, and how to minimize
those burdens. This NPRM does not
require a collection of information
subject to approval by the Office of
Management and Budget (OMB) under
the PRA, or affect any existing
collections of information. The
Department welcomes comments on this
determination.
VI. Executive Order 12866; Regulatory
Planning and Review; and Executive
Order 13563, Improved Regulation and
Regulatory Review; and Executive
Order 13771, Reducing Regulation and
Controlling Regulatory Costs
A. Introduction
Under E.O. 12866, OMB’s Office of
Information and Regulatory Affairs
(OIRA) determines whether a regulatory
action is significant and therefore,
subject to the requirements of the E.O.
and OMB review. Section 3(f) of E.O.
12866 defines a ‘‘significant regulatory
action’’ as an action that is likely to
result in a rule that: (1) Has an annual
effect on the economy of $100 million
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or more, or adversely affects in a
material way a sector of the economy,
productivity, competition, jobs, the
environment, public health or safety, or
state, local, or tribal governments or
communities (also referred to as
economically significant); (2) creates
serious inconsistency or otherwise
interferes with an action taken or
planned by another agency; (3)
materially alters the budgetary impacts
of entitlement grants, user fees, or loan
programs, or the rights and obligations
of recipients thereof; or (4) raises novel
legal or policy issues arising out of legal
mandates, the President’s priorities, or
the principles set forth in the E.O. As
described below, this proposed rule is
not economically significant. The
Department has prepared a Preliminary
Regulatory Impact Analysis (PRIA) in
connection with this NPRM, as required
under section 6(a)(3) of Executive Order
12866, and OMB has reviewed the rule.
Executive Order 13563 directs
agencies to propose or adopt a
regulation only upon a reasoned
determination that its benefits justify its
costs; the regulation is tailored to
impose the least burden on society,
consistent with achieving the regulatory
objectives; and in choosing among
alternative regulatory approaches, the
agency has selected those approaches
that maximize net benefits. Executive
Order 13563 recognizes that some
benefits are difficult to quantify and
provides that, where appropriate and
permitted by law, agencies may
consider and discuss qualitatively
values that are difficult or impossible to
quantify, including equity, human
dignity, fairness, and distributive
impacts.
B. Overview of the Proposed Rule and
Potential Affected Employees
This rule, if finalized as proposed,
clarifies that bonus, premium, and any
other supplemental payments are
compatible with the fluctuating
workweek method of calculating
overtime pay. Current legal uncertainty
regarding the compatibility of
supplemental pay with the fluctuating
workweek method deters employers
from making such payments to
employees paid under the fluctuating
workweek method. The proposed rule
would eliminate this deterrent effect,
and thereby permit employers who
compensate their employees under the
fluctuating workweek method to pay
employees a wider range of
supplemental pay.
If the proposed rule were finalized, it
would be clear to employers that
employees paid under the fluctuating
workweek method are eligible for all
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supplemental payments. The
Department relied on data from the
Current Population Survey (CPS) to
estimate the total pool of employees
who could possibly be affected.13 In
particular, the Department focused on
full-time, nonexempt workers who
report earning a fixed salary. The
Department’s regulations recognize only
two ways that an FLSA-covered
employer may pay a nonexempt
employee a fixed salary.14 First, under
29 CFR 778.113, the employer may pay
a salary for a specific number of hours
each week. For the purpose of this
analysis, the Department assumes that a
nonexempt worker paid under 29 CFR
778.113 would likely report having a
‘‘usual’’ number of hours worked in the
CPS. Second, under 29 CFR 778.114, the
employer pays a salary for whatever
number of hours are worked—this is the
fluctuating workweek method. For the
purpose of this analysis, the Department
assumes that a nonexempt worker paid
under the fluctuating workweek method
generally would not report having a
‘‘usual’’ number of hours worked each
week, but rather would report working
hours that ‘‘vary’’ from week to week.
The Department estimated the number
of such workers who could be
compensated using the fluctuating
workweek method by counting CPS
respondents who: (1) Are employed at a
FLSA-covered establishment; (2) are
nonexempt from FLSA overtime
obligations; (3) work full time at a single
job; (4) reside in the District of
Columbia or a state that permits the use
of the fluctuating workweek method; 15
(5) are paid on a salary basis; and (6)
work hours that ‘‘vary’’ from week to
week. The Department calculated that
721,656 workers satisfy all these criteria
based on 2018 CPS data. These workers
are generally eligible to be paid under
13 The CPS is a monthly survey of about 60,000
households that is jointly sponsored by the U.S.
Census Bureau and BLS. Households are surveyed
for four months, excluded from the survey for eight
months, surveyed for an additional four months,
and then permanently dropped from the sample.
During the last month of each rotation in the sample
(month 4 and month 16), employed respondents
complete a supplementary questionnaire in
addition to the regular survey.
14 Under either method of salary payment the
employee is entitled to overtime premium pay of at
least one and one-half times the regular rate.
However, the method of calculating the overtime
due differs because of the difference in what the
salary payment is intended to cover.
15 Currently four states generally prohibit the use
of the fluctuating workweek method under state
law: Alaska, California, Pennsylvania, and New
Mexico. See 8 Alaska Admin. Code section
15.100(d)(3); Cal. Labor Code section 515(d);
Chevalier v. Gen. Nutrition Ctrs., Inc., 2017 PA
Super 407, 177 A.3d 280 (Pa. Super. Ct. 2017),
appeal granted, 189 A.3d 386 (Pa. 2018); N.M. Dep’t
of Labor v. Echostar Commc’ns Corp., 134 P.3d 780,
783 (N.M. Ct. App. 2006).
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the fluctuating workweek method, but
the Department lacks specific data as to
how many are actually paid that way.
Using this group of workers to
estimate the fluctuating workweek
population may overstate the number of
employees paid under the fluctuating
workweek method because not all
nonexempt and full-time CPS
respondents who report earning a salary
for working hours that ‘‘vary’’ from
week to week are paid under the
fluctuating workweek method. Some
such respondents may actually be paid
a salary for a specific number of hours
under § 778.113, despite working
fluctuating hours, and so classifying
them as employees paid under the
fluctuating workweek method would
result in over-counting. Such an
estimate may also undercount the
number of employees paid under the
fluctuating workweek method because
the Department’s methodology excludes
all CPS respondents with ‘‘usual’’ hours
from counting as an employee paid
under the fluctuating workweek
method. But an employee who works a
‘‘usual’’ number of hours may still be
paid under the fluctuating workweek
method if there is some weekly
variation in the number of hours
worked. Indeed, relying on 2018 CPS
data, the Department estimates that an
additional 675,130 nonexempt, fulltime, and salaried workers report having
a ‘‘usual’’ number of hours but routinely
work hours that differ from that ‘‘usual’’
number. These additional workers are
also eligible to be paid under the
fluctuating workweek method, but the
Department lacks data as to how many
are actually paid that way.
Altogether, the total number of
workers the Department estimates who
may currently be paid under the
fluctuating workweek method is about
1.4 million (721,656 workers who report
their hours vary plus 675,130 workers
who report having a ‘‘usual’’ number of
hours but who work hours that differ
from that number). For the purpose of
this PRIA, the Department lacks data to
determine how prevalent this
compensation method actually is.
Without data on the precise number,
and for purposes of this illustrative
analysis, the Department assumes that
half of these workers are currently being
paid using the fluctuating workweek
method, meaning 698,393 workers
could become eligible for a wider range
of supplemental payments if the
proposed rule were finalized.
The actual number may be higher or
lower. The Department invites comment
on this illustrative analysis, including
any relevant data or information that
may further inform the estimated
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number of employees paid under the
fluctuating workweek method. The
Department especially welcomes
information from employers, employer
organizations, employee organizations,
or payroll processors who may have
unique insight into the number of
employees paid under this method.
The proposed clarification may also
encourage some employers to switch
their employees who are currently paid
on an hourly basis to the fluctuating
workweek method. The Department
believes legal confusion over the last
fifteen years, exacerbated by the 2011
Final Rule, likely caused some
employers to stop using the fluctuating
workweek method to compensate
employees, and instead pay them on an
hourly basis.16 The Department applied
the same estimation methodology it
used to approximate the current number
of employees paid under the fluctuating
workweek method to approximate the
number of such employees in previous
years—going back to 2004—using CPS
data from those years.17
The estimated percentage of U.S.
workers compensated under the
fluctuating workweek method has
declined from 0.83 percent in 2004 to
0.45 percent in 2018. At least some
portion of this decline likely may be
attributed to the legal uncertainty
discussed in greater detail above, but
some may be attributable to unrelated
causes.18 For example, the Department
recognizes that the total number of
nonexempt FLSA full-time salaried
workers decreased both in total number
and also as a share of the employee
population over this same period.19 The
Department further assumes that some
employers who switched their
employees away from the fluctuating
workweek method due to legal
uncertainty would be likely to switch
those employees back to the fluctuating
workweek. However, the Department
lacks sufficient information to estimate
the precise number of ‘‘switchers’’ due
to elimination of legal uncertainty. The
Department invites commenters to
provide data or information on the
number of employees who could have
their compensation methods switched,
or on the impact of this switch on their
hours, roles, or responsibilities. The
16 The Department believes that few employers
would have switched employees from the
fluctuating workweek method to a fixed salary for
a specific number of hours under § 778.113 because
those employees would have, by definition, worked
hours that varied from week to week.
17 The Department lacks the required CPS data
from before 2004.
18 Compare, e.g., Wills, 981 F. Supp. 2d at 256,
with Sisson, 2013 WL 945372, at *1.
19 From approximately 27.0 million in 2004 to
19.2 million in 2018.
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Department especially welcomes
information from employers, employer
organizations, employee organizations,
or payroll processors who may have
unique insight into the number of
employees paid under this method.
C. Costs
The Department believes that the only
likely costs attributable to this
rulemaking are regulatory
familiarization costs, which represent
direct costs to businesses associated
with reviewing changes to regulatory
requirements caused by a final rule.
Familiarization costs do not include
recurring compliance costs that
regulated entities would incur with or
without a rulemaking. The Department
calculated regulatory familiarization
costs by multiplying the estimated
number of establishments likely to
review the proposed rule by the
estimated time to review the rule and
the average hourly compensation of a
Compensation, Benefits, and Job
Analysis Specialist.
To calculate costs associated with
reviewing the rule, the Department first
estimated the number of establishments
likely to review the proposed rule, when
finalized. The most recent data on
private sector establishments at the time
this NPRM was drafted are from the
2016 Statistics of U.S. Businesses
(SUSB), which reports 7.8 million
establishments with paid employees.20
The Department believes that each of
the 7.8 million establishments will
review the rule. All employers will give
the proposed rule a cursory review,
lasting no more than five minutes, to
determine if they need to comply with
the rule. Most employers will not spend
any more time on the rule, because they
do not have any employees
compensated under the fluctuating
workweek method. Additionally, the
Department believes that employers
currently using or interested in using
the fluctuating workweek method to pay
workers will give the proposed rule a
more detailed review. The Department
estimates that 698,393 workers are paid
under the fluctuating workweek
method, based on the 2018 CPS data.
The Department uses this number to
help estimate the number of
establishments who will spend more
time reviewing the rule. As previously
discussed, the Department lacks data to
identify the specific employers or
employees who may switch to the
fluctuating workweek given the new
20 U.S. Census Bureau, 2016 Statistics of U.S.
Businesses (SUSB) Annual Data Tables by
Establishment Industry, https://www.census.gov/
data/tables/2016/econ/susb/2016-susbannual.html.
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legal clarity, but estimates, for purposes
of this cost analysis, that employers will
switch additional employees to being
paid under the fluctuating workweek
method. This entire pool is
approximately 0.45 percent of the 155.8
million workers in the United States. By
assuming these workers are
proportionally distributed among the
7.8 million establishments, the
Department estimates approximately
35,100 establishments pay or are
interested in paying employees using
the fluctuating workweek method, and
therefore, would review the proposed
rule in greater detail. Because the
proposed rule is a clarification that
simplifies the interaction between the
fluctuating workweek method and
supplemental payments, the Department
estimates it would take an average of 30
additional minutes (on top of the five
minutes spent on an initial review) for
each of these employers to review and
understand the rule. Some might spend
more than 30 additional minutes
reviewing the proposed rule, while
others might take less time; the
Department believes that 30 minutes is
a reasonable estimated average for all
interested employers in light of the
rule’s simplicity.
Next, the Department estimated the
hourly compensation of the employees
who would likely review the proposed
rule. The Department assumes that a
Compensation, Benefits, and Job
Analysis Specialist (Standard
Occupation Classification 13–1141), or
an employee of similar status and
comparable pay, would review the rule
at each establishment. The median
hourly wage of a Compensation,
Benefits, and Job Analysis Specialist is
$30.29.21 The Department adjusted this
base wage rate to reflect fringe benefits
such as health insurance and retirement
benefits, as well as overhead costs such
as rent, utilities, and office equipment.
The Department used a fringe benefits
rate of 46 percent of the base rate 22 and
an overhead rate of 17 percent of the
base rate, resulting in a fully loaded
hourly compensation rate for
Compensation, Benefits, and Job
Analysis Specialists of $49.37 = ($30.29
+ ($30.29 × 46%) + ($30.29 × 17%)).
The Department estimates one-time
regulatory familiarization costs in Year
1 of $32.8 million (= 35,100
establishments × 0.5 hours of review
21 Bureau of Labor Statistics, May 2018 National
Occupational Employment and Wage Estimates,
United States, https://www.bls.gov/oes/current/oes_
nat.htm.
22 The benefits-earnings ratio is derived from
BLS’s Employer Costs for Employee Compensation
data using variables CMU1020000000000D and
CMU1030000000000D.
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time × $49.37 per hour + 7.8 million
establishments × 0.083 hours of review
time × $49.37 per hour), which amounts
to a 10-year annualized cost of $3.73
million at a discount rate of 3 percent
or $4.36 million at a discount rate of 7
percent. This proposed rule would not
impose any new requirements on
employers or require any affirmative
measures for regulated entities to come
into compliance; therefore, there are no
other costs attributable to this proposed
rule. The Department acknowledges that
employers who do switch to the
fluctuating workweek method may
encounter adjustment costs as they
make changes to their payroll systems.
These costs were not captured here;
however, because employers are not
required to change their payment
method (i.e., their choice to switch is
voluntary), and the Department assumes
employers will make economically
rational decisions, then such costs
would reasonably be expected to be less
than employers’ combined cost savings
and salary reductions. The Department
invites comment on this analysis,
including any relevant data or
information that may further inform this
cost estimate.
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D. Cost Savings
The Department believes that this
proposed rule could lead to three
categories of potential cost savings: (1)
The opportunity costs of previously
forgone activities; (2) reduced
management costs for non-hourly
employees; and (3) reduced legal costs
for employers. The Department uses the
assumptions previously discussed in
this PRIA to develop illustrative
estimated cost savings. Based on these
estimates, the Department believes total
cost savings are likely to exceed
regulatory familiarization costs.
First, the proposed rule would
eliminate some of the opportunity costs
in lost productivity resulting from
employers’ current inability to offer
supplemental incentive pay to
employees compensated under the
fluctuating workweek method.23 Legal
uncertainty regarding the compatibility
of such pay with the fluctuating
workweek method prevents employers
and employees from entering into
certain mutually beneficial exchanges.
For instance, an employer using the
23 ‘‘[C]ost
savings should include the full
opportunity costs of the previously forgone
activities.’’ Office of Management and Budget,
‘‘Guidance Implementing Executive Order 13771,
Titled ‘Reducing Regulation and Controlling
Regulatory Costs,’ ’’ Apr. 5, 2017, https://
www.whitehouse.gov/sites/whitehouse.gov/files/
omb/memoranda/2017/M-17-21-OMB.pdf. Some
economists refer to this amount as deadweight loss
or ‘‘the sum of consumer and producer surplus.’’ Id.
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fluctuating workweek method could not
offer supplemental incentive pay in
exchange for performing undesirable
duties. See Dacar, 914 F.3d at 926 (extra
pay for ‘‘offshore’’ inspections
invalidates fluctuating workweek
method). The prohibition against such
beneficial exchanges imposes economic
costs, and the proposed rule, if
finalized, would eliminate such costs.
The Department evaluates the
potential scope of opportunity costs
imposed by current legal uncertainty as
the economic value of supplemental
incentive pay prevented by current legal
uncertainty. The Department assumes
that employers currently follow the
holdings of an increasing number of
courts on the compatibility between
supplemental payments and the
fluctuating workweek method. These
courts have held that productivity based
payments, such as commissions, are
compatible with the fluctuating
workweek method. See Lalli, 814 F.3d at
8. The Department therefore assumes
employers are not currently deterred
from paying productivity based bonuses
and premiums to employees under the
fluctuating workweek method.24 On the
other hand, courts have held, and the
2011 Preamble may have led employers
to believe, that shift differentials and
hours-based payments—such as
payments for holiday hours and hours
spent working offshore—are not
compatible with the fluctuating
workweek method. See Dacar, 914 F.3d
at 926. The Department believes that
employers are currently deterred from
making these types of payments to
employees paid under the fluctuating
workweek method. Finally, the
Department believes legal uncertainty
further deters employers from making
supplemental payments that are neither
productivity-based nor hours-based.
This includes, for example, retention
bonuses, referral bonuses, and safety
bonuses that the Bureau of Labor
Statistics categorize as ‘‘nonproduction
bonuses.’’ 25
24 The Department understands that this
assumption may not perfectly reflect reality because
many employers using the fluctuating workweek
method may presently be deterred from paying
production based bonuses and premiums,
especially outside of jurisdictions in which such
supplemental pay have been expressly held to be
compatible with the fluctuating workweek method.
By assuming all employers are paying production
bonuses despite this concern, the Department’s
illustrative estimate may be understating the
economic cost of current legal uncertainty. The
Department welcomes comments providing data or
information regarding whether employers using the
fluctuating workweek are currently paying
production based bonuses and premiums, such as
commissions.
25 Bureau of Labor Statistics, Fact Sheet for the
June 2000 Employment Cost Index Release (2000),
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The Department lacks sufficient data
to predict the precise deadweight loss
attributable to the present legal
uncertainty including the economic
value of work that fluctuating workweek
employees do not perform because their
employers cannot provide certain
supplemental pay. However, after the
rule change, if 70,000 workers who
presently are compensated under the
fluctuating workweek method—i.e.,
one-tenth of the Department’s estimate
of 698,393—receive supplemental pay
equal to approximately one-third the
national average shift differential and
nonproduction bonuses for work not
presently performed, the full annual
opportunity cost of lost productivity
that the proposed rule would eliminate
could exceed $60 million.26 Appendix
A contains a detailed illustrative
analysis regarding possible ranges of
potential opportunity cost eliminated
and the critical variables upon which
these estimates depend.
Ultimately, the Department lacks data
to precisely measure the extent of
overstating or understating its estimate
of opportunity costs eliminated from the
proposed rule. The Department
welcomes comments providing data or
information regarding the magnitude of
possible opportunity costs avoided by
this proposed rule, which may help the
Department further quantify these
effects in a Final Rule analysis. The
Department especially welcomes
information from employers, employer
organizations, employee organizations,
or payroll processors who may have
unique insight into employees paid
under the fluctuating workweek
method.
Second, the proposed rule would
reduce management costs for any
employers that switch employees from
hourly pay to the fluctuating workweek
method. As explained above, the
Department believes legal uncertainty
caused some employers to stop paying
employees using the fluctuating
workweek method, and instead to pay
them on an hourly basis. Since overtime
pay premiums for hourly employees are
constant (i.e., their regular rate does not
decrease as more overtime hours are
worked), these employers may incur
increased managerial costs because they
may spend more time developing work
at 1, https://www.bls.gov/ncs/ect/sp/ecrp0003.pdf.
As the name implies, nonproduction bonuses do
not include productivity based pay, such as
commissions, that courts generally find to be
compatible with the fluctuating workweek method.
26 BLS estimates that average hourly shift
differential and nonproduction bonuses are 3.4% of
hourly pay and the 698,393 workers that the
Department estimates are paid under the fluctuating
workweek method earn an average annual salary of
$49,282.
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schedules and closely monitoring an
employee’s hours to minimize or avoid
overtime pay. For example, the manager
of an hourly worker may have to assess
whether the marginal benefit of
scheduling the worker for more than 40
hours exceeds the marginal cost of
paying the overtime based on the higher
hourly rate. But such assessment is less
necessary for an employee paid under
the fluctuating workweek method
because the employee’s regular rate
decreases with each additional overtime
hour, reducing the overtime premium as
a share of compensation.
There was little precedent or data to
aid in evaluating these managerial costs.
With the exception of the 2016 and 2019
overtime rulemaking efforts, the
Department has not estimated
managerial costs of avoiding overtime
pay. See 81 FR 32391, 32477 (May 23,
2016); 84 FR 10900, 10932 (Mar. 29,
2019). Nor has the Department found
such estimates after reviewing the
literature. The Department therefore
refers to the methodology used in the
2019 overtime rulemaking to produce a
qualitative analysis of potential
additional cost savings.
Under the overtime rulemaking
methodology, the Department assumed
a manager spends ten minutes per week
scheduling and monitoring a newly
exempt employee to avoid or minimize
overtime pay. And employers may be
able to avoid at least some of this effort
if the employee were instead paid under
the fluctuating workweek method
because the marginal cost of paying
overtime would be lower. While, the
Department does not estimate the
precise number of hourly workers who
would switch from hourly pay to the
fluctuating workweek method if the
proposed rule were finalized, the
Department believes that management
costs may be reduced for every worker
who is switched because their managers
may spend less time managing their
schedules. If, hypothetically, 150,000
workers were switched, employers
might reduce their annual managerial
costs by over $ 66 million.27
The Department welcomes data or
information regarding the number of
employees who could have their
compensation method switched, how
employers would manage their hours
after switching, or other relevant factors
27 This
illustrative analysis assumes: Ten minutes
per week per worker, fifty-two weeks per year,
multiplied by a hypothetical number of new
employees paid under the fluctuating workweek
method, multiplied by the full-loaded median
hourly wage for a manager ($31.18 + $31.18(0.46)
+ $31.18(0.17) = $50.92). This wage is calculated as
the median hourly wage in the pooled 2018/19 CPS
MORG data for workers in management occupations
(excluding chief executives).
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that would help the Department further
quantify cost savings. The Department
especially welcomes information from
employers, employer organizations, or
payroll processors who may have
unique insight into employees paid
under the fluctuating workweek
method.
Third, the clarifying language and
updated examples included in this
NPRM may reduce the amount of time
employers spend attempting to
understand their obligations under the
law, after an initial one-time rule
familiarization. For example, employers
interested in offering supplemental
payments to employees compensated
under the fluctuating workweek method
would know immediately from the
language proposed for inclusion in
§ 778.114 that such payments will be
compatible with the fluctuating
workweek method, thereby obviating
further legal research and analysis on
the issue. The Department does not have
data to estimate the precise amount of
cost savings attributable to reduced
need for legal research and analysis, and
instead provides an example to
illustrate the potential for such savings.
If the additional legal clarity reduces
the annual amount of legal review by
just one hour for each employer that
pays or is interested in paying
employees using the fluctuating
workweek method, the Department
calculates potential cost savings of up to
$4.7 million. The Department obtained
this illustrative estimate by first
calculating the hourly cost of a lawyer
(Standard Occupation Classification 23–
1011). The median wage of a lawyer is
$58.13,28 and the Department adjusted
this to $94.75 per hour to account for
fringe benefits and overhead.29 The fully
loaded hourly compensation rate of
$94.75 is then multiplied by the 35,100
establishments that the Department
estimates pay or may be interested in
paying employees using the fluctuating
workweek method, resulting in a
product of $ 3.3 million per year.30 As
noted above, this figure is an illustrative
example of potential annual cost savings
due to reducing legal-review burdens,
and the Department welcomes
comments providing data or information
on this topic so that the Department
28 Bureau of Labor Statistics, May 2018 National
Occupational Employment and Wage Estimates,
United States, https://www.bls.gov/oes/current/oes_
nat.htm.
29 The Department used a fringe benefits rate of
46 percent of the base rate and an overhead rate of
17 percent of the base rate, resulting in a fully
loaded hourly compensation rate of $94.75 =
($58.13 + ($58.13 × 0.46) + ($58.13 × 0.17)).
30 This number is discussed in greater detail in
the Costs section, above.
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accurately quantify these effects in a
Final Rule analysis.
Even though the Department cannot
quantify the precise amount of total cost
savings, it expects cost savings to
outweigh regulatory familiarization
costs. Unlike one-time familiarization
costs, the potential cost savings
described in this section would
continue into the future, saving
employers valuable time and resources.
This proposal also offers increased
flexibility to employers in the way that
they compensate their employees.
However, the Department is unable to
precisely quantify cost savings and
other potential effects of the proposed
rule due to a lack of data. The
Department welcomes comments
providing data or information regarding
possible cost savings attributable to this
proposed rule, which may help the
Department further quantify these
effects in a Final Rule analysis. The
Department especially welcomes
information from employers, employer
organizations, employee organizations,
or payroll processors who may have
unique insight into employees paid
under the fluctuating workweek
method.
E. Transfers
Transfer payments occur when
income is redistributed from one party
to another. The Department believes the
proposed rule, if finalized, may cause
transfer payments to flow from
employers to employees and may also
cause transfer payments to flow from
employees to employers. The incidence,
magnitude, and ultimate beneficiaries of
such transfers is unknown.
The Department lacks data to estimate
the precise amount and composition of
the supplemental incentive pay that
employers may now offer, the extent to
which employers may restructure
compensation packages, the method by
which employers who switch
employees to a fluctuating workweek
may allocate additional compensation,
and the allocation of economic gains
between employees and employers. The
Department welcomes comments
providing data or information regarding
how employers will structure
employment compensation following
this rulemaking, as well as how
employers may change employees’
hours or responsibilities. The
Department especially welcomes
information from employers, employer
organizations, employee organizations,
employees, or payroll processors who
may have unique insight into employees
paid under the fluctuating workweek
method and the management practices
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employed by companies using the
fluctuating workweek method.
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F. Benefits
The Department believes the
proposed clarification would reduce
avoidable disputes and litigation
regarding the compatibility between
supplemental pay and the fluctuating
workweek method. As noted above,
there is no uniform consensus among
Federal courts as to whether and what
types of supplemental pay is permitted.
The Department believes this uncertain
legal environment generates a
substantial amount of avoidable
disputes and litigation. The proposed
rule would provide a simple standard
that permits all supplemental pay under
the fluctuating workweek method, and
therefore should reduce unnecessary
disputes and litigation.31 The
Department lacks data to quantify this
benefit, and welcomes data and
information on the amount of
unnecessary disputes and litigation that
would be avoided if the proposed rule
were finalized. The Department
especially welcomes information from
employers, employer organizations, or
payroll processors who may have
unique insight into employees paid
under the fluctuating workweek
method.
VII. Regulatory Flexibility Analysis
The Regulatory Flexibility Act of 1980
(RFA), 5 U.S.C. 601 et seq., as amended
by the Small Business Regulatory
Enforcement Fairness Act of 1996,
Public Law 104–121 (March 29, 1996),
requires Federal agencies engaged in
rulemaking to consider the impact of
their proposals on small entities,
consider alternatives to minimize that
impact, and solicit public comment on
their analyses. The RFA requires the
assessment of the impact of a regulation
on a wide range of small entities,
including small businesses, not-forprofit organizations, and small
governmental jurisdictions. Agencies
must perform a review to determine
whether a proposed or final rule would
have a significant economic impact on
a substantial number of small entities. 5
U.S.C. 603 and 604.
This proposed rule would not impose
any new requirements on employers or
require any affirmative measures for
regulated entities to come into
compliance. Therefore, there are no
other costs attributable to this
deregulatory proposed rule other than
regulatory familiarization costs. As
31 The costs of such disputes and litigation are not
insignificant, but are not estimated here nor
included in the projected regulatory cost savings.
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discussed above, the Department
calculated the familiarization costs for
both the estimated 7.8 million private
establishments in the United States and
for the estimated 50,064 establishments
that pay or are interested in paying
employees using the fluctuating
workweek method. The Department
estimated the one-time familiarization
cost for each of the 7.8 million
establishments—which would give the
proposed rule a cursory review—is
$4.11. And the one-time familiarization
cost for each of the 35,100
establishments that employ or are
interested in employing employees paid
under the fluctuating workweek
method—which would closely review
the proposed rule—is $24.69. Estimated
familiarization costs would be trivial for
small business entities, and would be
well below one percent of their gross
annual revenues, which is typically at
least $100,000 per year for the smallest
businesses.
The Department believes that this
proposed rule would achieve long-term
cost savings that outweigh initial
regulatory familiarization costs. For
example, the Department believes that
clarifying the confusing fluctuating
workweek regulation and adding
updated examples should reduce
compliance costs and litigation risks
that small business entities would
otherwise continue to bear. The
proposed rule would also reduce
administrative costs of small businesses
that respond by switching hourly
employees to the fluctuating workweek
method. The proposed rule further
enables a small business to offer
employees paid under the fluctuating
workweek method supplemental
incentive pay in exchange for certain
productive behavior, such as working
nightshifts or performing undesirable
duties. The business would offer such
supplemental pay only if the benefits of
the incentivized behavior exceed the
cost of payments. Because the vast
majority of businesses, including small
businesses, do not pay workers using
the fluctuating workweek method,32 the
Department believes such benefits will
be limited to few small businesses.
Based on this determination, the
Department certifies that the proposed
rule would not have a significant
economic impact on a substantial
number of small entities.
32 The Department of Labor estimates that only
0.45% of U.S. workers are compensated using
fluctuating workweek method.
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VIII. Unfunded Mandates Reform Act
Analysis
The Unfunded Mandates Reform Act
of 1995 (UMRA), 2 U.S.C. 1532, requires
that agencies prepare a written
statement, which includes an
assessment of anticipated costs and
benefits, before proposing any Federal
mandate that may result in excess of
$100 million (adjusted annually for
inflation) in expenditures in any one
year by state, local, and tribal
governments in the aggregate, or by the
private sector. While this rulemaking
would affect employers in the private
sector, it is not expected to result in
expenditures greater than $100 million
in any one year. Please see Section VI
for an assessment of anticipated costs
and benefits to the private sector.
IX. Executive Order 13132, Federalism
The Department has reviewed this
proposed rule in accordance with
Executive Order 13132 regarding
federalism and determined that it does
not have federalism implications. The
proposed rule would not have
substantial direct effects on the States,
on the relationship between the national
Government and the States, or on the
distribution of power and
responsibilities among the various
levels of government.
X. Executive Order 13175, Indian
Tribal Governments
This proposed rule would not have
substantial direct effects on one or more
Indian tribes, on the relationship
between the Federal Government and
Indian tribes, or on the distribution of
power and responsibilities between the
Federal Government and Indian tribes.
Appendix A
This appendix presents the
Department’s illustrative analysis of the
opportunity cost of work that is not
performed because employers are not
permitted to provide certain types of
supplemental incentive pay to
fluctuating workweek employees. The
proposed rule would reduce such
opportunity costs. What follows is
discussion of two approaches to
estimating these effects.
I. Method One: Using Supplemental Pay
Data
The Department’s first methodology
consists of three steps. First, the
Department estimates the amount of
additional supplemental pay that the
average fluctuating workweek employee
could receive if employers believed all
supplemental payments were
compatible with the fluctuating
workweek method. Second, the
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Department estimates the economic
value of the work that such
supplemental pay could have
incentivized—this represents the
opportunity cost per workers resulting
from legal uncertainty. Third, the
Department multiplies the opportunity
cost per worker by the estimated
number of workers who are potentially
compensated under the fluctuating
workweek method.33
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1. Average Supplemental Pay Being
Prevented
As discussed in the Preamble, the
Department assumes that employers
currently use production-based
supplemental pay—such as
commissions—to incentivize
employees, but they presently are
deterred from using other types of
supplemental pay. If this NPRM were
finalized as proposed, the Department
expects some employers may begin to
use other types of supplemental pay,
including nonproduction bonuses and
shift differentials, to incentivize
employees to perform economically
valuable tasks.
The Bureau of Labor Statistics (BLS)
provides estimates on nonproduction
bonuses, which include, e.g., safety
bonuses, holiday pay, attendance pay,
and referral bonuses.34 BLS also
provides separate estimates of shift
differentials that employees receive
nationwide. Shift differentials and
nonproduction bonuses comprise
approximately 3.4 percent of the salaries
and wages of workers nationwide.35 The
Department believes this 3.4 percent
national average may be a useful starting
point to estimate the amount of
33 This analysis does not attempt to evaluate
whether and to what extent some employees not
presently compensated under the fluctuating
workweek method might be shifted to the
fluctuating workweek method from their present
method of compensation.
34 Bureau of Labor Statistics, Fact Sheet for the
June 2000 Employment Cost Index Release (2000),
at 1, https://www.bls.gov/ncs/ect/sp/ecrp0003.pdf;
see also BLS, Employee Benefits Survey, March
2017, https://www.bls.gov/ncs/ebs/benefits/2017/
ownership/govt/table43a.htm. As the name implies,
nonproduction bonuses do not include productivity
based pay, such as commissions, that some courts
have found to be compatible with the fluctuating
workweek method. Approximately one-third of U.S.
workers have access to nonproduction bonuses in
2017. Id.
35 BLS estimates average wages and salaries of
private industry workers to be $24.17. And their
average hourly shift differential and nonproduction
bonus adds up to $0.81, which represents 3.4% of
hourly pay. Bureau of Labor Statistics, Employer
Costs for Employee Compensation, March 2019,
Table 1, https://www.bls.gov/news.release/archives/
ecec_06182019.pdf. This figure represents the
national average of all workers: Some workers may
receive little or no shift differentials and
nonproduction bonuses while other may receive
substantially higher shift differentials and
nonproduction bonuses than the national average.
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supplemental incentive pay that current
legal uncertainty could prevent.
The Department recognizes that 3.4
percent of salary may overstate or
understate the average supplemental
pay that legal uncertainty prevents
fluctuating workweek employees from
receiving. For example, the Department
assumes employers using the fluctuating
workweek method currently are unable
to directly incentivize certain
productive tasks with supplemental
pay. But some employers may be
indirectly (and less efficiently)
incentivizing such behavior, e.g.,
encouraging holiday work by increasing
the base salary of all employees and
requiring employees to work a holiday
as needed rather than paying a lower
salary to all employees and paying a
premium only to employees who work
that particular holiday. If so, the amount
of incentive pay prevented by current
legal uncertainty may be less than the
3.4 percent of salary. Conversely, the
amount of lost incentive pay may be
higher than 3.4 percent of salary
because that percentage does not
include production-based incentive pay.
The Department assumes employers
using the fluctuating workweek method
currently pay production-based
bonuses, such as commissions, to
incentivize productive behavior. But
case law permitting this practice
extends only to two circuits and some
district courts,36 and some employers
outside those jurisdictions may be
deterred from paying production based
incentive pay due to legal uncertainty.37
If so, the amount of lost incentive pay
for productive behavior due to legal
uncertainty may be higher than 3.4
percent of salary.
Ultimately, the Department lacks
sufficient data to precisely measure the
extent of overstatement or
understatement. In the presentation that
follows, the Department assumes that
the average fluctuating workweek
employee would receive less than the
national average of 3.4 percent of salary
if employers were assured that such
payments were compatible with the
fluctuating workweek method. This
appendix presents two scenarios
regarding the average supplemental pay
that that current legal uncertainty may
36 See, e.g., Lalli, 814 F.3d at 8; Dacar, 914 F.3d
at 926; Wills, 981 F. Supp. 2d at 256.
37 For instance, the 2011 Preamble’s statement
that ‘‘bonus and premium payments . . . are
incompatible with the fluctuating workweek
method of computing overtime under section
778.114’’ does not, on its face, permit employers to
pay commissions and other production-based
bonuses under the fluctuating workweek method.
See also Sisson, 2013 WL 945372, at *6
(commissions not permitted under fluctuating
workweek method).
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prevent fluctuating workweek
employees from receiving:
• Scenario 1 assumes supplemental
pay being prevented equals 1 percent of
salary; and
• Scenario 2 assumes supplemental
pay being prevented equals 2 percent of
salary.
As discussed in the preamble, the
Department uses CPS data to identify
approximately 1.4 million workers who
may currently be paid under the
fluctuating workweek method. CPS data
indicate that these 1.4 million workers
earn an average annual salary of
$49,282. Under Scenario 1, the average
amount of supplemental pay per
employee that legal uncertainty
prevents is $492.82 (= $49,282 × 1%)
per year. Under Scenario 2, the average
amount per employee is $985.64 (=
$49,282 × 2%) per year. On a weekly
basis, these scenarios would result in an
employee receiving approximately $9.48
or $18.95 in supplemental pay.
2. Average Opportunity Cost
The above estimates for Scenarios 1
and 2 represent potential supplemental
incentive payments that employers were
deterred from paying an average
employee compensated under the
fluctuating workweek method. And
since the employee did not receive this
amount, the Department assumes he or
she completed fewer productive tasks
that such pay would have incentivized,
such as working nights or weekends or
performing other undesirable duties.
The estimates under Scenarios 1 and
2 represent the worker’s share of the
total economic cost of lost productivity.
The Department assumes the worker’s
share of this cost is the same as labor’s
share of national income, which BLS
estimates was 56.4 percent in 2018 (the
most recent year of data available at
publication).38 The full, economy-wide
annual opportunity cost of lost
productivity that the proposed rule
would eliminate is therefore equal to the
lost supplemented pay under Scenarios
1 and 2 divided by 56.4 percent. Under
Scenario 1, this amounts to $873.79 (=
492.82 ÷ 56.4%) per employee
compensated under the fluctuating
workweek method. Annual opportunity
cost eliminated under Scenario 2 is
$1,747.59 (= 985.64 ÷ 56.4%) per such
employee.
3. Total Opportunity Cost Eliminated
The Department multiplied the
opportunity cost per employee by the
estimated number of fluctuating
38 Bureau of Labor Statistics, Labor Productivity
and Costs, https://www.bls.gov/lpc/special_
requests/msp_dataset.zip.
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workweek employees to estimate the
potential total reduction in opportunity
cost from the proposed rule. As
discussed in the Preamble, the
Department estimated there are up to
1.4 million workers who may currently
be paid under the fluctuating workweek
method and further assumed that half—
698,383 workers—are actually being
paid under that method. But, as the
Preamble noted, the actual number may
be higher or lower. To account for the
uncertainty in the actual number of
fluctuating workweek employees who
would receive supplemental pay under
the proposed rule, the Department
estimated the total reduction in
opportunity cost under three different
scenarios:
• Scenario A uses half of the
Department’s estimate of fluctuating
workweek employees, or 349,192
employees;
• Scenario B uses one quarter of the
Department’s estimate, or 174,596
employees; and
• Scenario C uses one tenth of the
Department’s estimate, or 69,838
employees.
59601
Scenarios A–C reflect different
assumptions regarding the number of
fluctuating workweek employees who
may receive supplemental pay, while
Scenarios 1 and 2 reflect different
assumptions regarding the amount of
supplemental pay—and by extension
productive activity—prevented by
current legal uncertainty. These create
six different combinations, A1 thorough
C2, each presenting a different estimate
for the total opportunity cost that the
proposed rule would eliminate. The
table below summarizes these
possibilities:
TABLE 1—OPPORTUNITY COST ELIMINATED
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Scenario A .............................................
Scenario B .............................................
Scenario C .............................................
39 The $61 million estimate should not be
interpreted as a true lower bound. Indeed, a review
of public comments on related rulemakings yields
only a few muted requests for the fluctuating
workweek policy to be revised—potentially
indicating that the associated current deadweight
loss is of limited magnitude.
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Scenario 2
1% Suppl. Pay
2% Suppl. Pay
349,192 Workers .................................................................
174,596 Workers .................................................................
69,838 Workers ...................................................................
As Table 1 shows, the estimated
opportunity cost that the proposed rule
could eliminate depends upon the
number of workers being compensated
under the fluctuating workweek method
and the amount of supplemental pay
that current legal uncertainty prevents
such workers from receiving. At the low
end is Scenario C1—representing the
lowest calculated number of fluctuating
workweek employees and the lowest
calculated amount of supplemental
pay—which indicates that opportunity
cost that could be eliminated is
approximately $61 million.39 And at the
high end is Scenario A2—representing
the highest estimate of affected
fluctuating workweek employees and
the highest amount of supplemental
pay—which indicates the opportunity
cost that could be eliminated by the
proposed rule is approximately $610
million.
The Department lacks sufficient data
and information necessary to precisely
predict which scenario is most plausible
and thus to estimate the potential
reduction in opportunity cost.
Accordingly, the Department invites
comment on this analysis, including any
relevant data or information on the
Department’s assumptions regarding: (1)
The estimated number of employees
paid under the fluctuating workweek
method; and (2) the amount of
VerDate Sep<11>2014
Scenario 1
supplemental pay that current legal
uncertainty prevents such employees
from receiving. The Department
especially welcomes information from
employers, employer organizations,
employee organizations, or payroll
processors who may have unique
insight into employees paid under the
fluctuating workweek method.
II. Method Two: Comparison With
Managerial Costs
In the absence of the fluctuating
workweek NPRM, employers whose
employees work irregular hours each
week have different compensation
options. One option is to pay workers an
hourly wage with premiums (for hazard
duty, graveyard shifts, and so forth),
another option is to pay a salary without
such premiums (another is to pay using
the fluctuating workweek method, but
without such premiums). Comparing
these two options indicates a tradeoff
between employer surplus—associated
with the ability to enhance productivity
by paying premiums—and reduced
managerial costs—associated with
paying salaries, per the Preamble’s
portion of this RIA. Hence, the
managerial cost savings can provide a
bound on the employer surplus effects
that can be achieved by eliminating this
tradeoff. Multiplying managerial costs
for waged workers of $441.31 per year
(=$50.92 × 52 weeks × 1⁄6 hour per week)
by the estimated 698,393 fluctuating
workweek employees yields an estimate
of $308 million as the upper bound on
the proposed rule’s employer surplus
PO 00000
Frm 00012
Fmt 4702
Sfmt 4702
$305,121,551
152,560,776
61,024,310
$610,243,103
305,121,551
122,048,621
effects.40 Worker surplus would likely
be of similar magnitude, thus putting
the overall upper bound on ruleinduced deadweight loss reduction at
approximately $0.6 billion. If there were
productivity gains from switching
employees into the fluctuating
workweek method, this bound could
rise. As with Method One, the
Department invites comment on this
analysis.
Signed at Washington, DC, this 28th day of
October, 2019.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.
List of Subjects in 29 CFR Part 778
Wages.
For the reasons set forth above, the
Department proposes to amend title 29,
part 778, of the Code of Federal
Regulations as follows:
PART 778—OVERTIME
COMPENSATION
1. The authority citation for part 778
continues to read as follows:
■
Authority: 52 Stat. 1060, as amended; 29
U.S.C. 201 et seq. Section 778.200 also issued
under Pub. L. 106–202, 114 Stat. 308 (29
U.S.C. 207(e) and (h)).
■
2. Revise § 778.114 to read as follows:
40 The estimate is an upper bound both due to
diminishing returns and because it does not
account for other potential employer choices (e.g.,
paying salaries with premiums, while enduring
uncertainty as to the arrangement’s legality) that
they would only pursue if less costly than the two
options previously discussed.
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Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules
khammond on DSKJM1Z7X2PROD with PROPOSALS
§ 778.114 Fluctuating workweek method of
computing overtime.
(a) The fluctuating workweek may be
used to calculate overtime
compensation for a nonexempt
employee if the following conditions are
met:
(1) The employee works hours that
fluctuate from week to week;
(2) The employee receives a fixed
salary that does not vary with the
number of hours worked in the
workweek, whether few or many;
(3) The amount of employee’s fixed
salary is sufficient to provide
compensation to the employee at a rate
not less than the applicable minimum
wage rate for every hour worked in
those workweeks in which the number
of hours the employee works is greatest;
(4) The employee and the employer
have a clear and mutual understanding
that the fixed salary is compensation
(apart from overtime premiums and any
bonuses, premium payments, or other
additional pay of any kind not
excludable from the regular rate under
section 7(e)(1) through (8) of the Act) for
the total hours worked each workweek
regardless of the number of hours; and
(5) The employee receives overtime
compensation, in addition to such fixed
salary and any bonuses, premium
payments, and additional pay of any
kind, for all overtime hours worked at
a rate of not less than one-half the
employee’s regular rate of pay for that
workweek. Since the salary is fixed, the
regular rate of the employee will vary
from week to week and is determined by
dividing the amount of the salary and
any non-excludable additional pay
received each workweek by the number
of hours worked in the workweek.
Payment for overtime hours at not less
than one-half such rate satisfies the
overtime pay requirement because such
hours have already been compensated at
the straight time rate by payment of the
fixed salary and non-excludable
additional pay. Payment of any bonuses,
premium payments, and additional pay
of any kind is not incompatible with the
fluctuating workweek method of
overtime payment, and such payments
must be included in the calculation of
the regular rate unless excludable under
section 7(e)(1) through (8) of the Act.
(b) The application of the principles
in paragraph (a) of this section 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 work hours 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 (apart from overtime
VerDate Sep<11>2014
16:29 Nov 04, 2019
Jkt 250001
premiums and any bonuses, premium
payments, or other additional pay of any
kind not excludable from the regular
rate under section 7(e)(1) through (8))
for all hours worked in the workweek.
(1) Example. If during the course of 4
weeks this employee works 37.5, 44, 50,
and 48 hours, the regular rate of pay in
each of these weeks is $16, $13.64, $12,
and $12.50, respectively. Since the
employee has already received straight
time compensation for all hours worked
in these examples, only additional halftime pay is due. For the first week the
employee is owed $600 (fixed salary of
$600, with no overtime hours); for the
second week $627.28 (fixed salary of
$600, and 4 hours of overtime pay at
half times the regular rate of $13.64 for
a total overtime payment of $27.28); for
the third week $660 (salary
compensation of $600, and 10 hours of
overtime pay at half times the regular
rate of $12 for a total overtime payment
of $60); for the fourth week $650 (fixed
salary of $600, and 8 overtime hours at
half times the regular rate of $12.50 for
a total overtime payment of $50).
(2) Example. If during the course of 4
weeks this employee works 37.5, 44, 50,
and 48 hours and 4 of the hours the
employee worked each week were
nightshift hours compensated at a
premium rate of an extra $5 per hour,
the employee’s total straight time
earnings would be $620 (fixed salary of
$600 plus $20 of non-overtime premium
pay for the 4 nightshift hours). In this
case, the regular rates of pay in each of
these weeks is $16.53, $14.09, $12.40,
and $12.92, respectively, and the
employee’s total compensation would
be calculated as follows: For the first
week the employee is owed $620 (fixed
salary of $600 plus $20 of non-overtime
premium pay, with no overtime hours);
for the second week $648.20 (fixed
salary of $600 plus $20 of non-overtime
premium pay, and 4 hours of overtime
at half times the regular rate of $14.09
for a total overtime payment of $28.20);
for the third week $682 (fixed salary of
$600 plus $20 of non-overtime premium
pay, and 10 hours of overtime at half
times the regular rate of $12.40 for a
total overtime payment of $62); for the
fourth week $671.68 (fixed salary of
$600 plus $20 of non-overtime premium
pay, and 8 hours of overtime at half
times the regular rate of $12.92 for a
total overtime payment of $51.68).
(3) Example. If during the course of 4
weeks this employee works 37.5, 44, 50,
and 48 hours and the employee received
a $100 productivity bonus each week,
the employee’s total straight time
earnings would be $700 (fixed salary of
$600 plus $100 productivity bonus). In
this case, the regular rate of pay in each
PO 00000
Frm 00013
Fmt 4702
Sfmt 4702
of these weeks is $18.67, $15.91, $14,
and $14.58, respectively, and the
employee’s total compensation would
be calculated as follows: For the first
week the employee is owed $700 (fixed
salary of $600 plus $100 productivity
bonus, with no overtime hours); for the
second week $731.84 (fixed salary of
$600 plus $100 productivity bonus, and
4 hours of overtime at half time the
regular rate of $15.91 for a total
overtime payment of $31.84); for the
third week $770 (fixed salary of $600
plus $100 productivity bonus, and 10
hours of overtime at half times the
regular rate of $14, for a total overtime
payment of $70); for the fourth week
$758.32 (fixed salary of $600 plus $100
productivity bonus, and 8 hours of
overtime at half times the regular rate of
$14.58 for a total overtime payment of
$58.32).
(c) Typically, the salaries described in
paragraph (a) of this section are paid to
employees who do not customarily
work a regular schedule of hours and
are in amounts agreed on by the parties
as adequate compensation for long
workweeks as well as short ones, under
the circumstances of the employment as
a whole. Where the conditions for the
use of the fluctuating workweek method
of overtime payment are present, the
Act, in requiring that ‘‘not less than’’ the
prescribed premium of 50 percent for
overtime hours worked be paid, does
not prohibit paying more. On the other
hand, where all the facts indicate that
an employee is being paid for overtime
hours at a rate no greater than that
which the employee receives for
nonovertime hours, compliance with
the Act cannot be rested on any
application of the fluctuating workweek
overtime formula.
[FR Doc. 2019–23860 Filed 11–4–19; 8:45 am]
BILLING CODE 4510–27–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket Number USCG–2019–0830]
RIN 1625–AA87
Security Zone; Super Bowl 2020,
Bayfront Park, Miami, FL
Coast Guard, DHS.
Notice of proposed rulemaking.
AGENCY:
ACTION:
The Coast Guard is proposing
to establish a temporary security zone
over certain navigable waters of
Biscayne Bay in connection with Super
SUMMARY:
E:\FR\FM\05NOP1.SGM
05NOP1
Agencies
[Federal Register Volume 84, Number 214 (Tuesday, November 5, 2019)]
[Proposed Rules]
[Pages 59590-59602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23860]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 /
Proposed Rules
[[Page 59590]]
DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 778
RIN 1235-AA31
Fluctuating Workweek Method of Computing Overtime
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Notice of proposed rulemaking; request for comments.
-----------------------------------------------------------------------
SUMMARY: This proposed rulemaking would revise the Department of
Labor's (Department) regulation for computing overtime compensation for
salaried nonexempt employees who work hours that vary each week
(fluctuating workweek) under the Fair Labor Standards Act (FLSA or the
Act). The proposal will clarify that payments in addition to the fixed
salary are compatible with the use of the fluctuating workweek method
of compensation, and that such payments must be included in the
calculation of the regular rate as appropriate under the Act. The
proposal would also add examples and make minor revisions to make the
rule easier to understand.
DATES: Submit written comments on or before December 5, 2019.
ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA31, by either of the following methods:
Electronic Comments: Submit comments through the Federal eRulemaking
Portal at https://www.regulations.gov. Follow the instructions for
submitting comments. Mail: Address written submissions to Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
NW, Washington, DC 20210. Instructions: Please submit only one copy of
your comments by only one method. All submissions must include the
agency name and RIN, identified above, for this rulemaking. Anyone who
submits a comment (including duplicate comments) should understand and
expect that the comment will become a matter of public record and will
be posted without change to http://www.regulations.gov, including any
personal information provided. All comments must be received by 11:59
p.m. on the date indicated for consideration in this rulemaking.
Commenters should transmit comments early to ensure timely receipt
prior to the close of the comment period, as the Department continues
to experience delays in the receipt of mail. For additional information
on submitting comments and the rulemaking process, see the ``Electronic
Access and Filing Comments'' heading below. Docket: For access to the
docket to read background documents or comments, go to the Federal
eRulemaking Portal at https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop. Director, Division of
Regulations, Legislation, and Interpretation, Office of Policy, Wage
and Hour Division, U.S. Department of Labor, Room S-3502, 200
Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406
(this is not a toll-free number). Copies of this proposed rule may be
obtained in alternative formats (Large Print, Braille, Audio Tape or
Disc), upon request, by calling (202) 693-0675 (this is not a toll-free
number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain
information or request materials in alternative formats.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or visit WHD's website for a nationwide listing of WHD district
and area offices at https://www.dol.gov/whd/america2.htm. Electronic
Access and Filing Comments: This proposed rule and supporting documents
are available through the Federal Register and the https://www.regulations.gov website. You may also access this document via
WHD's website at https://www.dol.gov/whd/. To comment electronically on
Federal rulemakings, go to the Federal eRulemaking Portal at https://www.regulations.gov, which will allow you to find, review, and submit
comments on Federal documents that are open for comment and published
in the Federal Register. You must identify all comments submitted by
including ``RIN 1235-AA31'' in your submission. Commenters should
transmit comments early to ensure timely receipt prior to the close of
the comment period (11:59 p.m. on the date identified above in the
DATES section); comments received after the comment period closes will
not be considered. Submit only one copy of your comments by only one
method. Anyone who submits a comment (including duplicate comments)
should understand and expect that the comment will become a matter of
public record and will be posted without change to https://www.regulations.gov, including any personal information provided.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The FLSA guarantees a minimum wage for all hours worked and limits
to 40 the number of hours per week a covered nonexempt employee can
work without additional compensation. See 29 U.S.C. 206, 207. Payment
of a fixed salary for fluctuating hours, also called the ``fluctuating
workweek method,'' is one way employers may meet their overtime pay
obligations to nonexempt employees, if certain conditions are met.
Under 29 CFR 778.114, an employer may use the fluctuating workweek
method for computing overtime compensation for a nonexempt employee if
the employee works fluctuating hours from week to week and receives,
pursuant to an understanding with the employer, a fixed salary as
straight time ``compensation (apart from overtime premiums)'' for
whatever hours the employee is called upon to work in a workweek,
whether few or many. 29 CFR 778.114(a). In such cases, because the
salary ``compensate[s] the employee at straight time rates for whatever
hours are worked in the workweek,'' an employer satisfies the overtime
pay requirement of section 7(a) of the FLSA if it compensates the
employee, in addition to the salary amount, at a rate of at least one-
half of the regular rate of pay for the hours worked each workweek in
excess of 40. 29 CFR 778.114(a). Because the employee's hours of work
fluctuate from week to week, the regular rate must be
[[Page 59591]]
determined separately each week based on the number of hours actually
worked each week. Id.
The payment of additional bonus and premium payments to employees
compensated under the fluctuating workweek method has presented
challenges to employers and the courts alike, as set forth in more
detail below. The proposed regulation would clarify that bonus
payments, premium payments, and other additional pay are consistent
with using the fluctuating workweek method of compensation, and that
such payments must be included in the calculation of the regular rate
unless they may be excluded under FLSA sections 7(e)(1)-(8). See 29
U.S.C. 207(e)(1)-(8).
The Department proposed a similar clarification through a Notice of
Proposed Rulemaking (NPRM) in 2008. See 73 FR 43654, 43662, 43669-70
(July 28, 2008). However, the Final Rule issued in 2011 did not adopt
this proposal because the Department, at the time, believed that courts
had ``not been unduly challenged'' in applying the current regulatory
text, that the proposed clarification ``would have been inconsistent''
with the Supreme Court's decision in Overnight Motor Transportation Co.
v. Missel, 316 U.S. 572 (1942), and that the proposed clarifying
language ``may create an incentive'' for employers ``to require
employees to work long hours.'' 76 FR 18832, 18848-50 (Apr. 5, 2011).
However, since 2011, courts have reached inconsistent holdings based on
a judicially crafted distinction between certain types of bonuses that
the Department has never recognized. As explained below, the Department
has reconsidered the need for a clarification, particularly in light of
the 2011 Final Rule and its interpretation by courts, now finds these
reasons articulated in 2011 to be unpersuasive, and is therefore re-
proposing substantially similar revisions to those initially proposed
in 2008.
Specifically, the Department proposes to add language to Sec.
778.114(a) clarifying that bonuses, premium payments, and other
additional pay of any kind are compatible with the use of the
fluctuating workweek method of compensation. The Department also
proposes to add examples to Sec. 778.114(b) to illustrate the
fluctuating workweek method of calculating overtime where an employee
is paid (1) a nightshift differential and (2) a productivity bonus in
addition to a fixed salary. The Department further proposes minor
revisions to Sec. 778.114(a) and (c) that were not proposed in the
2008 NPRM to improve comprehensibility. Specifically, revised Sec.
778.114(a) would list each of the requirements for using the
fluctuating workweek method, and duplicative text would be removed from
revised Sec. 778.114(c). Finally, the Department proposes to change
the title of the regulation from ``Fixed salary for fluctuating hours''
to ``Fluctuating Workweek Method of Computing Overtime.''
This proposed rule is expected to be an Executive Order (E.O.)
13771 deregulatory action. Details on the estimated reduced burdens and
cost savings of this proposed rule can be found in the rule's economic
analysis and supplemental illustrative analysis in Appendix A.
II. Background
The Department introduced the fluctuating workweek method of
calculating overtime pay in its 1940 Interpretive Bulletin No. 4. See
Interpretative Bulletin No. 4 ] ] 10, 12 (Nov. 1940). In 1942, the U.S.
Supreme Court upheld the fluctuating workweek method in Missel, 316
U.S. at 580. In that case, the Court held that where a nonexempt
employee had received only a fixed weekly salary (with no additional
overtime pay) for working irregular hours that frequently exceeded 40
per week and fluctuated from week to week, the employer was required to
retroactively pay an additional 50 percent of the employee's regular
rate of pay multiplied by the overtime hours worked to satisfy the
FLSA's time and a half overtime pay requirement. Id. at 573-74, 580-
81.\1\ The quotient of the weekly salary divided by the number of hours
actually worked each week, including the overtime hours, determined the
``regular rate at which [the] employee [was] employed'' under the fixed
salary arrangement. Id. at 580.
---------------------------------------------------------------------------
\1\ Half-time, rather than time-and-a-half pay, for overtime is
appropriate where the employee's weekly earnings constitute
compensation for all hours worked that week, including overtime
hours. Such a pay system already compensates the employee for
overtime hours at the regular rate, and so the employee is entitled
under the FLSA to an additional half-time the regular rate for those
hours. See 29 U.S.C. 207(a).
---------------------------------------------------------------------------
In 1968, informed by the Supreme Court's holding in Missel, the
Department issued 29 CFR 778.114, which explains how to perform the
regular rate calculation under the FLSA for salaried employees who work
fluctuating hours. See 29 CFR 778.1, 778.109, 778.114. The Supreme
Court has ``interpreted the [FLSA] statute in a manner that would
`afford the fullest possible scope to agreements' that are designed to
address `the special problems confronting employer and employee in
businesses where the work hours fluctuate from week to week and from
day to day . . . .' '' Hunter v. Sprint Corp., 453 F. Supp. 2d 44, 56-
57 (D.D.C. 2006) (quoting Walling v. A.H. Belo Corp., 316 U.S. 624, 635
(1942)).\2\ Indeed, ``[t]he [fluctuating workweek] method was developed
to permit FLSA-covered employees who work irregular hours to negotiate
a consistent minimum salary with their employers.'' Hunter, 453 F.
Supp. 2d at 61 (emphasis in original).
---------------------------------------------------------------------------
\2\ Note that Belo concerned a different type of flexible pay
agreement, now codified under Section 7(f) of the FLSA, in which an
employee was paid on an hourly basis with a guaranteed weekly sum.
The Department only cites Belo here for the limited purpose of
recognizing the manner in which the Court generally interprets work
arrangements under the FLSA when work hours vary from week to week.
In Hunter, the district court similarly referenced Belo in analyzing
the regular rate, and found notable that the Court decided Belo and
Missel on the same day and that both cases ultimately informed the
promulgation of the fluctuating workweek regulatory scheme. See
Hunter, 453 F. Supp. 2d at 56, 58 (``With the companion decisions of
Missel and Belo as a backdrop, the Department of Labor promulgated
regulations that provide `examples of the proper method of
determining the regular rate of pay in particular instances,' ''
including the fluctuating workweek method.) (quoting Sec. 778.109).
---------------------------------------------------------------------------
Consistent with this manner of interpretation and purpose, the
Department, until 2011, had never explicitly forbidden in rulemaking
the payment of bonuses and premiums beyond the minimum salary to
employees compensated under the fluctuating workweek method. As
explained more fully below, to the contrary, in both a 2008 NPRM and in
a 2009 opinion letter, the Department stated that such bonuses were
consistent with using the fluctuating workweek method. However, in the
Preamble to the 2011 Final Rule, the Department stated a different
position. The Department now seeks to add clarifying language to 29 CFR
778.114 affirming its current position that employers using the
fluctuating workweek method to calculate overtime compensation may pay
bonuses and premiums in addition to the minimum salary.
Early examples of Department guidance and court decisions exemplify
interpretations of the FLSA that ``afford the fullest scope possible''
to fluctuating workweek arrangements. For example, a 1999 Wage and Hour
Division (WHD) opinion letter explained that an employer using the
fluctuating workweek method may pay bonuses for working holidays or
vacations, broadly instructing that ``[w]here all the legal
prerequisites for the use of the fluctuating workweek method of
overtime payment are present, the
[[Page 59592]]
FLSA, in requiring that `not less than' the prescribed premium of 50
percent for overtime hours worked be paid, does not prohibit paying
more.'' \3\ As another example, courts have applied and endorsed the
fluctuating workweek method when employees received additional bonus
payments beyond what was statutorily required. See, e.g., Cash v. Conn
Appliances, Inc., 2 F. Supp. 2d 884, 908 (E.D. Tex. 1997) (applying
fluctuating workweek method where employee received incentive bonuses
in addition to fixed salary); see id. at 893 n.17 (citing Parisi v.
Town of Salem, No. 95-67-JD, 1997 WL 228509, at *3 (D.N.H. Feb. 20,
1997) (``The rules promulgated by the Secretary do not change when base
compensation includes not only a salary but a bonus payment; the bonus
payment is simply included in calculating the regular rate.'')).
---------------------------------------------------------------------------
\3\ WHD Opinion Letter, 1999 WL 1002399, at *2 (May 10, 1999)
(emphasis added).
---------------------------------------------------------------------------
However, in 2003, the First Circuit held that certain types of
additional pay were incompatible with the fluctuating workweek method.
See O'Brien v. Town of Agawam, 350 F.3d 279 (1st Cir. 2003). In
O'Brien, the First Circuit held that police officers' receipt of
``bonus'' pay for working nights and long hours, was contrary to the
fluctuating workweek method. Id. at 288. The O'Brien court reasoned
that an employer using the method must pay a `` `fixed amount as
straight time pay for whatever hours . . . work[ed],' '' and any extra
compensation would violate this `` `fixed amount' '' requirement. Id.
(quoting 29 CFR 778.114(a)).
The Department filed an amicus brief in support of the ultimate
overtime-back-pay result in O'Brien, reasoning that the ``base salary
covered only 1950 hours of work annually'' under the specific officers'
agreement at issue, and therefore, this ``base salary was not intended
to compensate them for an unlimited number of hours,'' as required by
29 CFR 778.114. Brief for the Sec'y of Labor as Amicus Curiae, O'Brien,
350 F.3d 279, 2004 WL 5660200, at *11, 13 (Feb. 20, 2004). In other
words, the Department reasoned that the fluctuating workweek method
could not be used because the officers' fixed salary was intended to
compensate them for a specific--rather than fluctuating--number of
hours each week. Id.\4\ However, the Department's brief did not address
whether bonus pay beyond the ``fixed amount'' required was incompatible
with the fluctuating workweek method.\5\
---------------------------------------------------------------------------
\4\ Id. at *16-18 (citing Valerio v. Putnam Assocs. Inc., 173
F.3d 35, 39 (1st Cir. 1999) (holding that fluctuating workweek
method was inappropriate where an employee was informed that her
daily hours were ``8:30 to whenever,'' she understood that her
salary would compensate her for fluctuating hours, but she
``routinely worked without complaint more than 40 hours per week
without extra pay''); Martin v. Tango's Restaurant, Inc., 969 F.2d
1319, 1324 (1st Cir. 1992) (approving use of fluctuating workweek
method where employee was paid a certain fixed salary each week,
regardless of the number of hours worked)).
\5\ In reflecting on Valerio and Tango's Restaurant, the
Department stated that ``[n]othing in either of those decisions
suggests that 29 CFR 778.114 extends, contrary to its terms, to a
pay system in which an employee, while receiving a fixed salary for
a certain minimum number of hours, is paid more for additional
straight time worked beyond a regular schedule.'' O'Brien Amicus Br.
at *18 (citing Valerio., 173 F.3d at 39; Tango's Restaurant, 969
F.2d at 1324). While the brief did not address the precise issue of
whether bonus pay beyond the ``fixed amount'' required was
incompatible with the fluctuating workweek method, to the extent
that the brief could be read to suggest that this may have been the
Department's position at the time, the Department is making clear
that this is not the Department's current position. The Department
instead seeks to clarify that bonus pay for extra straight time work
is compatible with the fluctuating work week method. See, e.g.,
Black v. Comdial Corp., Civ. A. No. 92-O81-C, 1994 WL 70113, at *2
(W.D. Va. Feb. 15, 1994) (``The provision of [straight time] bonus
pay for hours 45-61 changes neither the salary basis of [an
employee's] pay, nor the applicability of the fluctuating workweek
method of 29 CFR 778.114.'').
---------------------------------------------------------------------------
Some courts followed O'Brien to hold that certain types of bonuses
were incompatible with the fluctuating workweek method,\6\ while others
continued to hold that bonuses were compatible with that method.\7\
These inconsistent decisions appear to have created practical confusion
for employers.
---------------------------------------------------------------------------
\6\ See, e.g., Ayers v. SGS Control Servs., Inc., No. 03 CIV.
9077 RMB, 2007 WL 646326, at *10 (S.D.N.Y. Feb. 27, 2007)
(``Plaintiff who received sea pay or day-off pay did not have
`fixed' weekly straight time pay, in violation of 29 CFR
778.114(a).''); Dooley v. Liberty Mut. Ins. Co., 369 F. Supp. 2d 81,
87 (D. Mass. 2005) (bonus pay arrangement for weekend work violated
requirement that ``the employee must receive a fixed salary that
does not vary with the number of hours worked during the week'')
(internal quotation marks and citation omitted).
\7\ See, e.g., Clements v. Serco, Inc., 530 F.3d 1224, 1230
(10th Cir. 2008) (applying fluctuating workweek method where
employee received recruitment bonus in addition to fixed salary);
Perez v. RadioShack Corp., No. 02 C 7884, 2005 WL 3750320, at *1
(N.D. Ill. Dec. 14, 2005) (applying fluctuating workweek method
where employee received tenure pay, commissions, and other bonuses
in addition to fixed salary).
---------------------------------------------------------------------------
The Department's 2008 NPRM, in an effort to ``eliminate confusion
over the effect of paying bonus supplements and premium payments to
affected employees,'' proposed to add a sentence to the end of Sec.
778.114(a) providing that payment of overtime premiums and other bonus
and non-overtime premium payments will not invalidate the ``fluctuating
workweek'' method of overtime payment, but such payments must be
included in the calculation of the regular rate unless excluded under
section 7(e)(1) through (8) of the FLSA. 73 FR at 43670. The Department
also proposed to add ``an example to Sec. 778.114(b) to illustrate
these principles where an employer pays an employee a nightshift
differential in addition to a fixed salary.'' Id. at 43662; see also
id. at 43670. The proposed clarifying language in the 2008 NPRM
reflected the Department's position that bonus and premium payments are
compatible with the fluctuating workweek method.
On January 16, 2009, WHD reaffirmed this same position when it
issued an opinion letter explaining that ``[r]eceipt of additional
bonus payments does not negate the fact that an employee receives
straight-time compensation through the fixed salary for all hours
worked whether few or many, which is all that is required under Sec.
778.114(a).'' WHD Opinion Letter FLSA2009-24 (Jan. 16, 2009) (withdrawn
Mar. 2, 2009).
On May 5, 2011, the Department issued a Final Rule, which did not
adopt the proposed clarifying language to Sec. 778.114. See 76 FR
18832. Instead, in the Preamble, the Department stated it would leave
the text of Sec. 778.114 unchanged except for minor revisions. The
Department expressly stated that the decision not to implement the
proposed changes would avoid ``expand[ing] the use of [the fluctuating
workweek] method of computing overtime pay beyond the scope of the
current regulation,'' and would ``restore the current rule.'' 76 FR at
18850. The same 2011 Preamble, however, interpreted the ``current
rule'' to mean that bonus and premium payments ``are incompatible with
the fluctuating workweek method of computing overtime under section
778.114.'' 76 FR at 18850.
The 2011 Preamble's reference to the ``current rule'' appears to
have generated further confusion among courts, as the ``record
indicate[d] that in 2008 and 2009, . . . DOL construed the [fluctuating
workweek] regulation to permit bonus payments,'' then ``shifted
course'' in 2011 in a manner ``contrary to its publicly-disseminated
prior position.'' Switzer v. Wachovia Corp., No. CIV.A. H-11-1604, 2012
WL 3685978, at *4 (S.D. Tex. Aug. 24, 2012). For example, one court
stated that the 2011 Preamble ``presents an about-face'' that ``alters
the DOL's interpretation'' so as to prohibit employers from using the
fluctuating workweek method for workers who receive bonuses. Sisson v.
RadioShack Corp., No. 1:12CV958, 2013 WL 945372, at *6 (N.D. Ohio Mar.
11, 2013). Another court presented with identical facts as Sisson
reached an
[[Page 59593]]
opposite conclusion because it interpreted the 2011 Preamble as ``a
decision to maintain the status quo'' that ``does not[ ] disturb the
law permitting employers to use the [fluctuating workweek] method to
calculate the overtime pay of workers who receive performance
bonuses.'' Wills v. RadioShack Corp., 981 F. Supp. 2d 245, 259
(S.D.N.Y. 2013). As another example, a third court declined to give any
weight to the 2011 Preamble because it rested on an ``unconvincing''
interpretation of Missel. Smith v. Frac Tech Servs., LLC, No.
4:09CV00679 JLH, 2011 WL 11528539, at *2 (E.D. Ark. June 15, 2011).
A growing number of courts, since 2011, have developed a dichotomy
between ``productivity-based'' supplemental payments, such as
commissions, and ``hours-based'' supplemental payments, such as night-
shift premiums. Such courts hold that productivity-based supplemental
payments are compatible with the fluctuating workweek method, but not
hours-based supplemental payments. See, e.g., Dacar v. Saybolt, L.P.,
914 F.3d 917, 926 (5th Cir. 2018), as amended on denial of rehearing
(Feb. 1, 2019) (``Time-based bonuses, unlike performance-based
commissions, run afoul of the [fluctuating workweek] regulations'');
Lalli v. Gen. Nutrition Ctrs., Inc., 814 F.3d 1, 10 (1st Cir. 2016)
(``a compensation structure employing a fixed salary still complies
with section 778.114 when it includes additional, variable performance-
based commissions''). However, the Department has never drawn this
distinction, and this distinction is in tension with all of the
Department's prior written guidance and statements on the issue, such
as the 2004 O'Brien amicus brief (declining to support application of
fluctuating workweek method to payment of additional straight-time
hours), the 2008 NPRM and the 2009 opinion letter (permitting bonuses
as compatible with the fluctuating workweek), and even the 2011 Final
Rule (declining to implement the 2008 NPRM and stating that the current
rule prohibits all bonuses as compatible with the fluctuating
workweek).
As a result, the Department is increasingly concerned that it may
be confusing and administratively burdensome for employers to
distinguish between productivity- and hours-based bonuses and premium
payments, particularly because the Department itself does not
distinguish between such types of payment in determining the regular
rate. See 29 CFR 778.208-778.215. The Department is further concerned
that the ``productivity'' versus ``hours'' based distinction fails to
provide adequate guidance to employers because it has not been adopted
by all jurisdictions.\8\ The Department also believes that this
distinction is unhelpful for supplemental pay that does not fall neatly
into either category, such as retention bonuses, safety bonuses, and
referral bonuses.
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\8\ Decisions holding that all bonus and supplemental payments,
including productivity based commissions, are incompatible with the
fluctuating workweek remain good law in some heavily populated
jurisdictions, including the Federal judicial districts for the
Northern District of Ohio and the Middle District of Florida. See
Sisson, 2013 WL 945372, at *2-7; West v. Verizon Servs. Corp., No.
8:08-CV-1325-T-33MAP, 2011 WL 208314, at *11 (M.D. Fla. Jan. 21,
2011) (fluctuating workweek method invalid where employee ``received
various bonus payments and commissions'').
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The divergent views of the Department and courts--and indeed, even
among courts--have created considerable uncertainty for employers
regarding the compatibility of various types of supplemental pay with
the fluctuating workweek method. As such, the need for the Department
to clarify its fluctuating workweek rule is even stronger now than in
2008, when it proposed a substantially similar clarification.
III. Discussion
As an initial matter, the Department is making clear that employers
and courts should not rely on the statement in the 2011 Preamble that
``bonus and premium payments . . . are incompatible with the
fluctuating workweek method of computing overtime under section
778.114.'' 76 FR at 18850. The Department did not modify the regulatory
text in 2011 to align with this statement. Further, the Preamble
affirmatively denied it was making a change by insisting that the
Department was ``restor[ing] the current rule.'' 76 FR at 18850. As the
Supreme Court has explained, ``[w]hen an agency changes its existing
position . . . the agency must at least display awareness that it is
changing position.'' Encino Motorcars, LLC v. Navarro, 136 S Ct. 2117,
2125-26 (2016) (internal quotation marks and citations omitted).
Because, for example, the Switzer court viewed the 2011 Preamble
language as ``shifting course'' in a manner ``contrary'' to its prior
position,\9\ it is worth making clear that the Preamble does not
reflect a change from the Department's position that the 2008 NPRM
sought to clarify.
---------------------------------------------------------------------------
\9\ 2012 WL 3685978, at *4.
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The 2011 Preamble reaffirmed that ``the Department continues to
believe that the payment of bonus and premium payments can be
beneficial for employees.'' 76 FR at 18850. Yet it declined to permit
bonus and premium payments under the fluctuating workweek method
because, in 2011, the Department believed that the receipt of premium
and bonus payments ``would have been inconsistent with the requirement
of a fixed salary payment set forth by the Supreme Court in [Missel].''
76 FR at 18850. However, the 2011 Final Rule did not explain any basis
for the perceived inconsistency, and at least one court has found that
belief to be ``unconvincing'' because ``[n]othing in Missel prohibits
the use of the fluctuating work week method . . . whenever an employer
gives a bonus to an employee.'' Smith, 2011 WL 11528539, at *2.
Upon further review, the Department is now similarly unconvinced of
its 2011 position. The pre-2011 position was not inconsistent with
Missel; Missel did not even address the issue of bonus or incentive
payments beyond the fixed salary, let alone preclude certain types of
payments. The plaintiff in Missel had a fixed weekly salary regardless
of hours worked, and the Court explained how to compute overtime
compensation under those facts. As one court has explained, ``[T]he
message from the Supreme Court in Missel . . . was that the employment
contracts of FLSA-covered workers must guarantee that the regular rate
of compensation in any given week will not fall below the statutory
minimum wage.'' Hunter, 453 F. Supp. 2d at 57.\10\
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\10\ See also Smith, 2011 WL 11528539, at *2 (``Nothing in
Missel prohibits the use of the fluctuating work week method for
calculating damages whenever an employer gives a bonus to an
employee. A bonus given wholly at the discretion of the employer
cannot be said to affect the mutual understanding between the
employer and the employee that the employee's fixed salary comprises
his entire compensation.'').
---------------------------------------------------------------------------
The 2011 Final Rule also reflected the Department's concern, at the
time, that permitting employers that offer bonus and premium payments
to use the fluctuating workweek method of overtime payment could
``shift a large portion of employees' compensation into bonus and
premium payments, potentially resulting in wide disparities in
employees' weekly pay depending on the particular hours worked.'' 76 FR
at 18850. Upon reconsideration, the Department is no longer concerned
that employers would shift large portions of pay into bonus and premium
payments and is not aware of any evidence of problematic pay shifting.
To the contrary, the Bureau of Labor Statistics
[[Page 59594]]
finds that in situations where employers are permitted to pay bonuses
and premiums, such supplemental pay constitutes a relatively small
portion of employees' overall compensation--no more than 5% for any
occupation.\11\ Accordingly, the Department finds no reason to believe
that permitting employers using the fluctuating workweek method to pay
bonuses would result in large-scale pay shifting. In fact, the
Department now believes the proposal would encourage employers to pay
these bonuses, premiums, and additional pay to salaried nonexempt
employees who work fluctuating hours, and the Department does not
believe that employers will shift large portions of salaries into such
supplemental payments. Moreover, the Department's earlier concern that
permitting employers who offer bonus and premium payments to use the
fluctuating workweek would permit employers to pay a reduced fixed
salary would be addressed by retaining the requirement that the fixed
salary amount must be sufficient to provide compensation at a rate not
less than the minimum wage.
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\11\ Supplemental pay's portion of total compensation for any
occupation ranges from 0.3% (teachers) to 4.8% (production). See
Bureau of Labor Statistics, Employer Costs for Employee
Compensation, March 2019, Table 2, https://www.bls.gov/news.release/pdf/ecec.pdf.
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Finally, the 2011 Final Rule was based on the Department's view
that ``the courts have not been unduly challenged in applying the
current regulation to additional bonus and premium payments.'' 76 FR at
18850. However, as discussed in the background section, courts applying
the language from the 2011 Preamble have reached inconsistent holdings,
even in cases concerning the same types of bonus and premium payments.
Compare Wills, 981 F. Supp. 2d at 256 (holding that RadioShack's
payment of quarterly and annual performance based bonuses is compatible
with the fluctuating workweek method) with Sisson, 2013 WL 945372, at
*1 (holding that RadioShack's payment of quarterly and annual
performance based bonuses is not compatible with the fluctuating
workweek method). Moreover, a growing number of courts, only through
the lens of a wholly judicially developed distinction, now interpret
the current regulation, as interpreted in the 2011 Preamble, to
distinguish between productivity- and hours-based bonus and premium
payments, even though the Department has never drawn that distinction.
See Dacar, 914 F.3d at 926; Lalli, 814 F.3d at 10. Inconsistent
decisions and the development of case law not reflecting any previous
position of the Department convinces the Department that courts have
been unduly challenged in applying the current regulation.
Accordingly, the Department is proposing to clarify the current
regulation to allow employers who offer both productivity and hours
based bonuses and premium payments to use the fluctuating workweek
method of compensation; the proposed consistent treatment of all
bonuses and premium payments that are included in the regular rate will
eliminate any such confusion for employers. To further eliminate
confusion, the Department is proposing to clarify that additional pay
of any kind on top of the fixed salary is compatible with the
fluctuating workweek method. The proposed inclusion of ``additional pay
of any kind'' is intended to prevent disagreements over whether a
payment is a ``bonus'' or ``premium.'' Examples of ``additional pay of
any kind'' may include commissions, compensation falling within the
FLSA's section 3(m), supplemental hourly or lump sum payments, and
incentive-related sums.
In summary, the Department no longer finds persuasive the 2011
Final Rule's rationale for stating in the Preamble that bonus and
premium payments are incompatible with the fluctuating workweek method.
Paying employees bonus or premium payments for certain activities, such
as working undesirable hours, is common \12\ and, as the 2011 Final
Rule recognized, ``can be beneficial for employees.'' 76 FR at 18850.
The Department therefore proposes to clarify that all bonus and premium
payments are compatible with the fluctuating workweek method, thereby
eliminating any disincentives for employers to make such payments.
Thus, employers that would meet the conditions of Sec. 778.114 would
be able to use the fluctuating workweek method when paying nonexempt
employees bonuses and premiums as long as they include such payments in
the calculation of the regular rate, unless they may be otherwise
excluded under FLSA sections 7(e)(1)-(8).
---------------------------------------------------------------------------
\12\ The Bureau of Labor Statistics estimated in 2009 that 42.35
percent of workers receive bonuses and 19.75 percent receive shift
differentials. Bureau of Labor Statistics, A Look at Supplemental
Pay: Overtime Pay, Bonuses, and Shift Differentials, Table 2, Mar.
25, 2009, https://www.bls.gov/opub/mlr/cwc/a-look-at-supplemental-pay-overtime-pay-bonuses-and-shift-differentials.pdf.
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IV. Proposed Regulatory Changes
The Department proposes to revise its existing fluctuating workweek
regulation at Sec. 778.114 to address these issues. First, the
proposed rulemaking clarifies the regulation to expressly state that
any bonuses, premium payments, or other additional pay of any kind are
compatible with the fluctuating workweek method of compensation, and
that such payments must be included in the calculation of the regular
rate unless they are excludable under FLSA sections 7(e)(1)-(8).
Second, the proposal adds examples to Sec. 778.114(b) to illustrate
these principles where an employer pays an employee, in addition to a
fixed salary, (1) a nightshift differential and (2) a productivity
bonus. Third, the proposed regulation revises the rule in a minor way
to make it easier to read and understand. Revised Sec. 778.114(a)
would list each of the requirements for using the fluctuating workweek
method, and duplicative text would be removed from revised Sec.
778.114(c). Finally, the Department proposes to change the title of the
regulation from ``Fixed salary for fluctuating hours'' to ``Fluctuating
Workweek Method of Computing Overtime'' to better reflect the purpose
of the subsection and to improve the ability of employers to locate the
applicable rules.
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections and their
practical utility, the impact of paperwork and other information
collection burdens imposed on the public, and how to minimize those
burdens. This NPRM does not require a collection of information subject
to approval by the Office of Management and Budget (OMB) under the PRA,
or affect any existing collections of information. The Department
welcomes comments on this determination.
VI. Executive Order 12866; Regulatory Planning and Review; and
Executive Order 13563, Improved Regulation and Regulatory Review; and
Executive Order 13771, Reducing Regulation and Controlling Regulatory
Costs
A. Introduction
Under E.O. 12866, OMB's Office of Information and Regulatory
Affairs (OIRA) determines whether a regulatory action is significant
and therefore, subject to the requirements of the E.O. and OMB review.
Section 3(f) of E.O. 12866 defines a ``significant regulatory action''
as an action that is likely to result in a rule that: (1) Has an annual
effect on the economy of $100 million
[[Page 59595]]
or more, or adversely affects in a material way a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or state, local, or tribal governments or communities
(also referred to as economically significant); (2) creates serious
inconsistency or otherwise interferes with an action taken or planned
by another agency; (3) materially alters the budgetary impacts of
entitlement grants, user fees, or loan programs, or the rights and
obligations of recipients thereof; or (4) raises novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the E.O. As described below, this proposed
rule is not economically significant. The Department has prepared a
Preliminary Regulatory Impact Analysis (PRIA) in connection with this
NPRM, as required under section 6(a)(3) of Executive Order 12866, and
OMB has reviewed the rule.
Executive Order 13563 directs agencies to propose or adopt a
regulation only upon a reasoned determination that its benefits justify
its costs; the regulation is tailored to impose the least burden on
society, consistent with achieving the regulatory objectives; and in
choosing among alternative regulatory approaches, the agency has
selected those approaches that maximize net benefits. Executive Order
13563 recognizes that some benefits are difficult to quantify and
provides that, where appropriate and permitted by law, agencies may
consider and discuss qualitatively values that are difficult or
impossible to quantify, including equity, human dignity, fairness, and
distributive impacts.
B. Overview of the Proposed Rule and Potential Affected Employees
This rule, if finalized as proposed, clarifies that bonus, premium,
and any other supplemental payments are compatible with the fluctuating
workweek method of calculating overtime pay. Current legal uncertainty
regarding the compatibility of supplemental pay with the fluctuating
workweek method deters employers from making such payments to employees
paid under the fluctuating workweek method. The proposed rule would
eliminate this deterrent effect, and thereby permit employers who
compensate their employees under the fluctuating workweek method to pay
employees a wider range of supplemental pay.
If the proposed rule were finalized, it would be clear to employers
that employees paid under the fluctuating workweek method are eligible
for all supplemental payments. The Department relied on data from the
Current Population Survey (CPS) to estimate the total pool of employees
who could possibly be affected.\13\ In particular, the Department
focused on full-time, nonexempt workers who report earning a fixed
salary. The Department's regulations recognize only two ways that an
FLSA-covered employer may pay a nonexempt employee a fixed salary.\14\
First, under 29 CFR 778.113, the employer may pay a salary for a
specific number of hours each week. For the purpose of this analysis,
the Department assumes that a nonexempt worker paid under 29 CFR
778.113 would likely report having a ``usual'' number of hours worked
in the CPS. Second, under 29 CFR 778.114, the employer pays a salary
for whatever number of hours are worked--this is the fluctuating
workweek method. For the purpose of this analysis, the Department
assumes that a nonexempt worker paid under the fluctuating workweek
method generally would not report having a ``usual'' number of hours
worked each week, but rather would report working hours that ``vary''
from week to week. The Department estimated the number of such workers
who could be compensated using the fluctuating workweek method by
counting CPS respondents who: (1) Are employed at a FLSA-covered
establishment; (2) are nonexempt from FLSA overtime obligations; (3)
work full time at a single job; (4) reside in the District of Columbia
or a state that permits the use of the fluctuating workweek method;
\15\ (5) are paid on a salary basis; and (6) work hours that ``vary''
from week to week. The Department calculated that 721,656 workers
satisfy all these criteria based on 2018 CPS data. These workers are
generally eligible to be paid under the fluctuating workweek method,
but the Department lacks specific data as to how many are actually paid
that way.
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\13\ The CPS is a monthly survey of about 60,000 households that
is jointly sponsored by the U.S. Census Bureau and BLS. Households
are surveyed for four months, excluded from the survey for eight
months, surveyed for an additional four months, and then permanently
dropped from the sample. During the last month of each rotation in
the sample (month 4 and month 16), employed respondents complete a
supplementary questionnaire in addition to the regular survey.
\14\ Under either method of salary payment the employee is
entitled to overtime premium pay of at least one and one-half times
the regular rate. However, the method of calculating the overtime
due differs because of the difference in what the salary payment is
intended to cover.
\15\ Currently four states generally prohibit the use of the
fluctuating workweek method under state law: Alaska, California,
Pennsylvania, and New Mexico. See 8 Alaska Admin. Code section
15.100(d)(3); Cal. Labor Code section 515(d); Chevalier v. Gen.
Nutrition Ctrs., Inc., 2017 PA Super 407, 177 A.3d 280 (Pa. Super.
Ct. 2017), appeal granted, 189 A.3d 386 (Pa. 2018); N.M. Dep't of
Labor v. Echostar Commc'ns Corp., 134 P.3d 780, 783 (N.M. Ct. App.
2006).
---------------------------------------------------------------------------
Using this group of workers to estimate the fluctuating workweek
population may overstate the number of employees paid under the
fluctuating workweek method because not all nonexempt and full-time CPS
respondents who report earning a salary for working hours that ``vary''
from week to week are paid under the fluctuating workweek method. Some
such respondents may actually be paid a salary for a specific number of
hours under Sec. 778.113, despite working fluctuating hours, and so
classifying them as employees paid under the fluctuating workweek
method would result in over-counting. Such an estimate may also
undercount the number of employees paid under the fluctuating workweek
method because the Department's methodology excludes all CPS
respondents with ``usual'' hours from counting as an employee paid
under the fluctuating workweek method. But an employee who works a
``usual'' number of hours may still be paid under the fluctuating
workweek method if there is some weekly variation in the number of
hours worked. Indeed, relying on 2018 CPS data, the Department
estimates that an additional 675,130 nonexempt, full-time, and salaried
workers report having a ``usual'' number of hours but routinely work
hours that differ from that ``usual'' number. These additional workers
are also eligible to be paid under the fluctuating workweek method, but
the Department lacks data as to how many are actually paid that way.
Altogether, the total number of workers the Department estimates
who may currently be paid under the fluctuating workweek method is
about 1.4 million (721,656 workers who report their hours vary plus
675,130 workers who report having a ``usual'' number of hours but who
work hours that differ from that number). For the purpose of this PRIA,
the Department lacks data to determine how prevalent this compensation
method actually is. Without data on the precise number, and for
purposes of this illustrative analysis, the Department assumes that
half of these workers are currently being paid using the fluctuating
workweek method, meaning 698,393 workers could become eligible for a
wider range of supplemental payments if the proposed rule were
finalized.
The actual number may be higher or lower. The Department invites
comment on this illustrative analysis, including any relevant data or
information that may further inform the estimated
[[Page 59596]]
number of employees paid under the fluctuating workweek method. The
Department especially welcomes information from employers, employer
organizations, employee organizations, or payroll processors who may
have unique insight into the number of employees paid under this
method.
The proposed clarification may also encourage some employers to
switch their employees who are currently paid on an hourly basis to the
fluctuating workweek method. The Department believes legal confusion
over the last fifteen years, exacerbated by the 2011 Final Rule, likely
caused some employers to stop using the fluctuating workweek method to
compensate employees, and instead pay them on an hourly basis.\16\ The
Department applied the same estimation methodology it used to
approximate the current number of employees paid under the fluctuating
workweek method to approximate the number of such employees in previous
years--going back to 2004--using CPS data from those years.\17\
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\16\ The Department believes that few employers would have
switched employees from the fluctuating workweek method to a fixed
salary for a specific number of hours under Sec. 778.113 because
those employees would have, by definition, worked hours that varied
from week to week.
\17\ The Department lacks the required CPS data from before
2004.
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The estimated percentage of U.S. workers compensated under the
fluctuating workweek method has declined from 0.83 percent in 2004 to
0.45 percent in 2018. At least some portion of this decline likely may
be attributed to the legal uncertainty discussed in greater detail
above, but some may be attributable to unrelated causes.\18\ For
example, the Department recognizes that the total number of nonexempt
FLSA full-time salaried workers decreased both in total number and also
as a share of the employee population over this same period.\19\ The
Department further assumes that some employers who switched their
employees away from the fluctuating workweek method due to legal
uncertainty would be likely to switch those employees back to the
fluctuating workweek. However, the Department lacks sufficient
information to estimate the precise number of ``switchers'' due to
elimination of legal uncertainty. The Department invites commenters to
provide data or information on the number of employees who could have
their compensation methods switched, or on the impact of this switch on
their hours, roles, or responsibilities. The Department especially
welcomes information from employers, employer organizations, employee
organizations, or payroll processors who may have unique insight into
the number of employees paid under this method.
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\18\ Compare, e.g., Wills, 981 F. Supp. 2d at 256, with Sisson,
2013 WL 945372, at *1.
\19\ From approximately 27.0 million in 2004 to 19.2 million in
2018.
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C. Costs
The Department believes that the only likely costs attributable to
this rulemaking are regulatory familiarization costs, which represent
direct costs to businesses associated with reviewing changes to
regulatory requirements caused by a final rule. Familiarization costs
do not include recurring compliance costs that regulated entities would
incur with or without a rulemaking. The Department calculated
regulatory familiarization costs by multiplying the estimated number of
establishments likely to review the proposed rule by the estimated time
to review the rule and the average hourly compensation of a
Compensation, Benefits, and Job Analysis Specialist.
To calculate costs associated with reviewing the rule, the
Department first estimated the number of establishments likely to
review the proposed rule, when finalized. The most recent data on
private sector establishments at the time this NPRM was drafted are
from the 2016 Statistics of U.S. Businesses (SUSB), which reports 7.8
million establishments with paid employees.\20\
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\20\ U.S. Census Bureau, 2016 Statistics of U.S. Businesses
(SUSB) Annual Data Tables by Establishment Industry, https://www.census.gov/data/tables/2016/econ/susb/2016-susb-annual.html.
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The Department believes that each of the 7.8 million establishments
will review the rule. All employers will give the proposed rule a
cursory review, lasting no more than five minutes, to determine if they
need to comply with the rule. Most employers will not spend any more
time on the rule, because they do not have any employees compensated
under the fluctuating workweek method. Additionally, the Department
believes that employers currently using or interested in using the
fluctuating workweek method to pay workers will give the proposed rule
a more detailed review. The Department estimates that 698,393 workers
are paid under the fluctuating workweek method, based on the 2018 CPS
data. The Department uses this number to help estimate the number of
establishments who will spend more time reviewing the rule. As
previously discussed, the Department lacks data to identify the
specific employers or employees who may switch to the fluctuating
workweek given the new legal clarity, but estimates, for purposes of
this cost analysis, that employers will switch additional employees to
being paid under the fluctuating workweek method. This entire pool is
approximately 0.45 percent of the 155.8 million workers in the United
States. By assuming these workers are proportionally distributed among
the 7.8 million establishments, the Department estimates approximately
35,100 establishments pay or are interested in paying employees using
the fluctuating workweek method, and therefore, would review the
proposed rule in greater detail. Because the proposed rule is a
clarification that simplifies the interaction between the fluctuating
workweek method and supplemental payments, the Department estimates it
would take an average of 30 additional minutes (on top of the five
minutes spent on an initial review) for each of these employers to
review and understand the rule. Some might spend more than 30
additional minutes reviewing the proposed rule, while others might take
less time; the Department believes that 30 minutes is a reasonable
estimated average for all interested employers in light of the rule's
simplicity.
Next, the Department estimated the hourly compensation of the
employees who would likely review the proposed rule. The Department
assumes that a Compensation, Benefits, and Job Analysis Specialist
(Standard Occupation Classification 13-1141), or an employee of similar
status and comparable pay, would review the rule at each establishment.
The median hourly wage of a Compensation, Benefits, and Job Analysis
Specialist is $30.29.\21\ The Department adjusted this base wage rate
to reflect fringe benefits such as health insurance and retirement
benefits, as well as overhead costs such as rent, utilities, and office
equipment. The Department used a fringe benefits rate of 46 percent of
the base rate \22\ and an overhead rate of 17 percent of the base rate,
resulting in a fully loaded hourly compensation rate for Compensation,
Benefits, and Job Analysis Specialists of $49.37 = ($30.29 + ($30.29 x
46%) + ($30.29 x 17%)).
---------------------------------------------------------------------------
\21\ Bureau of Labor Statistics, May 2018 National Occupational
Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm.
\22\ The benefits-earnings ratio is derived from BLS's Employer
Costs for Employee Compensation data using variables
CMU1020000000000D and CMU1030000000000D.
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The Department estimates one-time regulatory familiarization costs
in Year 1 of $32.8 million (= 35,100 establishments x 0.5 hours of
review
[[Page 59597]]
time x $49.37 per hour + 7.8 million establishments x 0.083 hours of
review time x $49.37 per hour), which amounts to a 10-year annualized
cost of $3.73 million at a discount rate of 3 percent or $4.36 million
at a discount rate of 7 percent. This proposed rule would not impose
any new requirements on employers or require any affirmative measures
for regulated entities to come into compliance; therefore, there are no
other costs attributable to this proposed rule. The Department
acknowledges that employers who do switch to the fluctuating workweek
method may encounter adjustment costs as they make changes to their
payroll systems. These costs were not captured here; however, because
employers are not required to change their payment method (i.e., their
choice to switch is voluntary), and the Department assumes employers
will make economically rational decisions, then such costs would
reasonably be expected to be less than employers' combined cost savings
and salary reductions. The Department invites comment on this analysis,
including any relevant data or information that may further inform this
cost estimate.
D. Cost Savings
The Department believes that this proposed rule could lead to three
categories of potential cost savings: (1) The opportunity costs of
previously forgone activities; (2) reduced management costs for non-
hourly employees; and (3) reduced legal costs for employers. The
Department uses the assumptions previously discussed in this PRIA to
develop illustrative estimated cost savings. Based on these estimates,
the Department believes total cost savings are likely to exceed
regulatory familiarization costs.
First, the proposed rule would eliminate some of the opportunity
costs in lost productivity resulting from employers' current inability
to offer supplemental incentive pay to employees compensated under the
fluctuating workweek method.\23\ Legal uncertainty regarding the
compatibility of such pay with the fluctuating workweek method prevents
employers and employees from entering into certain mutually beneficial
exchanges. For instance, an employer using the fluctuating workweek
method could not offer supplemental incentive pay in exchange for
performing undesirable duties. See Dacar, 914 F.3d at 926 (extra pay
for ``offshore'' inspections invalidates fluctuating workweek method).
The prohibition against such beneficial exchanges imposes economic
costs, and the proposed rule, if finalized, would eliminate such costs.
---------------------------------------------------------------------------
\23\ ``[C]ost savings should include the full opportunity costs
of the previously forgone activities.'' Office of Management and
Budget, ``Guidance Implementing Executive Order 13771, Titled
`Reducing Regulation and Controlling Regulatory Costs,' '' Apr. 5,
2017, https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf. Some economists refer to this amount
as deadweight loss or ``the sum of consumer and producer surplus.''
Id.
---------------------------------------------------------------------------
The Department evaluates the potential scope of opportunity costs
imposed by current legal uncertainty as the economic value of
supplemental incentive pay prevented by current legal uncertainty. The
Department assumes that employers currently follow the holdings of an
increasing number of courts on the compatibility between supplemental
payments and the fluctuating workweek method. These courts have held
that productivity based payments, such as commissions, are compatible
with the fluctuating workweek method. See Lalli, 814 F.3d at 8. The
Department therefore assumes employers are not currently deterred from
paying productivity based bonuses and premiums to employees under the
fluctuating workweek method.\24\ On the other hand, courts have held,
and the 2011 Preamble may have led employers to believe, that shift
differentials and hours-based payments--such as payments for holiday
hours and hours spent working offshore--are not compatible with the
fluctuating workweek method. See Dacar, 914 F.3d at 926. The Department
believes that employers are currently deterred from making these types
of payments to employees paid under the fluctuating workweek method.
Finally, the Department believes legal uncertainty further deters
employers from making supplemental payments that are neither
productivity-based nor hours-based. This includes, for example,
retention bonuses, referral bonuses, and safety bonuses that the Bureau
of Labor Statistics categorize as ``nonproduction bonuses.'' \25\
---------------------------------------------------------------------------
\24\ The Department understands that this assumption may not
perfectly reflect reality because many employers using the
fluctuating workweek method may presently be deterred from paying
production based bonuses and premiums, especially outside of
jurisdictions in which such supplemental pay have been expressly
held to be compatible with the fluctuating workweek method. By
assuming all employers are paying production bonuses despite this
concern, the Department's illustrative estimate may be understating
the economic cost of current legal uncertainty. The Department
welcomes comments providing data or information regarding whether
employers using the fluctuating workweek are currently paying
production based bonuses and premiums, such as commissions.
\25\ Bureau of Labor Statistics, Fact Sheet for the June 2000
Employment Cost Index Release (2000), at 1, https://www.bls.gov/ncs/ect/sp/ecrp0003.pdf. As the name implies, nonproduction bonuses do
not include productivity based pay, such as commissions, that courts
generally find to be compatible with the fluctuating workweek
method.
---------------------------------------------------------------------------
The Department lacks sufficient data to predict the precise
deadweight loss attributable to the present legal uncertainty including
the economic value of work that fluctuating workweek employees do not
perform because their employers cannot provide certain supplemental
pay. However, after the rule change, if 70,000 workers who presently
are compensated under the fluctuating workweek method--i.e., one-tenth
of the Department's estimate of 698,393--receive supplemental pay equal
to approximately one-third the national average shift differential and
nonproduction bonuses for work not presently performed, the full annual
opportunity cost of lost productivity that the proposed rule would
eliminate could exceed $60 million.\26\ Appendix A contains a detailed
illustrative analysis regarding possible ranges of potential
opportunity cost eliminated and the critical variables upon which these
estimates depend.
---------------------------------------------------------------------------
\26\ BLS estimates that average hourly shift differential and
nonproduction bonuses are 3.4% of hourly pay and the 698,393 workers
that the Department estimates are paid under the fluctuating
workweek method earn an average annual salary of $49,282.
---------------------------------------------------------------------------
Ultimately, the Department lacks data to precisely measure the
extent of overstating or understating its estimate of opportunity costs
eliminated from the proposed rule. The Department welcomes comments
providing data or information regarding the magnitude of possible
opportunity costs avoided by this proposed rule, which may help the
Department further quantify these effects in a Final Rule analysis. The
Department especially welcomes information from employers, employer
organizations, employee organizations, or payroll processors who may
have unique insight into employees paid under the fluctuating workweek
method.
Second, the proposed rule would reduce management costs for any
employers that switch employees from hourly pay to the fluctuating
workweek method. As explained above, the Department believes legal
uncertainty caused some employers to stop paying employees using the
fluctuating workweek method, and instead to pay them on an hourly
basis. Since overtime pay premiums for hourly employees are constant
(i.e., their regular rate does not decrease as more overtime hours are
worked), these employers may incur increased managerial costs because
they may spend more time developing work
[[Page 59598]]
schedules and closely monitoring an employee's hours to minimize or
avoid overtime pay. For example, the manager of an hourly worker may
have to assess whether the marginal benefit of scheduling the worker
for more than 40 hours exceeds the marginal cost of paying the overtime
based on the higher hourly rate. But such assessment is less necessary
for an employee paid under the fluctuating workweek method because the
employee's regular rate decreases with each additional overtime hour,
reducing the overtime premium as a share of compensation.
There was little precedent or data to aid in evaluating these
managerial costs. With the exception of the 2016 and 2019 overtime
rulemaking efforts, the Department has not estimated managerial costs
of avoiding overtime pay. See 81 FR 32391, 32477 (May 23, 2016); 84 FR
10900, 10932 (Mar. 29, 2019). Nor has the Department found such
estimates after reviewing the literature. The Department therefore
refers to the methodology used in the 2019 overtime rulemaking to
produce a qualitative analysis of potential additional cost savings.
Under the overtime rulemaking methodology, the Department assumed a
manager spends ten minutes per week scheduling and monitoring a newly
exempt employee to avoid or minimize overtime pay. And employers may be
able to avoid at least some of this effort if the employee were instead
paid under the fluctuating workweek method because the marginal cost of
paying overtime would be lower. While, the Department does not estimate
the precise number of hourly workers who would switch from hourly pay
to the fluctuating workweek method if the proposed rule were finalized,
the Department believes that management costs may be reduced for every
worker who is switched because their managers may spend less time
managing their schedules. If, hypothetically, 150,000 workers were
switched, employers might reduce their annual managerial costs by over
$ 66 million.\27\
---------------------------------------------------------------------------
\27\ This illustrative analysis assumes: Ten minutes per week
per worker, fifty-two weeks per year, multiplied by a hypothetical
number of new employees paid under the fluctuating workweek method,
multiplied by the full-loaded median hourly wage for a manager
($31.18 + $31.18(0.46) + $31.18(0.17) = $50.92). This wage is
calculated as the median hourly wage in the pooled 2018/19 CPS MORG
data for workers in management occupations (excluding chief
executives).
---------------------------------------------------------------------------
The Department welcomes data or information regarding the number of
employees who could have their compensation method switched, how
employers would manage their hours after switching, or other relevant
factors that would help the Department further quantify cost savings.
The Department especially welcomes information from employers, employer
organizations, or payroll processors who may have unique insight into
employees paid under the fluctuating workweek method.
Third, the clarifying language and updated examples included in
this NPRM may reduce the amount of time employers spend attempting to
understand their obligations under the law, after an initial one-time
rule familiarization. For example, employers interested in offering
supplemental payments to employees compensated under the fluctuating
workweek method would know immediately from the language proposed for
inclusion in Sec. 778.114 that such payments will be compatible with
the fluctuating workweek method, thereby obviating further legal
research and analysis on the issue. The Department does not have data
to estimate the precise amount of cost savings attributable to reduced
need for legal research and analysis, and instead provides an example
to illustrate the potential for such savings.
If the additional legal clarity reduces the annual amount of legal
review by just one hour for each employer that pays or is interested in
paying employees using the fluctuating workweek method, the Department
calculates potential cost savings of up to $4.7 million. The Department
obtained this illustrative estimate by first calculating the hourly
cost of a lawyer (Standard Occupation Classification 23-1011). The
median wage of a lawyer is $58.13,\28\ and the Department adjusted this
to $94.75 per hour to account for fringe benefits and overhead.\29\ The
fully loaded hourly compensation rate of $94.75 is then multiplied by
the 35,100 establishments that the Department estimates pay or may be
interested in paying employees using the fluctuating workweek method,
resulting in a product of $ 3.3 million per year.\30\ As noted above,
this figure is an illustrative example of potential annual cost savings
due to reducing legal-review burdens, and the Department welcomes
comments providing data or information on this topic so that the
Department accurately quantify these effects in a Final Rule analysis.
---------------------------------------------------------------------------
\28\ Bureau of Labor Statistics, May 2018 National Occupational
Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm.
\29\ The Department used a fringe benefits rate of 46 percent of
the base rate and an overhead rate of 17 percent of the base rate,
resulting in a fully loaded hourly compensation rate of $94.75 =
($58.13 + ($58.13 x 0.46) + ($58.13 x 0.17)).
\30\ This number is discussed in greater detail in the Costs
section, above.
---------------------------------------------------------------------------
Even though the Department cannot quantify the precise amount of
total cost savings, it expects cost savings to outweigh regulatory
familiarization costs. Unlike one-time familiarization costs, the
potential cost savings described in this section would continue into
the future, saving employers valuable time and resources. This proposal
also offers increased flexibility to employers in the way that they
compensate their employees. However, the Department is unable to
precisely quantify cost savings and other potential effects of the
proposed rule due to a lack of data. The Department welcomes comments
providing data or information regarding possible cost savings
attributable to this proposed rule, which may help the Department
further quantify these effects in a Final Rule analysis. The Department
especially welcomes information from employers, employer organizations,
employee organizations, or payroll processors who may have unique
insight into employees paid under the fluctuating workweek method.
E. Transfers
Transfer payments occur when income is redistributed from one party
to another. The Department believes the proposed rule, if finalized,
may cause transfer payments to flow from employers to employees and may
also cause transfer payments to flow from employees to employers. The
incidence, magnitude, and ultimate beneficiaries of such transfers is
unknown.
The Department lacks data to estimate the precise amount and
composition of the supplemental incentive pay that employers may now
offer, the extent to which employers may restructure compensation
packages, the method by which employers who switch employees to a
fluctuating workweek may allocate additional compensation, and the
allocation of economic gains between employees and employers. The
Department welcomes comments providing data or information regarding
how employers will structure employment compensation following this
rulemaking, as well as how employers may change employees' hours or
responsibilities. The Department especially welcomes information from
employers, employer organizations, employee organizations, employees,
or payroll processors who may have unique insight into employees paid
under the fluctuating workweek method and the management practices
[[Page 59599]]
employed by companies using the fluctuating workweek method.
F. Benefits
The Department believes the proposed clarification would reduce
avoidable disputes and litigation regarding the compatibility between
supplemental pay and the fluctuating workweek method. As noted above,
there is no uniform consensus among Federal courts as to whether and
what types of supplemental pay is permitted. The Department believes
this uncertain legal environment generates a substantial amount of
avoidable disputes and litigation. The proposed rule would provide a
simple standard that permits all supplemental pay under the fluctuating
workweek method, and therefore should reduce unnecessary disputes and
litigation.\31\ The Department lacks data to quantify this benefit, and
welcomes data and information on the amount of unnecessary disputes and
litigation that would be avoided if the proposed rule were finalized.
The Department especially welcomes information from employers, employer
organizations, or payroll processors who may have unique insight into
employees paid under the fluctuating workweek method.
---------------------------------------------------------------------------
\31\ The costs of such disputes and litigation are not
insignificant, but are not estimated here nor included in the
projected regulatory cost savings.
---------------------------------------------------------------------------
VII. Regulatory Flexibility Analysis
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
as amended by the Small Business Regulatory Enforcement Fairness Act of
1996, Public Law 104-121 (March 29, 1996), requires Federal agencies
engaged in rulemaking to consider the impact of their proposals on
small entities, consider alternatives to minimize that impact, and
solicit public comment on their analyses. The RFA requires the
assessment of the impact of a regulation on a wide range of small
entities, including small businesses, not-for-profit organizations, and
small governmental jurisdictions. Agencies must perform a review to
determine whether a proposed or final rule would have a significant
economic impact on a substantial number of small entities. 5 U.S.C. 603
and 604.
This proposed rule would not impose any new requirements on
employers or require any affirmative measures for regulated entities to
come into compliance. Therefore, there are no other costs attributable
to this deregulatory proposed rule other than regulatory
familiarization costs. As discussed above, the Department calculated
the familiarization costs for both the estimated 7.8 million private
establishments in the United States and for the estimated 50,064
establishments that pay or are interested in paying employees using the
fluctuating workweek method. The Department estimated the one-time
familiarization cost for each of the 7.8 million establishments--which
would give the proposed rule a cursory review--is $4.11. And the one-
time familiarization cost for each of the 35,100 establishments that
employ or are interested in employing employees paid under the
fluctuating workweek method--which would closely review the proposed
rule--is $24.69. Estimated familiarization costs would be trivial for
small business entities, and would be well below one percent of their
gross annual revenues, which is typically at least $100,000 per year
for the smallest businesses.
The Department believes that this proposed rule would achieve long-
term cost savings that outweigh initial regulatory familiarization
costs. For example, the Department believes that clarifying the
confusing fluctuating workweek regulation and adding updated examples
should reduce compliance costs and litigation risks that small business
entities would otherwise continue to bear. The proposed rule would also
reduce administrative costs of small businesses that respond by
switching hourly employees to the fluctuating workweek method. The
proposed rule further enables a small business to offer employees paid
under the fluctuating workweek method supplemental incentive pay in
exchange for certain productive behavior, such as working nightshifts
or performing undesirable duties. The business would offer such
supplemental pay only if the benefits of the incentivized behavior
exceed the cost of payments. Because the vast majority of businesses,
including small businesses, do not pay workers using the fluctuating
workweek method,\32\ the Department believes such benefits will be
limited to few small businesses. Based on this determination, the
Department certifies that the proposed rule would not have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\32\ The Department of Labor estimates that only 0.45% of U.S.
workers are compensated using fluctuating workweek method.
---------------------------------------------------------------------------
VIII. Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1532,
requires that agencies prepare a written statement, which includes an
assessment of anticipated costs and benefits, before proposing any
Federal mandate that may result in excess of $100 million (adjusted
annually for inflation) in expenditures in any one year by state,
local, and tribal governments in the aggregate, or by the private
sector. While this rulemaking would affect employers in the private
sector, it is not expected to result in expenditures greater than $100
million in any one year. Please see Section VI for an assessment of
anticipated costs and benefits to the private sector.
IX. Executive Order 13132, Federalism
The Department has reviewed this proposed rule in accordance with
Executive Order 13132 regarding federalism and determined that it does
not have federalism implications. The proposed rule would not have
substantial direct effects on the States, on the relationship between
the national Government and the States, or on the distribution of power
and responsibilities among the various levels of government.
X. Executive Order 13175, Indian Tribal Governments
This proposed rule would not have substantial direct effects on one
or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.
Appendix A
This appendix presents the Department's illustrative analysis of
the opportunity cost of work that is not performed because employers
are not permitted to provide certain types of supplemental incentive
pay to fluctuating workweek employees. The proposed rule would reduce
such opportunity costs. What follows is discussion of two approaches to
estimating these effects.
I. Method One: Using Supplemental Pay Data
The Department's first methodology consists of three steps. First,
the Department estimates the amount of additional supplemental pay that
the average fluctuating workweek employee could receive if employers
believed all supplemental payments were compatible with the fluctuating
workweek method. Second, the
[[Page 59600]]
Department estimates the economic value of the work that such
supplemental pay could have incentivized--this represents the
opportunity cost per workers resulting from legal uncertainty. Third,
the Department multiplies the opportunity cost per worker by the
estimated number of workers who are potentially compensated under the
fluctuating workweek method.\33\
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\33\ This analysis does not attempt to evaluate whether and to
what extent some employees not presently compensated under the
fluctuating workweek method might be shifted to the fluctuating
workweek method from their present method of compensation.
---------------------------------------------------------------------------
1. Average Supplemental Pay Being Prevented
As discussed in the Preamble, the Department assumes that employers
currently use production-based supplemental pay--such as commissions--
to incentivize employees, but they presently are deterred from using
other types of supplemental pay. If this NPRM were finalized as
proposed, the Department expects some employers may begin to use other
types of supplemental pay, including nonproduction bonuses and shift
differentials, to incentivize employees to perform economically
valuable tasks.
The Bureau of Labor Statistics (BLS) provides estimates on
nonproduction bonuses, which include, e.g., safety bonuses, holiday
pay, attendance pay, and referral bonuses.\34\ BLS also provides
separate estimates of shift differentials that employees receive
nationwide. Shift differentials and nonproduction bonuses comprise
approximately 3.4 percent of the salaries and wages of workers
nationwide.\35\ The Department believes this 3.4 percent national
average may be a useful starting point to estimate the amount of
supplemental incentive pay that current legal uncertainty could
prevent.
---------------------------------------------------------------------------
\34\ Bureau of Labor Statistics, Fact Sheet for the June 2000
Employment Cost Index Release (2000), at 1, https://www.bls.gov/ncs/ect/sp/ecrp0003.pdf; see also BLS, Employee Benefits Survey, March
2017, https://www.bls.gov/ncs/ebs/benefits/2017/ownership/govt/table43a.htm. As the name implies, nonproduction bonuses do not
include productivity based pay, such as commissions, that some
courts have found to be compatible with the fluctuating workweek
method. Approximately one-third of U.S. workers have access to
nonproduction bonuses in 2017. Id.
\35\ BLS estimates average wages and salaries of private
industry workers to be $24.17. And their average hourly shift
differential and nonproduction bonus adds up to $0.81, which
represents 3.4% of hourly pay. Bureau of Labor Statistics, Employer
Costs for Employee Compensation, March 2019, Table 1, https://www.bls.gov/news.release/archives/ecec_06182019.pdf. This figure
represents the national average of all workers: Some workers may
receive little or no shift differentials and nonproduction bonuses
while other may receive substantially higher shift differentials and
nonproduction bonuses than the national average.
---------------------------------------------------------------------------
The Department recognizes that 3.4 percent of salary may overstate
or understate the average supplemental pay that legal uncertainty
prevents fluctuating workweek employees from receiving. For example,
the Department assumes employers using the fluctuating workweek method
currently are unable to directly incentivize certain productive tasks
with supplemental pay. But some employers may be indirectly (and less
efficiently) incentivizing such behavior, e.g., encouraging holiday
work by increasing the base salary of all employees and requiring
employees to work a holiday as needed rather than paying a lower salary
to all employees and paying a premium only to employees who work that
particular holiday. If so, the amount of incentive pay prevented by
current legal uncertainty may be less than the 3.4 percent of salary.
Conversely, the amount of lost incentive pay may be higher than 3.4
percent of salary because that percentage does not include production-
based incentive pay. The Department assumes employers using the
fluctuating workweek method currently pay production-based bonuses,
such as commissions, to incentivize productive behavior. But case law
permitting this practice extends only to two circuits and some district
courts,\36\ and some employers outside those jurisdictions may be
deterred from paying production based incentive pay due to legal
uncertainty.\37\ If so, the amount of lost incentive pay for productive
behavior due to legal uncertainty may be higher than 3.4 percent of
salary.
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\36\ See, e.g., Lalli, 814 F.3d at 8; Dacar, 914 F.3d at 926;
Wills, 981 F. Supp. 2d at 256.
\37\ For instance, the 2011 Preamble's statement that ``bonus
and premium payments . . . are incompatible with the fluctuating
workweek method of computing overtime under section 778.114'' does
not, on its face, permit employers to pay commissions and other
production-based bonuses under the fluctuating workweek method. See
also Sisson, 2013 WL 945372, at *6 (commissions not permitted under
fluctuating workweek method).
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Ultimately, the Department lacks sufficient data to precisely
measure the extent of overstatement or understatement. In the
presentation that follows, the Department assumes that the average
fluctuating workweek employee would receive less than the national
average of 3.4 percent of salary if employers were assured that such
payments were compatible with the fluctuating workweek method. This
appendix presents two scenarios regarding the average supplemental pay
that that current legal uncertainty may prevent fluctuating workweek
employees from receiving:
Scenario 1 assumes supplemental pay being prevented equals
1 percent of salary; and
Scenario 2 assumes supplemental pay being prevented equals
2 percent of salary.
As discussed in the preamble, the Department uses CPS data to
identify approximately 1.4 million workers who may currently be paid
under the fluctuating workweek method. CPS data indicate that these 1.4
million workers earn an average annual salary of $49,282. Under
Scenario 1, the average amount of supplemental pay per employee that
legal uncertainty prevents is $492.82 (= $49,282 x 1%) per year. Under
Scenario 2, the average amount per employee is $985.64 (= $49,282 x 2%)
per year. On a weekly basis, these scenarios would result in an
employee receiving approximately $9.48 or $18.95 in supplemental pay.
2. Average Opportunity Cost
The above estimates for Scenarios 1 and 2 represent potential
supplemental incentive payments that employers were deterred from
paying an average employee compensated under the fluctuating workweek
method. And since the employee did not receive this amount, the
Department assumes he or she completed fewer productive tasks that such
pay would have incentivized, such as working nights or weekends or
performing other undesirable duties.
The estimates under Scenarios 1 and 2 represent the worker's share
of the total economic cost of lost productivity. The Department assumes
the worker's share of this cost is the same as labor's share of
national income, which BLS estimates was 56.4 percent in 2018 (the most
recent year of data available at publication).\38\ The full, economy-
wide annual opportunity cost of lost productivity that the proposed
rule would eliminate is therefore equal to the lost supplemented pay
under Scenarios 1 and 2 divided by 56.4 percent. Under Scenario 1, this
amounts to $873.79 (= 492.82 / 56.4%) per employee compensated under
the fluctuating workweek method. Annual opportunity cost eliminated
under Scenario 2 is $1,747.59 (= 985.64 / 56.4%) per such employee.
---------------------------------------------------------------------------
\38\ Bureau of Labor Statistics, Labor Productivity and Costs,
https://www.bls.gov/lpc/special_requests/msp_dataset.zip.
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3. Total Opportunity Cost Eliminated
The Department multiplied the opportunity cost per employee by the
estimated number of fluctuating
[[Page 59601]]
workweek employees to estimate the potential total reduction in
opportunity cost from the proposed rule. As discussed in the Preamble,
the Department estimated there are up to 1.4 million workers who may
currently be paid under the fluctuating workweek method and further
assumed that half--698,383 workers--are actually being paid under that
method. But, as the Preamble noted, the actual number may be higher or
lower. To account for the uncertainty in the actual number of
fluctuating workweek employees who would receive supplemental pay under
the proposed rule, the Department estimated the total reduction in
opportunity cost under three different scenarios:
Scenario A uses half of the Department's estimate of
fluctuating workweek employees, or 349,192 employees;
Scenario B uses one quarter of the Department's estimate,
or 174,596 employees; and
Scenario C uses one tenth of the Department's estimate, or
69,838 employees.
Scenarios A-C reflect different assumptions regarding the number of
fluctuating workweek employees who may receive supplemental pay, while
Scenarios 1 and 2 reflect different assumptions regarding the amount of
supplemental pay--and by extension productive activity--prevented by
current legal uncertainty. These create six different combinations, A1
thorough C2, each presenting a different estimate for the total
opportunity cost that the proposed rule would eliminate. The table
below summarizes these possibilities:
Table 1--Opportunity Cost Eliminated
----------------------------------------------------------------------------------------------------------------
Scenario 1 Scenario 2
---------------------------------------
1% Suppl. Pay 2% Suppl. Pay
----------------------------------------------------------------------------------------------------------------
Scenario A................................ 349,192 Workers............. $305,121,551 $610,243,103
Scenario B................................ 174,596 Workers............. 152,560,776 305,121,551
Scenario C................................ 69,838 Workers.............. 61,024,310 122,048,621
----------------------------------------------------------------------------------------------------------------
As Table 1 shows, the estimated opportunity cost that the proposed
rule could eliminate depends upon the number of workers being
compensated under the fluctuating workweek method and the amount of
supplemental pay that current legal uncertainty prevents such workers
from receiving. At the low end is Scenario C1--representing the lowest
calculated number of fluctuating workweek employees and the lowest
calculated amount of supplemental pay--which indicates that opportunity
cost that could be eliminated is approximately $61 million.\39\ And at
the high end is Scenario A2--representing the highest estimate of
affected fluctuating workweek employees and the highest amount of
supplemental pay--which indicates the opportunity cost that could be
eliminated by the proposed rule is approximately $610 million.
---------------------------------------------------------------------------
\39\ The $61 million estimate should not be interpreted as a
true lower bound. Indeed, a review of public comments on related
rulemakings yields only a few muted requests for the fluctuating
workweek policy to be revised--potentially indicating that the
associated current deadweight loss is of limited magnitude.
---------------------------------------------------------------------------
The Department lacks sufficient data and information necessary to
precisely predict which scenario is most plausible and thus to estimate
the potential reduction in opportunity cost. Accordingly, the
Department invites comment on this analysis, including any relevant
data or information on the Department's assumptions regarding: (1) The
estimated number of employees paid under the fluctuating workweek
method; and (2) the amount of supplemental pay that current legal
uncertainty prevents such employees from receiving. The Department
especially welcomes information from employers, employer organizations,
employee organizations, or payroll processors who may have unique
insight into employees paid under the fluctuating workweek method.
II. Method Two: Comparison With Managerial Costs
In the absence of the fluctuating workweek NPRM, employers whose
employees work irregular hours each week have different compensation
options. One option is to pay workers an hourly wage with premiums (for
hazard duty, graveyard shifts, and so forth), another option is to pay
a salary without such premiums (another is to pay using the fluctuating
workweek method, but without such premiums). Comparing these two
options indicates a tradeoff between employer surplus--associated with
the ability to enhance productivity by paying premiums--and reduced
managerial costs--associated with paying salaries, per the Preamble's
portion of this RIA. Hence, the managerial cost savings can provide a
bound on the employer surplus effects that can be achieved by
eliminating this tradeoff. Multiplying managerial costs for waged
workers of $441.31 per year (=$50.92 x 52 weeks x \1/6\ hour per week)
by the estimated 698,393 fluctuating workweek employees yields an
estimate of $308 million as the upper bound on the proposed rule's
employer surplus effects.\40\ Worker surplus would likely be of similar
magnitude, thus putting the overall upper bound on rule-induced
deadweight loss reduction at approximately $0.6 billion. If there were
productivity gains from switching employees into the fluctuating
workweek method, this bound could rise. As with Method One, the
Department invites comment on this analysis.
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\40\ The estimate is an upper bound both due to diminishing
returns and because it does not account for other potential employer
choices (e.g., paying salaries with premiums, while enduring
uncertainty as to the arrangement's legality) that they would only
pursue if less costly than the two options previously discussed.
Signed at Washington, DC, this 28th day of October, 2019.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.
List of Subjects in 29 CFR Part 778
Wages.
For the reasons set forth above, the Department proposes to amend
title 29, part 778, of the Code of Federal Regulations as follows:
PART 778--OVERTIME COMPENSATION
0
1. The authority citation for part 778 continues to read as follows:
Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq.
Section 778.200 also issued under Pub. L. 106-202, 114 Stat. 308 (29
U.S.C. 207(e) and (h)).
0
2. Revise Sec. 778.114 to read as follows:
[[Page 59602]]
Sec. 778.114 Fluctuating workweek method of computing overtime.
(a) The fluctuating workweek may be used to calculate overtime
compensation for a nonexempt employee if the following conditions are
met:
(1) The employee works hours that fluctuate from week to week;
(2) The employee receives a fixed salary that does not vary with
the number of hours worked in the workweek, whether few or many;
(3) The amount of employee's fixed salary is sufficient to provide
compensation to the employee at a rate not less than the applicable
minimum wage rate for every hour worked in those workweeks in which the
number of hours the employee works is greatest;
(4) The employee and the employer have a clear and mutual
understanding that the fixed salary is compensation (apart from
overtime premiums and any bonuses, premium payments, or other
additional pay of any kind not excludable from the regular rate under
section 7(e)(1) through (8) of the Act) for the total hours worked each
workweek regardless of the number of hours; and
(5) The employee receives overtime compensation, in addition to
such fixed salary and any bonuses, premium payments, and additional pay
of any kind, for all overtime hours worked at a rate of not less than
one-half the employee's regular rate of pay for that workweek. Since
the salary is fixed, the regular rate of the employee will vary from
week to week and is determined by dividing the amount of the salary and
any non-excludable additional pay received each workweek by the number
of hours worked in the workweek. Payment for overtime hours at not less
than one-half such rate satisfies the overtime pay requirement because
such hours have already been compensated at the straight time rate by
payment of the fixed salary and non-excludable additional pay. Payment
of any bonuses, premium payments, and additional pay of any kind is not
incompatible with the fluctuating workweek method of overtime payment,
and such payments must be included in the calculation of the regular
rate unless excludable under section 7(e)(1) through (8) of the Act.
(b) The application of the principles in paragraph (a) of this
section 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 work hours 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 (apart from overtime premiums
and any bonuses, premium payments, or other additional pay of any kind
not excludable from the regular rate under section 7(e)(1) through (8))
for all hours worked in the workweek.
(1) Example. If during the course of 4 weeks this employee works
37.5, 44, 50, and 48 hours, the regular rate of pay in each of these
weeks is $16, $13.64, $12, and $12.50, respectively. Since the employee
has already received straight time compensation for all hours worked in
these examples, only additional half-time pay is due. For the first
week the employee is owed $600 (fixed salary of $600, with no overtime
hours); for the second week $627.28 (fixed salary of $600, and 4 hours
of overtime pay at half times the regular rate of $13.64 for a total
overtime payment of $27.28); for the third week $660 (salary
compensation of $600, and 10 hours of overtime pay at half times the
regular rate of $12 for a total overtime payment of $60); for the
fourth week $650 (fixed salary of $600, and 8 overtime hours at half
times the regular rate of $12.50 for a total overtime payment of $50).
(2) Example. If during the course of 4 weeks this employee works
37.5, 44, 50, and 48 hours and 4 of the hours the employee worked each
week were nightshift hours compensated at a premium rate of an extra $5
per hour, the employee's total straight time earnings would be $620
(fixed salary of $600 plus $20 of non-overtime premium pay for the 4
nightshift hours). In this case, the regular rates of pay in each of
these weeks is $16.53, $14.09, $12.40, and $12.92, respectively, and
the employee's total compensation would be calculated as follows: For
the first week the employee is owed $620 (fixed salary of $600 plus $20
of non-overtime premium pay, with no overtime hours); for the second
week $648.20 (fixed salary of $600 plus $20 of non-overtime premium
pay, and 4 hours of overtime at half times the regular rate of $14.09
for a total overtime payment of $28.20); for the third week $682 (fixed
salary of $600 plus $20 of non-overtime premium pay, and 10 hours of
overtime at half times the regular rate of $12.40 for a total overtime
payment of $62); for the fourth week $671.68 (fixed salary of $600 plus
$20 of non-overtime premium pay, and 8 hours of overtime at half times
the regular rate of $12.92 for a total overtime payment of $51.68).
(3) Example. If during the course of 4 weeks this employee works
37.5, 44, 50, and 48 hours and the employee received a $100
productivity bonus each week, the employee's total straight time
earnings would be $700 (fixed salary of $600 plus $100 productivity
bonus). In this case, the regular rate of pay in each of these weeks is
$18.67, $15.91, $14, and $14.58, respectively, and the employee's total
compensation would be calculated as follows: For the first week the
employee is owed $700 (fixed salary of $600 plus $100 productivity
bonus, with no overtime hours); for the second week $731.84 (fixed
salary of $600 plus $100 productivity bonus, and 4 hours of overtime at
half time the regular rate of $15.91 for a total overtime payment of
$31.84); for the third week $770 (fixed salary of $600 plus $100
productivity bonus, and 10 hours of overtime at half times the regular
rate of $14, for a total overtime payment of $70); for the fourth week
$758.32 (fixed salary of $600 plus $100 productivity bonus, and 8 hours
of overtime at half times the regular rate of $14.58 for a total
overtime payment of $58.32).
(c) Typically, the salaries described in paragraph (a) of this
section are paid to employees who do not customarily work a regular
schedule of hours and are in amounts agreed on by the parties as
adequate compensation for long workweeks as well as short ones, under
the circumstances of the employment as a whole. Where the conditions
for the use of the fluctuating workweek method of overtime payment are
present, the Act, in requiring that ``not less than'' the prescribed
premium of 50 percent for overtime hours worked be paid, does not
prohibit paying more. On the other hand, where all the facts indicate
that an employee is being paid for overtime hours at a rate no greater
than that which the employee receives for nonovertime hours, compliance
with the Act cannot be rested on any application of the fluctuating
workweek overtime formula.
[FR Doc. 2019-23860 Filed 11-4-19; 8:45 am]
BILLING CODE 4510-27-P