Fluctuating Workweek Method of Computing Overtime, 59590-59602 [2019-23860]

Download as PDF 59590 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 khammond on DSKJM1Z7X2PROD with PROPOSALS SUMMARY: VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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 PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 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 E:\FR\FM\05NOP1.SGM 05NOP1 khammond on DSKJM1Z7X2PROD with PROPOSALS Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules 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 VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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). PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 59591 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). E:\FR\FM\05NOP1.SGM 05NOP1 59592 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS 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 VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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). PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 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 E:\FR\FM\05NOP1.SGM 05NOP1 khammond on DSKJM1Z7X2PROD with PROPOSALS Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules 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 VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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. PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 59593 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.’’). E:\FR\FM\05NOP1.SGM 05NOP1 khammond on DSKJM1Z7X2PROD with PROPOSALS 59594 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules 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. VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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. PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 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 E:\FR\FM\05NOP1.SGM 05NOP1 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS 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 VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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). PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 59595 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 E:\FR\FM\05NOP1.SGM 05NOP1 59596 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS 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. VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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. PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 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. E:\FR\FM\05NOP1.SGM 05NOP1 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules 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. khammond on DSKJM1Z7X2PROD with PROPOSALS 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. VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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), PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 59597 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. E:\FR\FM\05NOP1.SGM 05NOP1 59598 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS 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). VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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. PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 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 E:\FR\FM\05NOP1.SGM 05NOP1 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules employed by companies using the fluctuating workweek method. khammond on DSKJM1Z7X2PROD with PROPOSALS 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. VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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. PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 59599 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 E:\FR\FM\05NOP1.SGM 05NOP1 59600 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules 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 khammond on DSKJM1Z7X2PROD with PROPOSALS 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. VerDate Sep<11>2014 16:29 Nov 04, 2019 Jkt 250001 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). PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 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. E:\FR\FM\05NOP1.SGM 05NOP1 Federal Register / Vol. 84, No. 214 / Tuesday, November 5, 2019 / Proposed Rules 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 khammond on DSKJM1Z7X2PROD with PROPOSALS 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. 16:29 Nov 04, 2019 Jkt 250001 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. E:\FR\FM\05NOP1.SGM 05NOP1 59602 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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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%)).
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    \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.
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    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.
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    \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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    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\
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    \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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    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.
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    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.
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    \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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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.
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    \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.
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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 
supplemental incentive pay that current legal uncertainty could 
prevent.
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    \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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    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.
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    \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.
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    \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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    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