Fluctuating Workweek Method of Computing Overtime, 34610-34633 [2020-10872]

Download as PDF 34610 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations in advance, the calendar year will apply. * * * * * § 541.607 ■ [Removed and Reserved] 3. Remove and reserve § 541.607. Signed at Washington, DC, this 29th day of May, 2020. Cheryl M. Stanton, Administrator, Wage and Hour Division. [FR Doc. 2020–11979 Filed 6–5–20; 8:45 am] BILLING CODE 4510–27–P 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: Final rule. AGENCY: The Department of Labor (the Department) is revising its regulation for computing overtime compensation of salaried nonexempt employees who work hours that vary each week (fluctuating workweek) under the Fair Labor Standards Act (FLSA or the Act). The final rule clarifies 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 Department also adds examples and makes minor revisions to make the rule easier to understand. DATES: This final rule is effective on August 7, 2020. FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director, 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; telephone: (202) 693–0406 (this is not a toll-free number). Copies of this final 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 khammond on DSKJM1Z7X2PROD with RULES SUMMARY: VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 (866) 4US–WAGE ((866) 487–9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD’s website for a nationwide listing of WHD district and area offices at http://www.dol.gov/ whd/america2.htm. SUPPLEMENTARY INFORMATION: I. Executive Summary Section 7(a) of the FLSA requires employers to pay their nonexempt employees overtime pay of at least ‘‘one and one-half times the regular rate at which [the employee] is employed’’ for all hours worked in excess of 40 in a workweek. 29 U.S.C. 207(a). In other words, for each hour over 40 an employee works in a workweek, the employee is entitled to straight-time compensation at the regular rate and an additional 50 percent of the regular rate for that hour. Where an employee receives a fixed salary for fluctuating hours, an employer may use the ‘‘fluctuating workweek method’’ to compute overtime compensation owed, if certain conditions are met. 29 CFR 778.114. Under current 29 CFR 778.114, an employer may use the fluctuating workweek method if the employee works fluctuating hours from week to week and receives, pursuant to a clear and mutual understanding with the employer, a fixed salary as straight time compensation 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,’’ the regular rate ‘‘is determined by dividing the number of hours worked in the workweek into the amount of the salary,’’ and 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 overtime hour. 29 CFR 778.114(a). Because the employee’s hours of work fluctuate from week to week, the regular rate must be determined separately each week based on the number of hours actually worked each week. Id. The payment of additional bonus and premium payments on top of the fixed salary to employees compensated under the fluctuating workweek method has presented challenges to employers and the courts alike, as set forth in more detail below. In the Notice of Proposed Rulemaking (NPRM), the Department proposed to clarify that bonus payments, premium payments, and other additional pay are consistent with PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 the use of the fluctuating workweek method of compensation. See 84 FR 59590, 59591 (Nov. 5, 2019). Such supplemental payments and the fixed salary provide straight-time compensation for all hours worked and the regular rate is determined by dividing that amount by the hours worked in the workweek. Additional bonuses or premium 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 an 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). The preamble to the 2011 final rule further stated, for the first time in rulemaking by the Department, that all straight-time bonus and premium payments were incompatible with the fluctuating workweek method, while maintaining that the preamble ‘‘restore[d] the current rule.’’ The decision in that rulemaking not to make any substantive changes to the regulatory text, however, caused courts to interpret the 2011 final rule in different ways and to reach 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 considered anew the need for a clarification, particularly in light of the 2011 final rule and its interpretation by courts, now finds the reasons articulated in 2011 to be unpersuasive, and is therefore finalizing revisions that are substantially similar to those initially proposed in 2008. Specifically, the Department is adding 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 is also adding examples to § 778.114(b) to illustrate the fluctuating workweek method of calculating overtime where an employee is paid (1) a nightshift differential, (2) a productivity bonus in E:\FR\FM\08JNR1.SGM 08JNR1 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations addition to a fixed salary, and (3) premium pay for weekend work. The Department is further making nonsubstantive revisions to § 778.114(a) and (c) that were not proposed in the 2008 NPRM to enhance clarity. Specifically, revised § 778.114(a) will now list each of the requirements for using the fluctuating workweek method, while duplicative text is being removed from revised § 778.114(c). Finally, the Department is changing the title of the regulation from ‘‘Fixed salary for fluctuating hours’’ to ‘‘Fluctuating Workweek Method of Computing Overtime.’’ The Department also believes that this rule will allow employers and employees to better utilize flexible work schedules. This is especially important as workers return to work following the COVID–19 pandemic. Some employers are likely to promote social distancing in the workplace by having their employees adopt variable work schedules, possibly staggering their start and end times for the day. This rule will make it easier for employers and employees to agree to unique scheduling arrangements while allowing employees to retain access to the bonuses and premiums they would otherwise earn. This final rule is an Executive Order (E.O.) 13771 deregulatory action. Details on the estimated reduced burdens and cost savings of this final rule can be found in the rule’s economic analysis. Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), the Office of Information and Regulatory Affairs has designated this rule as a ‘‘major rule’’ as defined by 5 U.S.C. 804(2). khammond on DSKJM1Z7X2PROD with RULES II. Background A. Principles of Computing Overtime Pay Based on the Regular Rate Section 7(a) of the FLSA requires employers to pay their nonexempt employees overtime premium pay of at least ‘‘one and one-half times the regular rate at which [the employee] is employed’’ for all hours worked in excess of 40 in a workweek. 29 U.S.C. 207(a). The regular rate is computed for each workweek and is defined as ‘‘all remuneration for employment,’’ save for eight statutory exclusions, divided by the number of hours worked. 29 U.S.C. 207(e); see also Bay Ridge Operating Co. v. Aaron, 334 U.S. 446, 458 (1948) (stating that the ‘‘regular rate must be computed by dividing the total number of hours worked into the total compensation received’’).1 For each 1 The preamble to the Department’s 2019 rulemaking concerning ‘‘Regular Rate under the Fair Labor Standards Act’’ discusses in greater VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 hour over 40 an employee works in a workweek, the employee is entitled to straight time compensation at the regular rate and an additional 50 percent of the regular rate for that hour. See, e.g., Walling v. YoungermanReynolds Hardwood Co., 325 U.S. 419, 423–24 (1945). Dividing non-excludable remuneration by hours worked is the only proper method to compute the regular rate and the Department’s regulations at §§ 778.110–778.115 ‘‘give some examples of the proper method of determining the regular rate of pay in particular instances.’’ 29 CFR 778.109.2 One of the examples is § 778.114, which concerns instances where the employee is paid a fixed salary that is understood to be compensation for a variable number of hours worked each week, whether few or many, as opposed to a specific number of hours. The regular rate equals the quotient of the weekly salary and the number of hours worked and necessarily changes as the number of hours vary week to week. For each overtime hour worked, the employee is entitled to straight-time pay plus an additional 50 percent of the regular rate as an overtime premium. Because the weekly salary is compensation for all hours worked in a workweek, the employee would have already received straight-time pay for any overtime hours worked, so he or she is entitled to additional compensation at one-half of the regular rate for overtime hours. This method of computing overtime pay is the subject of this rulemaking and is known as the fluctuating workweek method. The fluctuating workweek method is not the only such example where additional overtime compensation is properly computed as one-half the regular rate because the straight time portion of the required ‘‘one and onedetail the legislative and regulatory history of the regular rate. See 84 FR 68736, 68737–39 (Dec. 16, 2019). 2 Total non-excludable remuneration is divided by all hours worked to determine the regular rate where all hours worked have been compensated. This will always be the case under the fluctuating workweek method because the fixed salary covers all hours worked and, when combined with nonexcludable bonuses and premiums, constitutes all straight time pay. When an employee is paid a salary for fixed hours, however, the salary is divided by the hours that it covers, not the total hours worked, and additional straight time is due for any additional hours, as well as any overtime premium. 29 CFR 778.113. Similarly, if an employee who is paid hourly, for example, has worked uncompensated hours, the uncompensated hours are not included in determining the regular rate and the employee is owed their regular rate for the uncompensated hours as well as any overtime premium. See 29 CFR 778.109 (regular rate is nonexcludable remuneration divided ‘‘by the total number of hours actually worked by [the employee] in that workweek for which such compensation was paid’’) (emphasis added). PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 34611 half times the regular rate’’ has already been paid. This method of computation is also appropriate where an employee is compensated through piece rate, job rate, or day rate arrangements. Section 778.110 concerns instances where the employee is paid an hourly wage. If an hourly wage were the sole component of compensation, the regular rate would simply be the hourly wage. 29 CFR 778.110(a). Compensation for each overtime hour would equal one times the hourly rate as straight-time pay plus an additional one-half times the hourly rate, for a total of ‘‘one and one-half times the regular rate.’’ 29 U.S.C. 207(a). Section 778.111 concerns instances where the employee is paid on a piece rate basis plus an hourly premium for time spent waiting. In § 778.111(a)’s scenario, the regular rate for each week is computed by adding piece rate compensation to the total waiting premium and then dividing that sum by the number of hours worked. This constitutes the employee’s straight time pay and ‘‘[o]nly additional half-time pay is required’’ for overtime hours worked. 29 CFR 778.111.3 Section 778.112 concerns instances where the employee is paid a flat amount for a day’s work or a specific job, regardless of how many hours were actually worked on a particular day or for a particular job. The regular rate is computed as the sum of all day rate or job rate compensation in a workweek divided by the total number of hours worked. As with piece rate pay, this constitutes straight-time pay for all hours worked. Accordingly, the employee ‘‘is then entitled to extra halftime pay at this [regular] rate for all hours worked in excess of 40 in the workweek.’’ 29 CFR 778.112. Section 778.113 concerns instances where the employee is paid a salary for a specific number of hours each week. In this scenario, the salary can be expressed as a constant hourly rate equal to the salary amount divided by the specific number of hours that the salary is intended to compensate.4 Since the salary covers a specific number of hours, and not all hours in a workweek, it would not cover straight-time compensation for hours in excess of that specific number, including any such 3 Section 778.111(b) further provides that, for any workweek in which a piece rate employee receives an hourly guarantee in lieu of the piece rate compensation, the regular rate is equal to the guaranteed hourly rate. 4 If the salary covers a period longer than a week, an hourly rate can still be computed by dividing the salary by the number of hours covered in the period, whether that is a month, a year, or something else. E:\FR\FM\08JNR1.SGM 08JNR1 34612 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations overtime hours. Accordingly, the employee must receive straight-time pay at the regular rate in addition to one-half of the regular rate as overtime premium for each such overtime hour. Finally, § 778.115 concerns instances where an employee receives straighttime pay at multiple different rates in the same workweek. In such cases, the ‘‘regular rate for that week is the weighted average of such rates’’ and the employee is entitled to additional halftime for overtime hours. 29 CFR 778.115.5 These examples all apply the same fundamental principle for computing the regular rate: The regular rate for each workweek is calculated by dividing non-excludable remuneration by the number of hours worked. They also apply the same fundamental principle for computing overtime pay: Overtime pay for each hour worked above 40 is equal to straight-time pay for that hour plus an additional 50 percent of the regular rate as overtime premium. With these examples and principles in mind, the Department turns to the background specific to the fluctuating workweek method of computing overtime pay under § 778.114. B. History of the Fluctuating Workweek Method khammond on DSKJM1Z7X2PROD with RULES 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 Overnight Motor Transp. Co., v. Missel, 316 U.S. 572, 580 (1942). 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, 580–81.6 The quotient of the 5 Under certain circumstances, an employer may also pay overtime to an employee who is employed at two different rates ‘‘at a rate not less than one and one-half times the hourly nonovertime rate established for the type of work [the employee] is performing during such overtime hours.’’ 29 CFR 778.419(a); see 29 U.S.C. 207(g)(2). 6 As discussed above, half-time, rather than timeand-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 VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 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 nonexempt 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)).7 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. To the contrary, as explained more fully below, in both the 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 entitled under the FLSA to an additional half-time the regular rate for those hours. See 29 U.S.C. 207(a). 7 Note that Belo concerned a different type of flexible pay agreement, now codified under section 7(f) of the FLSA, under which an employee was paid on an hourly basis with a guaranteed weekly sum. The Department cites Belo here only 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). PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 adds 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 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 FLSA, in requiring that ‘not less than’ the prescribed premium of 50 percent for overtime hours worked be paid, does not prohibit paying more.’’ 8 As another example, courts have applied and endorsed the fluctuating workweek method when employees received additional bonus payments. 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.’’)); Black v. Comdial Corp., Civ. A. No. 92–O81–C, 1994 WL 70113, at *5 (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.’’). 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 therefore, any extra compensation would violate this ‘‘fixed amount’’ requirement. Id. (quoting 29 CFR 778.114(a)). 8 WHD Opinion Letter, 1999 WL 1002399, at *2 (May 10, 1999) (emphasis added). E:\FR\FM\08JNR1.SGM 08JNR1 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES 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 understood to compensate them for a specific—rather than fluctuating— number of hours each week. Id. However, the Department’s brief did not address whether bonus pay beyond the ‘‘fixed amount’’ required was incompatible with the fluctuating workweek method.9 Some courts followed O’Brien to hold that certain types of bonuses were incompatible with the fluctuating workweek method,10 while others continued to hold that bonuses were compatible with that method.11 These 9 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 v. Putnam Assocs. Inc., 173 F.3d 35, 39 (1st Cir. 1999); Martin v. Tango’s Restaurant, 969 F.2d 1319, 1324 (1st Cir. 1992)). Section 778.113 should be used to compute overtime owed based on the regular rate where a fixed salary is understood to cover a certain number of hours. 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 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, 1994 WL 70113, at *2 (‘‘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.’’). 10 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). 11 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 VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 inconsistent decisions appeared 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 the regular rate unless excluded under section 7(e)(1) through (8) of the FLSA. 73 FR at 43656, 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. Id. at 18853. 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.’’ Id. 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.’’ Id. The 2011 preamble’s reference to the ‘‘current rule’’ appears to have generated further confusion among the fluctuating workweek method where employee received tenure pay, commissions, and other bonuses in addition to fixed salary). PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 34613 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 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, as explained in the NPRM, 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 E:\FR\FM\08JNR1.SGM 08JNR1 34614 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES 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 explained in the NPRM, the divergent views of the Department and the courts—and even among courts— have created considerable uncertainty for employers regarding the compatibility of various types of supplemental pay with the fluctuating workweek method. As discussed below, comments received from several commenters support this assessment and document the confusion. 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. The Department is therefore issuing this final rule to clarify that bonus and premium payments (whether hours-based, productionbased, or other) are compatible with the use of the fluctuating workweek method of compensation. C. The Department’s Proposal On November 5, 2019, the Department issued an NPRM proposing to revise its existing regulation at § 778.114(a) to clarify 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). See 84 FR at 59591. The NPRM further proposed to add 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. Id. The Department also proposed simplifying revisions § 778.114 by listing each required circumstance for the fluctuating workweek method to correctly compute overtime pay and removing duplicative text from revised § 778.114(c). Id. Finally, the Department proposed 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. Id. Approximately 36 individuals and organizations commented on the NPRM during the 30-day comment period that ended on December 5, 2019. The VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 Department received comments from a diverse array of constituencies, including individual employees, employer and industry associations, employee advocacy groups, non-profit organizations, law firms, professional associations, and other interested members of the public. Many of the commenters supported the Department’s efforts to clarify the fluctuating workweek regulation, while other commenters opposed the proposed rule. All timely comments received may be viewed on www.regulations.gov, docket ID WHD–2019–0006. The Department has carefully considered the timelysubmitted comments on the proposed changes. The Department received a few comments that are beyond the scope of this rulemaking, such as requests to raise the federal minimum wage. The Department does not have authority to effectuate such a statutory change and therefore did not consider doing so as part of the proposed rule. This final rule does not address comments that are out of scope of this rulemaking. Significant issues raised in the comments on the Department’s proposal are discussed below, along with the Department’s response to those comments. III. Final Regulatory Revisions The Department is finalizing its proposal to revise and update the regulation at § 778.114 to 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 sections below discuss, in turn, the major issues raised by commenters and the Department’s responses. A. Section 778.114 Is an Example of Computing Overtime Pay Based on the Regular Rate The NPRM proposed to revise § 778.114(a) to state that ‘‘[t]he fluctuating workweek method may be used to calculate overtime compensation for a nonexempt employee if the [listed] conditions are met[.]’’ 84 FR 59602. The purpose of the revision was to provide a list of conditions which, if present, ensure that overtime pay is correctly computed under the FLSA. But the proposed revision appears to have created, or at least did not dispel, the misconception that the fluctuating workweek method deviates from the standard ‘‘one and PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 one-half times’’ overtime payment obligation under the FLSA. Some commenters, for instance, characterized the fluctuating workweek method as an ‘‘exception’’ or ‘‘alternative’’ to the overtime premium requirement. See, e.g., Center for Workplace Compliance (CWC), National Employment Lawyers Association (NELA), National Employment Law Project (NELP). Other commenters observed that the fluctuating workweek method in § 778.114 is merely an example of how to compute the regular rate and overtime compensation in certain circumstances. The U.S. Chamber of Commerce (Chamber) requested that the Department ‘‘make clear that [§ ] 778.114 (like the other examples in the interpretive bulletin of which it is a part) merely provides an example of how to calculate overtime in the particular circumstances described in the example.’’ Associated Builders and Contractors (ABC) similarly urged the Department ‘‘to clarify that examples given in the final rule are just that: examples.’’ The Chamber further requested that the Department clarify that, because the fluctuating workweek method in § 778.114 merely provides an example, it ‘‘does not impose any restrictions, conditions, or limitations on the ‘wages divided by hours’ approach to calculating the regular rate and the resulting overtime premium.’’ See also ABC at 3 (‘‘The department should make clear that examples given do not impose limitations, restrictions or other conditions on applying the overtime calculation.’’). The Department agrees that § 778.114 is an example of how to properly compute overtime compensation based on the regular rate. Section 778.109 states, ‘‘The following sections give some examples of the proper method of determining the regular rate of pay in particular instances,’’ and § 778.114 is one of these examples. See Allen v. Bd. of Pub. Educ. for Bibb Cty., 495 F.3d 1306, 1313 (11th Cir. 2007) (‘‘[R]eading section 778.115 in the context of section 778.109, it becomes apparent that the former is one of the examples mentioned in the latter as a way that the regular rate may be calculated in certain cases.’’). The Department briefly discussed these examples in the background section of this preamble, to make clear that the fluctuating workweek method under § 778.114 is merely one of several examples of how to properly compute the regular rate and overtime pay to satisfy the FLSA’s statutory pay requirements. As an example of correct computation of overtime pay based on the regular rate, § 778.114 cannot impose E:\FR\FM\08JNR1.SGM 08JNR1 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations requirements that are inconsistent with overtime pay requirements under the FLSA. See Allen, 495 F.3d at 1312. That said, § 778.114 can impose restrictions that are consistent with how overtime pay is computed under the FLSA. When an employee is paid a fixed salary as straight-time compensation for all hours worked and then receives a bonus, the fluctuating workweek method described in § 778.114 correctly computes the regular rate and overtime owed under the FLSA. For the foregoing reasons, the Department is clarifying that the fluctuating workweek method under § 778.114 is just one example of how to properly compute overtime pay owed under the FLSA in the circumstances described therein. To make this point clearer, the Department is revising § 778.114(a) to state: ‘‘An employer may use the fluctuating workweek method to properly compute overtime compensation based on the regular rate for a nonexempt employee under the following circumstances: . . .’’ khammond on DSKJM1Z7X2PROD with RULES B. Circumstances Where an Employer May Use the Fluctuating Workweek Method To Compute Overtime Pay Proposed § 778.114(a)(1) through (5) lists five circumstances which, if all are met, enable an employer to use the fluctuating workweek method to properly compute the regular rate and overtime pay owed under the FLSA. Each of these circumstances is discussed below. 1. Hours That Fluctuate From Week to Week Current § 778.114(a) states that the fluctuating workweek method is appropriate where, inter alia, an employee ‘‘ha[s] hours of work which fluctuate from week to week.’’ The NPRM proposed to retain this requirement in § 778.114(a)(1), which lists ‘‘the employee works hours that fluctuate from week to week’’ as a condition that must be met. 84 FR at 59602. Some commenters, such as Jackson Lewis, expressed concern that the NPRM did not specify whether the employee’s fluctuation in hours worked per week could involve any range of hours or whether the hours worked must sometimes fluctuate below forty hours in the workweek. Although neither the current nor the proposed regulatory language require an employee’s hours to sometimes fluctuate below forty hours per week, commenters pointed out that there has been uncertainty about this point. Commenters requested that the Department clarify that employers are VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 able to use the fluctuating workweek method even for employees whose hours worked rarely, if ever, go below forty in the workweek. The Department has long held the position that there is no requirement that the employee’s hours of work must fluctuate below forty hours per week. The Department has consistently stated that the fluctuating workweek method remains appropriate even when it is only the number of overtime hours that fluctuate. See WHD Opinion Letter FLSA (October 27, 1967) (‘‘There is no requirement that the hours of work of an employee compensated on the fluctuating workweek basis fluctuate above and below 40 hours in a workweek as there is for employees employed pursuant to section 7(f) (formerly section 7(e)) of the Act.’’); WHD Opinion Letter FLSA2009–3, 2009 WL 648995 (Jan. 14, 2009) (stating that the fluctuating workweek method can be used to compute back wages for workers whose hours fluctuated, but who were generally expected to work a minimum of fifty hours per week). Moreover, although a few courts have held that an employee’s hours must fluctuate below forty hours per week before his or her overtime can be computed using the fluctuating workweek method,12 courts have more frequently found that the fluctuating workweek method does not actually require that the employee’s hours fluctuate below forty hours. See, e.g., Aiken v. County of Hampton, 172 F.3d 43, 1998 WL 957458, at *3 (4th Cir. 1998) (unpublished) (holding that an employer can use the fluctuating workweek method when the employee reliably works a base number of hours over forty per week, so long as the number of overtime hours per week fluctuate); Condo v. Sysco Corp., 1 F.3d 599, 602 (7th Cir. 1993) (stating that the employer may use the fluctuating workweek method when an employee’s hours fluctuate above but not below forty hours per week); Mitchell v. Abercrombie & Fitch Co., 428 F. Supp. 2d 725, 735 (S.D. Ohio 2006), aff’d 225 F. App’x 362 (6th Cir. 2007) (per curiam) (finding no support for the argument that an employee’s hours must fluctuate both above and below forty hours per week for the fluctuating workweek method to be used); Ramos v. Telegian Corp., 176 F. Supp. 3d 181, 195 (E.D.N.Y. Mar. 31, 2016) (holding that the fluctuating workweek 12 See, e.g., Blotzer v. L–3 Comms. Corp., No. CV– 11–274–TUC–JGZ, 2012 WL 6086931, at *12 (D. Ariz. Dec. 6, 2012); Hasan v. GPM Investments, LLC, 896 F. Supp. 2d 145, 150 (D. Conn. 2012); Costello v. Home Depot USA, Inc., 944 F. Supp. 2d 199, 208 (D. Conn. 2013). PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 34615 regulation does not require or even suggest a requirement that an employee’s hours fluctuate both above and below forty in the workweek). Having reviewed and considered the comments, the Department is adopting its proposed regulatory language regarding the requirement that an employee must receive a fixed salary that does not vary with the number of hours worked in the workweek, whether few or many, for the fluctuating workweek method to be applicable. To prevent any further misunderstanding, however, the Department is also clarifying that the regulation does not require that an employee’s hours must sometimes fluctuate below forty hours per week, so long as the employee’s hours worked do vary. 2. Fixed Salary That Does Not Vary With the Number of Hours Worked Section 778.114(a) currently provides that, in order for an employer to calculate overtime pay pursuant to the fluctuating workweek method, the employee must be paid a ‘‘fixed salary . . . for the hours worked each workweek, whatever their number.’’ 29 CFR 778.114(a). The regulation also requires employers using the fluctuating workweek method to pay the guaranteed salary even where ‘‘the workweek is one in which a full schedule of hours is not worked.’’ 29 CFR 778.114(c). The NPRM proposed to modify the current regulation to clarify that employers may pay bonuses, premium payments, and other additional pay of any kind in addition to the fixed salary. See 84 FR 59602. The NPRM did not propose, however, to substantively change the current requirement that an employee must be paid a ‘‘fixed salary’’ representing compensation for all of the hours worked in the workweek. The proposed regulatory text in the NPRM stated that one of the conditions that must be satisfied in order to use the fluctuating workweek method is that the employee be paid ‘‘a fixed salary that does not vary with the number of hours worked in the workweek.’’ Id. A few commenters, including ABC and the Chamber, requested that the Department state in the final rule that the fluctuating workweek method may be used as long as the employee is paid on a salary basis as defined in 29 CFR 541.602. They asked the Department to replace the current ‘‘fixed salary’’ requirement with, or to define the ‘‘fixed salary’’ requirement by, reference to the salary basis test that is used for the minimum wage and overtime exemption for executive, administrative, and professional employees in section 13(a)(1) of the FLSA. 29 U.S.C. 213(a). E:\FR\FM\08JNR1.SGM 08JNR1 khammond on DSKJM1Z7X2PROD with RULES 34616 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations The Chamber urged the adoption of the salary basis test as defined in 29 CFR 541.602 in the fluctuating workweek context so that employers could make deductions from the ‘‘fixed salary’’ under the fluctuating workweek method on the same basis that deductions are permitted under part 541. The Wage & Hour Defense Institute (WHDI) similarly requested that the Department provide in the final rule that deductions from the salary for full days not worked (e.g., due to illness) are permissible while using the fluctuating workweek method. The Department has carefully considered these commenters’ requests to incorporate the salary basis definition and to allow the same types of deductions permissible under part 541 from the ‘‘fixed salary’’ in § 778.114 and has determined not to adopt such a change at this time. The Department has consistently rejected the argument that the executive, administrative, and professional exemption’s salary basis requirements and the permitted deductions from salary set forth in § 541.602 should apply to the fluctuating workweek method. See, e.g., FLSA2006–15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006); FLSA Opinion Letter, 1999 WL 1002415, at *1–2 (May 28, 1999); FLSA Opinion Letter, 1991 WL 11648489, at *1 (Aug. 20, 1991). Adoption of the part 541 salary basis requirements and permitted pay deductions would be contrary to the Department’s longstanding interpretation that salary deductions for days or hours not worked are generally incompatible with the payment of a ‘‘fixed’’ salary under the fluctuating workweek method. See, e.g., FLSA2006–15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006); FLSA Opinion Letter, 1991 WL 11648489, at *1 (Aug. 20, 1991); FLSA Opinion Letter, 1983 WL 802650, at *1 (Nov. 30, 1983); FLSA Opinion Letter, 1978 WL 388412, at *1 (Dec. 29, 1978). As the Department has explained, ‘‘[I]t is the longstanding position of the Wage and Hour Division that an employer utilizing the fluctuating workweek method of payment may not make deductions from an employee’s salary for absences occasioned by the employee.’’ FLSA2006–15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006). For example, an employer using the fluctuating workweek method may not make deductions from an employee’s salary when the employee has exhausted his or her sick leave bank or has not yet earned sufficient sick leave to cover an absence due to illness. Id.; see also FLSA Opinion Letter, 1978 WL 388412, at *1 (Dec. 29, 1978) (explaining that deductions made for VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 ‘‘excused absences, even for personal reasons (such as time off to visit a relative who is ill) would be inconsistent’’ with the requirement in § 778.114 that an employee be paid a full, ‘‘fixed’’ salary for any week in which he or she performs work). The Department has for many years advised, however, that an employer using the fluctuating workweek method of computing overtime pay ‘‘may take a disciplinary deduction from an employee’s salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions do not cut into the required minimum wage or overtime compensation.’’ FLSA2006–15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006) (emphasis added); see also FLSA Opinion Letter, 1983 WL 802650, at *1 (Nov. 30, 1983) (same); WHD Field Operations Handbook 32b04b(b) (same); Samson v. Apollo Resources, Inc., 242 F.3d 629, 639 (5th Cir. 2001) (concluding that occasional deductions from pay for willful absences or tardiness ‘‘do not run afoul of the guidelines governing the [fluctuating workweek] method’’). If such deductions are consistently or frequently made, however, then ‘‘the practice of making such deductions would raise questions as to the validity of the compensation plan.’’ FLSA2006– 15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006) (citing 29 CFR 778.306(b)); FLSA Opinion Letter, 1983 WL 802650, at *1 (Nov. 30, 1983) (same). Replacing the ‘‘fixed salary’’ requirement of the fluctuating workweek method with the salary basis definition in § 541.602, thereby expanding the types of pay deductions that would be permissible under § 778.114, could have a significant effect on the scope and applicability of the fluctuating workweek method. Because the request to adopt the salary basis test and to permit new deductions not previously recognized as compatible with the ‘‘fixed salary’’ requirement in the fluctuating workweek context would constitute a significant change to the current regulation and the Department’s longstanding interpretation of that regulation, the Department would want to solicit and carefully consider public comment on the issue before adopting such a revision. Accordingly, the Department declines to grant the request to apply the salary basis requirements of § 541.602 to § 778.114 at this time. The Department has, however, determined that it would be helpful to the public to expressly incorporate in the regulation itself its longstanding interpretation that PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 employers using the fluctuating workweek method may take occasional disciplinary deductions from an employee’s salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions do not cut into the required minimum wage or overtime compensation. The Department has therefore decided to add such clarifying language to the regulatory text in § 778.114(d). 3. The Fixed Salary Satisfies the Minimum Wage Current § 778.114(a) states that the fluctuating workweek method is appropriate where, inter alia, ‘‘the amount of the 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.’’ 29 CFR 778.114(a). The NPRM included nearly identical text in proposed § 778.114(a)(3) as one of the circumstances that must be met for using the fluctuating workweek method. A few commenters noted that, because the regular rate falls as hours increase under the fluctuating workweek method, in occasional workweeks in which an employee works extremely high hours, the regular rate may fall below the minimum wage, even where employers have endeavored to ensure that the payment system generally is compliant with minimum wage requirements. See, e.g., Chamber; ABC. These commenters acknowledge that, in such situations, the employer would violate the FLSA unless it provides additional payments to satisfy the minimum wage. The commenters request, however, that the Department clarify that an employer’s intermittent need to provide supplemental payments to ensure the minimum wage is met would not retroactively invalidate the fluctuating workweek method. They further request that the Department add language providing that the fixed salary need only be ‘‘reasonably calculated’’ to provide compensation at a rate not less than the applicable minimum wage. After careful consideration, the Department has decided to adopt the language as proposed. As the commenters acknowledge, in any given workweek where the employee’s fixed salary does not at least meet the applicable minimum wage, the employer must make an additional payment to bring the employee up to the applicable minimum wage. See WHD Opinion Letter FLSA 945 (Feb. 6, 1969); WHD Opinion Letter FLSA (June 12, E:\FR\FM\08JNR1.SGM 08JNR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations 1969); Cash, 2 F. Supp. 2d at 894. Therefore, the proposed regulation maintains the requirement for the use of the fluctuating workweek method that the fixed salary be sufficient to compensate the employee for all hours worked at a rate not less than the applicable minimum wage. In explaining that the fixed salary must be sufficient to compensate the employee at a rate not less than the minimum wage for the fluctuating workweek method to be used, however, the proposed regulatory language does not indicate that an occasional failure to meet this requirement retroactively invalidates the use of the fluctuating workweek method in previous workweeks or prevents the employer from continuing to use the fluctuating workweek method for that employee in subsequent workweeks. On the contrary, the Department has already determined that where an employer has reasonably calculated the fixed salary to cover at least the minimum wage for all hours worked, an occasional workweek where the fixed salary does not at least equal the applicable minimum wage, due to unusual and unforeseeable circumstances, does not invalidate the use of the fluctuating workweek method in other workweeks in which the salary equals or exceeds the applicable minimum wage as anticipated. See WHD Opinion Letter FLSA–883 (Aug. 30, 1966) (stating that the employer ‘‘must not only in fact assure that no workweek will be worked in which the salary fails to provide at least the current statutory minimum hourly rate of $1.25, but the salary must also be so arranged that it is reasonably calculated to provide for such a statutory minimum’’); WHD Opinion Letter FLSA (Feb. 6, 1969) (finding that ‘‘the bona fides of the pay plan will not fail solely on the grounds that in five weeks in an annual period, due to unforeseen circumstances beyond the control or the anticipation of the employer and employee, the salary failed to provide at least the applicable statutory minimum hourly rate of pay’’). The courts have also consistently held that the employer is not prohibited from using the fluctuating workweek method in other workweeks merely due to infrequent workweeks where the fixed salary did not at least equal the minimum wage for all hours worked due to unforeseen circumstances. See, e.g., Cash, 2 F. Supp. 2d at 894 (finding that the employer’s use of the fluctuating workweek method was still appropriate in most workweeks despite ‘‘infrequent occasions when unforeseen events cause the employee to work so many hours that her salary fails to VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 support an average hourly rate at least equal to the applicable minimum wage’’); Perez v. Radio Shack Corp., 2005 WL 3750320, at *5 (N.D. Ill. Dec. 14, 2005) (declining to conclude that the employer should have foreseen that employees’ hours worked would be so high that their fixed salary would not cover the applicable minimum wage in all workweeks, when all employees in the potential class received less than the minimum wage approximately fortynine times in a four-year time period); Aiken, 172 F.3d 43, 1998 WL 957458, at *5–6 (according substantial weight to the Department’s opinion letters that suggest that ‘‘making a minimum wage adjustment on five occasions in a twoyear period does not defeat the validity of the fluctuating workweek plan,’’ and concluding that employees are not entitled to any additional compensation beyond the minimum wage straight time and overtime adjustments they had already received for those workweeks); Davis v. Friendly Exp., Inc., 2003 WL 21488682, at *2 (11th Cir. 2003) (finding that an employer does not have to adopt another method of computing overtime where the fixed salary did not at least equal the applicable minimum wage for all hours worked in a few, isolated workweeks due to unforeseen events). The overall use of the fluctuating workweek method is thus not invalidated by occasional and unforeseeable workweeks in which the employee’s fixed salary did not provide compensation to the employee at a rate not less than the applicable minimum wage, so long as the fixed salary was reasonably calculated to compensate the employee at or above the applicable minimum wage in the foreseeable circumstances of the employee’s work. It is important to note, however, that the employer will not be able to use the fluctuating workweek method in circumstances where the employer could have foreseen that the employee’s salary would not at least equal the applicable minimum wage in all workweeks, or where the employee’s salary in fact did not at least equal the applicable minimum wage with some degree of frequency. In such circumstances, the employer and the employee must reach a new understanding, either as to the number of hours that the employee is to work or the amount of fixed salary to be paid, or the employer must use a different method to compute overtime. See WHD Opinion Letter FLSA (Feb. 6, 1969) (stating that the fluctuating workweek method ‘‘would be inapplicable where the employer could have foreseen or anticipated that the salary would be PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 34617 insufficient to yield the minimum wage even in a nominal number of workweeks such as five in an annual period’’); WHD Opinion Letter FLSA (June 12, 1969) (finding that ‘‘the fact that the employee’s salary failed to equal the statutory minimum wage in as many as 27 workweeks[ ] in one year would render moot any consideration that such a situation could not have been anticipated . . . [and] to ensure that his fluctuating workweek plan will be valid in the future, the employer must reach a new understanding with the employee’’); Davis v. Friendly Exp., Inc., No. 02–14111, 2003 WL 21488682, at *2 (11th Cir. 2003) (per curiam) (‘‘If, however, the need for a minimum wage supplement becomes common, the fluctuating workweek calculation may not apply unless the employer and the employee reach a new understanding.’’); Aiken, 172 F.3d 43, 1998 WL 957458, at *5 (rejecting an employee’s argument that an employer and employee must reach a new understanding regarding the use of the fluctuating workweek method if there is even a single workweek in which the employee’s fixed salary falls below the minimum wage, stating instead that the validity of such a pay plan is defeated only if such workweeks are foreseeable or frequent); Perez v. Radio Shack Corp., No. 02 C 7884, 2005 WL 3750320, at *3 (N.D. Ill. Dec. 14, 2005) (‘‘If the breaches become too common, however, the employer must cease using the fluctuating workweek method and reach a new understanding with the employee.’’). 4. Clear and Mutual Understanding In its current form, § 778.114(a) provides that, to use the fluctuating workweek method of computing overtime, an employer and employee must, inter alia, possess ‘‘a clear mutual understanding . . . that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period.’’ 29 CFR 778.114(a). The current regulation further explains that the fluctuating workweek method may not be used ‘‘unless the employee clearly understands that the salary covers whatever hours the job may demand in a particular workweek and the employer pays the salary even though the workweek is one in which a full schedule of hours is not worked.’’ 29 CFR 778.114(c). The NPRM proposed to modify the current language regarding the clear and mutual understanding requirement for readability and to clarify that employers may pay bonuses, premium payments, E:\FR\FM\08JNR1.SGM 08JNR1 khammond on DSKJM1Z7X2PROD with RULES 34618 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations and other additional pay of any kind in addition to the fixed salary. See 84 FR 59602. The NPRM did not, however, propose to substantively change the current requirement that an employee and employer must clearly understand that the fixed salary represents compensation for all of the hours worked in the workweek, whether many or few. See id. (proposing that the employee and employer must ‘‘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’’). A few commenters, including the WHDI and Fisher Phillips, requested that this clear and mutual understanding requirement be removed or modified in the final rule. WHDI stated that, as previously interpreted by the Department and courts, an employer is not required to prove an employee’s state of mind in order to satisfy this requirement. In other words, WHDI asserted that the fluctuating workweek method ‘‘is established via objective evidence, not state of mind evidence’’ and thus the reference to a clear and mutual understanding between the employer and employee is misleading and should be deleted. Fisher Phillips similarly argued that the NPRM’s proposed ‘‘clear and mutual understanding’’ language would erroneously create a heightened ‘‘requirement’’ for use of the fluctuating workweek method. Fisher Phillips requested that WHD simply use the term ‘‘understanding’’ to avoid future litigation over the meaning of this provision. The ‘‘clear mutual understanding’’ language has appeared in § 778.114 since 1968. See 33 FR 986, 991 (Jan. 26, 1968). The Department’s longstanding position is that the mutual understanding that must exist between the employer and employee is that the fixed salary paid to the employee represents compensation for all the hours worked in that workweek, however many or few. See, e.g., FLSA2009–3 Opinion Letter, 2009 WL 648995, at *2 (Jan. 14, 2009); FLSA Opinion Letter, 1999 WL 1002399, at *1 (May 10, 1999). The clear and mutual understanding requirement does not, however, extend to the specific method used to compute the overtime pay. See FLSA2009–3 Opinion Letter, 2009 WL 648995, at *2 (Jan. 14, 2009). In other words, the current regulation does not impose a requirement that the employee VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 needs to fully understand the precise payroll method by which his or her overtime compensation is calculated. Id. Numerous courts have reached the same conclusion in analyzing the current regulation. See, e.g., Garcia v. Yachting Promotions, Inc., 662 F. App’x 795, 797 (11th Cir. 2016) (per curiam) (‘‘An employee does not have to understand every contour of how the fluctuating workweek method is used . . . so long as the employee understands that his base salary is fixed regardless of the hours worked.’’); Clements v. Serco, Inc., 530 F.3d 1224, 1230–31 (10th Cir. 2008) (same); Valerio v. Putnam Assocs. Inc., 173 F.3d 35, 40 (1st Cir. 1999) (‘‘The parties must only have reached a ‘clear mutual understanding’ that while the employee’s hours may vary, his or her base salary will not.’’); Bailey v. Cnty. of Georgetown, 94 F.3d 152, 156 (4th Cir. 1996) (‘‘Neither [section 778.114] nor the FLSA in any way indicates that an employee must also understand the manner in which his or her overtime pay is calculated.’’). The NPRM did not propose to substantively modify this longstanding interpretation or to create a new heightened requirement with respect to the nature of the understanding that must exist between the parties. The Department believes that the clear and mutual understanding requirement is an important condition placed upon the usage of the fluctuating workweek method. The commenters requesting deletion of this requirement did not present evidence that courts, employers, or employees are unduly challenged in understanding or applying the requirement. Accordingly, the Department declines to substantively modify its proposal to incorporate the existing clear and mutual understanding requirement in the regulatory text. The Department has decided, however, to add clarifying text in § 778.114(a) to emphasize that, although the parties must have a clear and mutual understanding that the fixed salary is compensation for all hours worked in the workweek, they need not possess such an understanding as to the specific method used to calculate overtime pay. 5. Computing Overtime Pay Owed Under the Fluctuating Workweek Method Proposed § 778.114(a)(5) requires that ‘‘[t]he 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 PO 00000 Frm 00022 Fmt 4700 Sfmt 4700 workweek.’’ It further clarifies that ‘‘[p]ayment 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.’’ Proposed § 778.114(a)(5) also revises the current rule’s explanation of how the regular rate and overtime pay would be computed under the fluctuating workweek method to account for cases where the employee receives nonexcludable supplemental payments. Specifically, ‘‘the regular rate of the employee will vary from week to week and is determined by dividing the amount of the salary and any nonexcludable additional pay received each workweek by the number of hours worked in the workweek’’ and ‘‘[p]ayment 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.’’ 84 FR at 59602.13 As discussed above, the fluctuating workweek method computes overtime pay where an employee receives a weekly salary that is understood to be compensation for all hours worked. Accordingly, § 778.114 is an example of a scenario where additional overtime compensation is properly computed as one-half the regular rate because the straight-time portion of the required ‘‘one and one-half times the regular rate’’ has already been paid. Any pay arrangement that provides compensation for all hours worked in a workweek would cover the straight-time portion of required overtime pay, leaving the need to pay only an additional half-time premium for each overtime hour. See 29 CFR 778.111, 778.112. The fact that an employee received a bonus or premium payment as part of such an arrangement would not negate the fact that he or she has already received the straight-time portion of required overtime pay as long at the additional payment is appropriately included in the regular rate. In other words, payment of bonuses, premiums, and other 13 By comparison, current § 778.114(a) states that ‘‘the regular rate of the employee will vary from week to week and is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week’’ and ‘‘[p]ayment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate, under the salary arrangement.’’ 29 CFR 778.114(a). E:\FR\FM\08JNR1.SGM 08JNR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations additional pay under the fluctuating workweek method will not change the half-time overtime calculation, as long as those payments are appropriately included in the regular rate, because the employees will have already received the straight-time due to them for all hours worked, and only additional halftime needs to be computed for overtime hours to comply with the FLSA. For example, suppose an employee were paid $491 in fixed weekly salary plus an $8 per hour nightshift premium. In a week in which the employee works 50 hours, including 4 hours for which the employee receives the nightshift premium, the employee’s straight time pay is $523 ($491 salary plus $32 nightshift premium), and the regular rate is $10.46. The employer need only pay an additional $5.23, half time the regular rate, for each of the 10 overtime hours, for a total of $52.30. The payment of the $8 nightshift premium is reflected in this fluctuating workweek method computation. The fluctuating workweek method therefore correctly computes overtime pay owed under the FLSA when an employee receives a fixed salary and hours based premiums that compensate him or her for all hours worked. This is the same result as would occur if the employee were paid, for example, on a piece rate basis but also received additional pay for specific hours. See 29 CFR 778.111(a) (providing a regulatory example of payment of waiting time in addition to piece rate and explaining that only additional half time is due for overtime hours). Many commenters welcomed the proposed clarification in § 778.114(a)(5). According to the Society for Human Resource Management (SHRM), ‘‘employees and employers are best served by a system that promotes maximum flexibility in structuring employee pay and benefits and clarity for employers when preparing total compensation packages’’ and the proposed clarification ‘‘will provide much-needed clarity to the regulated community.’’ The Society of Independent Gasoline Marketers of America (SIGMA) stated that ‘‘[t]reating all such bonus payments consistently will reduce employer confusion and regulatory burdens and facilitate compliance with overtime rules.’’ See also CWC, World Floor Covering Association (WFCA). Some of the commenters supporting the clarification in proposed § 778.114(a)(5) requested that the Department further clarify the types of ‘‘additional pay of any kind’’ that would be compatible with the fluctuating workweek method. SHRM requested that the Department ‘‘specifically VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 referenc[e] ‘commissions’ as a permissible form of additional pay. . . to eliminate any confusion over whether such commission payments are compatible with the fluctuating workweek method.’’ As noted in the NPRM, the Department agrees that commissions constitute a type of ‘‘additional pay of any kind’’ that would be compatible with the fluctuating workweek method. See 84 FR at 59594 (‘‘[e]xamples of ‘additional pay of any kind’ may include commissions’’).14 Additionally, the Department believes hazard pay also would be compatible with the fluctuating workweek method. Id. at 59601 (listing additional pay ‘‘for hazard duty, graveyard shifts, and so forth’’ as types of premiums that would be permitted under this final rule). Accordingly, the Department is revising the phrase ‘‘any bonuses, premium payments, or other additional pay of any kind’’ in proposed § 778.114 to ‘‘any bonuses, premium payments, commissions, hazard pay, or other additional pay of any kind.’’ The WFCA requested that the Department restrict ‘‘additional pay of any kind’’ that would not invalidate the fluctuating workweek method ‘‘to what is ultimately included in the definition of the regular rate.’’ Such a restriction would imply that supplemental payments that are excludable from the regular rate under section 207(e)—such as overtime premiums under section 207(e)(5)–(7), or ‘‘payments in the nature of gifts made at Christmas time’’ under section 207(e)(1)—would invalidate the fluctuating workweek method. Such supplemental pay, however, does not impact the employee’s straight time compensation because it is excludable from the regular rate. The Department has never interpreted such payments as being inconsistent with the use of the fluctuating workweek method of compensation. The requested restriction would also have the effect of discouraging employers using the fluctuating workweek method from offering excludable supplemental pay. But as explained more fully in the Department’s recent rulemaking regarding the regular rate, 84 FR 68736, excludable payments such as on-site 14 29 CFR 778.117 (‘‘Commissions (whether based on a percentage of total sales or of sales in excess of a specified amount, or on some other formula) are payments for hours worked and must be included in the regular rate. This is true regardless of whether the commission is the sole source of the employee’s compensation or is paid in addition to a guaranteed salary or hourly rate, or on some other basis, and regardless of the method, frequency, or regularity of computing, allocating and paying the commission.’’). PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 34619 medical care, wellness programs, and contributions to health and retirement plans, benefit workers immensely. See 29 CFR 778.215, 778.224. The Department believes such excludable remuneration should be encouraged and not discouraged. As such, the Department declines to restrict the types of additional pay that would be compatible with the fluctuating workweek method. Several commenters objected to the proposed clarification that ‘‘[p]ayment of bonuses, premium payments, and additional pay of any kind is not incompatible with the fluctuating workweek method of overtime payment’’ and requested that the Department rescind the proposed revisions to § 778.114(a)(5). These commenters raised a number of arguments, which the Department addresses below. a.) Whether Use of the Fluctuating Workweek Method Is Consistent With the Purpose of the FLSA Comments submitted by NELA, NELP, Economic Policy Institute (EPI), and 18 State Attorneys General (State AGs) contend that, by making it easier for employers to use the fluctuating workweek method, the proposed clarification in § 778.114(a)(5) is contrary to the FLSA’s remedial purpose. For instance, NELA asserts that the proposed rule would undermine ‘‘the primary purposes of the FLSA’s overtime provisions,’’ which are ‘‘to protect workers from long hours of work and to spread employment.’’ See also NELP, EPI, State AGs. As an initial matter, the Department emphasizes, as previously discussed, that the fluctuating workweek method does not deviate from the standard method of computing overtime pay under the FLSA. As has always been clear in the regulatory text, because the employee has received straight time compensation for all hours in the workweek, the overtime payment obligation is met by payment of an additional one-half the regular rate for all hours over 40 in the workweek. Far from being contrary to the purpose of the FLSA’s overtime requirement, half-time overtime under the fluctuating workweek method furthers that purpose. As the Supreme Court has explained, ‘‘[B]y increasing the employer’s labor costs by 50% at the end of the 40-hour week and by giving the employees a 50% premium for all excess hours, Section 7(a) achieves its dual purpose of inducing the employer to reduce the hours of work and to employ more men and of compensating the employees for the burden of a long E:\FR\FM\08JNR1.SGM 08JNR1 34620 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations workweek.’’ Youngerman-Reynolds Hardwood, 325 U.S. at 423–24. The Supreme Court has further warned against the ‘‘flawed premise that the FLSA pursues its remedial purpose at all costs.’’ Encino Motorcars, LLC v. Navarro, 138 S. Ct. 1134, 1142 (2018) (internal quotation marks omitted). In this case, the FLSA pursues its remedial purpose in its overtime requirement at a clearly defined cost: ‘‘increasing the employer’s labor costs by 50% . . . for all [overtime] hours.’’ YoungermanReynolds Hardwood, 325 U.S. at 423. That is precisely what the fluctuating workweek method achieves. As such, the fluctuating workweek method is consistent with the FLSA, and the Department believes that any increased use of the method by employers in response to this final rule will not conflict with the purposes of the Act. b.) Whether the Final Rule Is Consistent With Supreme Court Precedent khammond on DSKJM1Z7X2PROD with RULES In its comment, NELA states that the final rule is inconsistent with the Supreme Court’s decision in Missel, 316 U.S. 572. According to NELA, ‘‘the [Missel] Court held that an employer may pay a diminishing half-time overtime premium only if the employee receives a fixed weekly wage amount that never varies based on work performed.’’ In support of this conclusion, NELA stated that ‘‘[n]owhere in Missel did the Court consider, let alone authorize, the scenario of an employer paying a fixed salary [plus] other variable hours-based compensation under a half-time pay scheme.’’ NELA further contended that the Missel Court ‘‘directly answered’’ the question of ‘‘whether an employer can ever pay any amount other than base salary while still availing itself of [the fluctuating workweek method].’’ The plaintiff in Missel received a $2.50 per week allowance for supper money in addition to the fixed salary, which NELA argued is a type of supplemental pay that does not vary with respect to hours worked.15 According to NELA, since the Missel Court permitted nonhours-based additional compensation under the fluctuating workweek method provided that the employee’s total compensation was fixed in advance and guaranteed, it must also have prohibited all hours-based additional 15 The Department notes that the Supreme Court’s opinion in Missel made no mention of the allowance for supper money, which was noted in the lower court opinions. The fixed salary amount referenced in the Court’s opinion, however, included the weekly allowance. The Department also notes that under certain circumstances supper money can be excluded from the regular rate. 29 CFR 778.217(b)(4). VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 compensation under that method. See NELA (arguing that Missel held that additional compensation is permitted under the fluctuating workweek method ‘‘if (and only if) the additional compensation amounts—like the base salary—are fixed and do not vary based on the number or type of hours worked’’). The Department agrees with NELA that the Missel Court did not consider the scenario where an employee receives hours-based supplemental pay on top of a fixed salary, and so could not have expressly authorized such payments under the fluctuating workweek method. But for that same reason, the Missel Court could not have precluded such payments. 84 FR at 59593 (‘‘Missel did not even address the issue of bonus or incentive payments beyond the fixed salary, let alone preclude certain types of payments.’’); see also Smith, 2011 WL 11528539, at *2 (‘‘Nothing in Missel prohibits the use of the fluctuating work week method for calculating [overtime owed] whenever an employer gives a bonus to an employee.’’). The Department does not agree that the Missel Court’s decision means that all hours-based compensation must be forbidden. As NELA conceded, Missel did not address hours-based compensation. As such, the Court could not have ‘‘directly answered’’ any question concerning hours-based supplemental pay. Therefore, Missel does not support NELA’s contention that a half-time overtime premium is appropriate ‘‘only if the employee receives a fixed weekly wage amount that never varies based on work performed.’’ c.) Whether the Final Rule Is Inconsistent With Other Legal Precedent Several commenters, including NELP, argued that ‘‘since Missel, courts have consistently been clear in their application of the [fluctuating workweek] rule. Under the [fluctuating workweek method], the employer’s regular rate of pay can vary only with the number of hours worked per week, not the type of work performed during those hours or any premiums paid for those hours.’’ See also State AGs. These commenters list several court cases holding that the fluctuating workweek method is not compatible with hoursbased bonuses. See, e.g., NELP; State AGs. However, since Missel, courts have taken a wide range of approaches regarding the payment of bonuses and premium payments under the fluctuating workweek method and have not been consistent in their application PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 of the fluctuating workweek rule. For example, some courts held that bonus and premium payments were permitted under the fluctuating workweek method, and did not make the distinction between hours-based and production-based payments that some courts later developed. See, e.g., Cash, 2 F. Supp. 2d at 908 (applying fluctuating workweek method where employee received incentive bonuses in addition to fixed salary); Black, 1994 WL 70113, at *5 (applying fluctuating workweek method where employee received straight-time bonuses for long hours in addition to fixed salary). Conversely, other courts have categorically prohibited such pay. See 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 because employee ‘‘received various bonus payments and commissions’’). In 2003, the First Circuit held that the fluctuating workweek method may be used only where an employee receives a ‘‘ ‘fixed amount as straight time pay for whatever hours [the employee] is called upon to work in a workweek.’ ’’ O’Brien, 350 F.3d at 288 (quoting 29 CFR 778.114(a)). Following O’Brien, and citing the 2011 final rule preamble in their reasoning, some courts have developed a dichotomy that permits production-based bonuses but prohibits hours-based bonuses under the fluctuating workweek method. See Dacar, 914 F.3d at 926; Lalli, 814 F.3d at 10. The Department notes, however, that neither the Department’s regulations nor the FLSA distinguish between production-based and hoursbased bonuses. Further, and perhaps most importantly, this legal precedent was based on the wording of the regulation prior to this rulemaking, and was exacerbated by the unclear preamble discussion in the 2011 final rule, both of which the Department is addressing in this rulemaking.16 As these divergent approaches demonstrate, and contrary to the assertions of some commenters, the case law is neither consistent nor clear. These inconsistent interpretations by 16 NELP states in a footnote that courts issuing case law that is inconsistent with the final rule ‘‘have been interpreting Supreme Court precedent, not the regulation.’’ But, as explained above, Supreme Court precedent does not directly address the compatibility of bonus and premium payments with the fluctuating workweek method. And the courts cited by NELP ground their analysis in the Department’s fluctuating workweek regulation. For instance, the O’Brien court explained that ‘‘the parties limit their arguments to whether the compensation scheme . . . comports with the regulation, and we confine ourselves to the same question.’’ 350 F.3d 287 n.15. E:\FR\FM\08JNR1.SGM 08JNR1 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations courts have created practical confusion and challenges for employers. Comments received in this rulemaking document the confusion caused by the judicially-developed distinction between productivity-based and hoursbased bonuses. See CWC (‘‘Some courts have permitted additional payments, others have prohibited them. S[t]ill other courts have drawn distinctions between permitted and prohibited additional payments based on the purpose of the payments. This widely divergent case law has created a greater disincentive for employers to consider the fluctuating workweek [method].’’). One of the reasons for this rulemaking is to clear up the confusion caused by the divergent case law. This final rule makes clear that permitting all supplemental pay while using the fluctuating workweek method is consistent with how overtime pay is computed based on the regular rate under the FLSA. The Department recognizes that this clarification is inconsistent with certain legal precedent, such as those cases that adhere to the judicially-developed dichotomy between hours-based and productivity-based bonuses.17 However, as discussed above, neither the Department’s regulations nor the FLSA distinguish between production- and hours-based bonuses when computing the regular rate and overtime pay. Indeed, this dichotomy lacks support and is in tension with all of the Department’s prior written guidance on the issue. The clarifications provided in this preamble discussion and the corresponding explicit revisions to the regulatory text will bring much needed clarity regarding the compatibility of all types of bonuses with the fluctuating workweek method to the courts, employers, and employees alike. khammond on DSKJM1Z7X2PROD with RULES d.) Whether the Final Rule Is Consistent With the Department’s Prior Position NELA argues that the final rule is inconsistent with the Department’s prior position, particularly the position taken in the 2011 final rule. But as explained in the NPRM and below, it is not clear what precise position was taken in that final rule. In fact, that is the point of this rulemaking: to clarify the Department’s position on whether payments of bonuses and premiums are permissible under the fluctuating workweek method. 17 Indeed, given courts’ different approaches, no rule here can be consistent with all the case law since Missel, and the Department does not attempt to do so. Rather, the Department’s objective is to provide a rule that gives clear guidelines to employers and employees. VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 Since 1968, the regulatory text of § 778.114 has explained that, under the fluctuating workweek method, ‘‘[p]ayment for overtime hours at onehalf [the regular] rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate, under the salary arrangement.’’ In the 2008 NPRM, the Department proposed to clarify that the payment of additional bonuses and premiums was compatible with the fluctuating workweek method. This was because, as explained in the 2009 opinion letter, ‘‘[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.’’ In the 2011 final rule, the Department did not adopt the proposed clarifying language to § 778.114, and instead 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 clarifications 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.’’ Id. Because the Department had stated clearly in both the 2008 NPRM and the 2009 opinion letter that payment of bonuses was permissible under the same regulatory language in § 778.114 that the Department retained in the 2011 final rule, the Department’s reference to the ‘‘current rule’’ prohibiting such payments was unclear. See 73 FR at 43662; WHD Opinion Letter FLSA2009–24 (Jan. 16, 2009) (withdrawn Mar. 2, 2009). As explained in the background section of this preamble, the apparent misalignment between the 2011 preamble language and the substantively unchanged final regulatory text created substantial confusion for the regulated community. See CWC (‘‘[S]tatements in the preamble to the [2011] final rule . . . contributed to the growing confusion over how additional compensation should be treated’’ because ‘‘while DOL did not publish any substantive changes to its codified rules, it articulated an explanation directly contrary to past practice.’’). Attempting to make sense of the 2011 final rule, the court in Sisson concluded that the 2011 final rule actually PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 34621 ‘‘present[ed] an about-face’’ that ‘‘alters the DOL’s interpretation.’’ 2013 WL 945372, at *6; Switzer, 2012 WL 3685978, at *4 (describing the Department as having ‘‘shifted course’’ in the 2011 final rule). This interpretation, however, ignores the ‘‘restore the current rule’’ language and the unchanged regulatory text. The Wills court concluded that ‘‘the status quo was being maintained,’’ but defined the status quo as then-emerging case law permitting production-based bonuses while prohibiting hours-based ones. 981 F. Supp. 2d at 262; see Lalli, 814 F.3d at 9 (‘‘DOL’s decision to leave the regulation alone means that the bulletin would have done nothing to change the federal courts’ existing ‘treatment of that precise issue’’’) (quoting Wills, 981 F. Supp. 2d at 252). Many subsequent courts have affirmed the distinction between production-based and hoursbased bonuses. See, e.g., Dacar, 914 F.3d at 926; Lalli, 814 F.3d at 8–10. But the Department has never endorsed the distinction between hours-based bonuses and production-based bonuses. In fact, as NELA points out, the Department’s documented intent to file an amicus curiae brief in support of the appeal of the Wills decision evinces the Department’s disagreement with Wills. The Department’s clarification in this final rule is consistent with its interpretations in the 2008 NPRM and the 2009 opinion letter and, importantly, is also consistent with the regulatory text as reaffirmed in the 2011 rule, which explained that employers that paid a fixed salary to employees whose hours fluctuated from week to week would satisfy their overtime payment obligation by paying an additional 50 percent of the employee’s regular rate for all overtime hours. The Department’s clarification in this final rule does not alter this fundamental principle of overtime compensation. Instead, it clarifies that the employee’s straight time compensation may include bonus and premium payments in addition to a fixed salary. In such situations, where the regular rate includes all payments that are not excludable under section 207(e)(1)–(8), the employer’s overtime payment obligation will be met by the payment of an additional 50 percent of the employee’s regular rate for all overtime hours. Thus the Department does not agree that the current rule is inconsistent with its prior positions. e.) Whether the Inverse Relationship Between the Regular Rate and Hours Worked Undermines the FLSA Several commenters expressed concern that, under the fluctuating E:\FR\FM\08JNR1.SGM 08JNR1 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations workweek method, the regular rate decreases when hours increase. For instance, the State AGs stated that the fluctuating workweek method of calculating overtime ‘‘is therefore the only method whereby the employee’s regular rate of pay and the employee’s overtime rate of pay actually decrease as the hours worked increase.’’ These commenters assert that this inverse relationship is in tension with the remedial purposes of the FLSA’s overtime requirement and harms workers paid under that method. NELA, for example, stated that the inverse relationship between the regular rate and hours worked ‘‘provides a strong financial incentive to employers to require ever more overtime hours and to limit the number of employees.’’ As discussed above, however, the fluctuating workweek method is not the only method under which the regular rate decreases as hours worked increase. For instance, the regular rate of an employee paid through a day-rate arrangement under § 778.112 is equal to the fixed day-rate amounts per week divided by hours worked. Because the day rate does not increase for longer work days, the regular rate necessarily falls as hours worked increase. Thus, there is some degree of inverse relationship between the regular rate and hours worked in every overtime compensation example listed in §§ 778.110–778.115 except where the employee is paid exclusively through an hourly rate, in §§ 778.110(a) and 778.113. Whenever an employee receives any compensation in addition to or in lieu of hourly pay—such as a fixed bonus, or a day rate—the regular rate likely would vary inversely with hours worked. But that does not mean such compensation arrangements are at odds with the FLSA. Indeed, it is a function of the FLSA’s definition of the regular rate as non-excludable compensation divided by hours worked. Furthermore, nothing in this rule changes the basic rules for calculating pay under the fluctuating workweek method, including overtime. As such, any ‘‘financial incentive’’ to requiring overtime work would remain the same as in the status quo. The Department further disagrees that the inverse relationship ‘‘provides a strong financial incentive to employers to require ever more overtime hours and to limit the number of employees.’’ NELA. While the overtime premium per hour decreases as hours increase, the employer must still pay an overtime premium that is designed to discourage overtime work and spread employment, and the total amount of overtime premium an employer owes continues to increase as hours increase. The Department notes that the payment of hours-based bonuses to employees compensated under the fluctuating workweek method—which this final rule clarifies is permitted— may diminish or even eliminate the inverse relationship between hours worked and the regular rate that commenters find objectionable. Consider the compensation scheme in Black, which the court upheld as compatible with the fluctuating workweek method, see 1994 WL 70113, at *2, *5: The Employee was paid a fixed salary for all hours worked in a workweek plus a straight-time bonus for each hour worked in excess of 45. The bonus rate equals the weekly salary divided by 40 (which equals 0.025 of the fixed weekly salary per hour). If the employee works more than 45 hours, the regular rate equals: Under this this compensation scheme, so long as the employee works enough hours to receive the bonus, the regular rate would actually increase for each additional hour of overtime work. For example, an employee who works 50 hours and receives a fixed salary of $600 plus a straight-time bonus of $15 for each hour worked in excess of 45 would have a regular rate of $13.50. But if he or she works five additional hours, the regular rate would rise to $13.63. the fluctuating workweek method could face reduced earnings: ‘‘Employers will . . . be unlikely to switch to the fluctuating workweek method unless their employees tend to work more hours above their usual hours than below their usual hours. That means workers whose employers choose to switch to the fluctuating workweek method are likely to receive lower earnings than they receive under the usual method.’’ The Department does not believe this scenario is likely to be widespread, if it occurs at all. It is certainly true that an employer theoretically could reduce an employee’s overall earnings by switching that employee from hourly pay to the fluctuating workweek method. But the same employer could also reduce the employee’s earnings by the exact same amount by lowering the employee’s hourly rate of pay. As such, the ability to switch an employee to the fluctuating workweek method should not make the employer more able or willing to reduce the employee’s earnings. Such an employee would be agnostic as to the method behind an earning reduction: Having the hourly wage reduced or being switched to the fluctuating workweek method with an equivalently low salary would both make the employee equally dissatisfied because the negative effect on earnings is the same. Worker dissatisfaction may affect morale, turnover, and other productivity factors. The employer would also be agnostic: The employer’s labor cost savings are the same and the employee is equally dissatisfied. So the employer faces the same tradeoff between labor costs savings, on one hand, and worker dissatisfaction on the other. The Department therefore finds no reason why the ability to switch an hourly worker to the fluctuating workweek method (an ability already present without the new rule) would make an employer any more able or willing to reduce the employee’s earnings as compared to simply reducing the hourly rate of pay.18 khammond on DSKJM1Z7X2PROD with RULES f.) Effects on Workers Who Switch to the Fluctuating Workweek Method The proposed clarification in § 778.114(a)(5) would make it more attractive for employers to use the fluctuating workweek method, so employers would be more likely to start using the method. While some commenters welcomed greater regulatory clarity, others, including EPI, State AGs, and NELP, expressed concern that when an employee switches to being paid under the fluctuating workweek method, the ‘‘employee . . . will lose the time-anda-half overtime premium.’’ EPI; see also State AGs, NELP. EPI further described how, in its view, a worker switched to VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 18 While this possibility was not raised by EPI, the Department posits that some hourly employees may be willing to forgo a small amount of earnings to be switched to the fluctuating workweek method, perhaps because the employee prefers a fixed salary to unstable hourly pay. In this instance, an employer could theoretically switch the employee to the fluctuating workweek method while reducing the employee’s earnings by the exact amount the E:\FR\FM\08JNR1.SGM 08JNR1 ER08JN20.004</GPH> 34622 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations As such, the Department believes employers switching hourly employees to the fluctuating workweek method should not, on balance, reduce workers’ earnings. To the contrary, overall earnings are likely to increase. As explained below, the final rule is likely to reduce labor market inefficiency, i.e., deadweight loss, by reducing employers’ need to manage the hours of employees who are switched to the fluctuating workweek method and enabling employers to incentivize work not presently being performed. The benefit of this deadweight loss reduction will be distributed among both capital and labor factors, meaning that, on average, employers’ profits and workers’ earnings will both rise. See SHRM (‘‘employees and employers are best served by a system that promotes maximum flexibility in structuring employee pay and benefits’’). khammond on DSKJM1Z7X2PROD with RULES g.) Effects on Workers Paid Under the Fluctuating Workweek Method Several commenters, including State AGs and NELA, expressed concern that the final rule would encourage employers to shift the compensation of employees already being paid under the fluctuating workweek method away from the fixed salary and towards bonuses and premiums. The NPRM expressly considered this possibility, which was also raised in the 2011 final rule, but ultimately concluded that any compensation shifting would not be significant. The Department’s conclusion in this regard relied on 2019 Bureau of Labor Statistics (BLS) data showing that supplemental pay of the type permitted by the final rule—i.e., nonproduction bonuses and shift differentials—constitutes a relatively small portion of employees’ overall compensation nationwide, no more than five percent of any occupation.19 The Department reasoned that, if the prohibition against nonproduction employee was willing to forgo without having a net effect on the employee’s satisfaction. But the Department does not believe that the employer could convince the employee to forgo the entire amount he or she is willing to forgo because an employer’s market power—while often substantial—is rarely absolute. As long as the employee has even a small degree of market power, the employee is likely to forgo less earnings than he or she was willing to be switched to the fluctuating workweek method, leaving the employee more satisfied than before. This hypothetical scenario does not raise significant worker welfare concerns because the end outcome reflects the employee’s preferences as much as the employers. Indeed, by the terms of the hypothetical scenario, switching to the fluctuating workweek method is guaranteed to leave the employee at least as satisfied as before. 19 Bureau of Labor Statistics, Employer Costs for Employee Compensation—June 2019, https:// www.bls.gov/news.release/pdf/ecec.pdf. VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 bonuses and shift differentials under the fluctuating workweek method were lifted, employers using that method would, at most, shift compensation away from the salary and towards such supplemental pay to approximately the same extent as employers nationwide who are not similarly restricted. Since BLS data show employers nationwide have not shifted compensation away from base pay towards nonproduction bonuses and shift differentials to a significant degree (again, no more than five percent for any occupation), the Department concluded that lifting the restriction for employers using the fluctuating workweek method would not result in significant compensation shifting towards those types of pay. Some commenters agreed with this conclusion. See, e.g., SIGMA (‘‘The Association concurs with DOL’s assessment, which is based upon data from the Bureau of Labor statistics, that permitting employers to pay bonuses, premiums, and additional pay to employees compensated with the fluctuating workweek method will not lead employers to shift large portions of salaries into those types of supplemental payments.’’). Other commenters disputed the Department’s use of certain BLS data in this rulemaking. NELA asserted, ‘‘The fact that the Bureau’s statistics show employers currently pay civilians nonproduction bonuses as 1.8% of compensation and shift differentials as 0.2% does not constitute evidence or indication of any kind that employers will not shift compensation to nonguaranteed bonuses and supplementary compensation if given the opportunity to do so’’ under the fluctuating workweek method. The State AGs further argued that the Department’s reliance on the BLS data ‘‘ignores . . . that the rule [the Department] is changing has prevented employers from exploiting the [fluctuating workweek] method and acted as a deterrent against shifting more pay towards hours-based premiums.’’ These commenters appear to believe that the perceived prohibition of supplemental pay under the fluctuating workweek method is responsible for the low rate at which employees nationwide receive nonproduction bonuses and shift differentials in comparison to base pay reflected in the BLS data. But that cannot be true because over 99 percent of employees nationwide are not paid under the fluctuating workweek method and so do not face its perceived restrictions against paying nonproduction bonuses and shift PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 34623 differentials.20 Even though the vast majority of employees nationwide face no restrictions from receiving nonproduction bonuses and shift differentials, their employers have not shifted a significant portion of their compensation towards such supplemental pay. Accordingly, the Department continues to believe that BLS data indicate that, if employees paid using the fluctuating workweek method of compensation begin to receive supplemental pay, there would not be significant compensation shifting. NELA further argued that ‘‘the fact that the Bureau of Statistics was reporting the same (and even lower) average figures of supplemental pay as a percentage of total compensation when the 2008 NPRM issued . . . and when the Department issued its 2011 Final Rule, proves that the same Bureau statistics . . . are simply not evidence of the proposition they are cited to purportedly support.’’ According to NELA, this is because ‘‘those figures were reported and available to commenters and the Department alike when it determined in 2011 that employers would likely reduce salaries and shift compensation to nonguaranteed bonus and other supplemental pay if given the opportunity to do so’’ under the fluctuating workweek method.21 The Department agrees with NELA that the rate at which employers nationwide have paid nonproduction bonuses and shift differentials as compared to base pay has been very low for at least the past decade. That supports the Department’s conclusion that employers using the fluctuating workweek method would not shift more compensation to nonproduction bonuses and shift differentials if given the same opportunity to do so as employers nationwide. The Department disagrees with NELA that the availability of similar BLS data between 2008 and 2011 meant that the Department’s concern regarding compensation shifting was informed by such BLS data. No commenter presented BLS data to the Department, and the Department’s 2011 final rule did not cite 20 The RIA estimates that 698,393 workers are compensated using the fluctuating workweek method, which represents 0.4 percent of U.S. workers. 21 Citing Bureau of Labor Statistics, Employer Costs for Employee Compensation Historical Tables June 2019, Table 1, https://www.bls.gov/web/ecec/ ececqrtn.pdf (reporting for ‘‘all workers’’ supplemental pay as percentage of total compensation at 2.5% (2008), 2.5% (2009), 2.3% (2010), 2.4% (2011); shift differentials at .2% (2008–11); and nonproduction bonuses at 1.4% (2008), 1.5% (2009), 1.3% (2010), and 1.4% (2011)). E:\FR\FM\08JNR1.SGM 08JNR1 34624 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations any such data. The 2011 final rule did not state that it relied on any data whatsoever to conclude that the proposed regulation ‘‘could have had the unintended effect of permitting employers to pay a greatly reduced fixed salary and shift a large portion of employees’ compensation into bonus and premium payments.’’ 76 FR at 18850. For these reasons, the Department continues to have confidence in BLS data indicating that the final rule’s clarification that employees paid under the fluctuating workweek method may receive supplemental pay would not result in significant shifting of compensation away from the fixed salary towards supplemental pay. khammond on DSKJM1Z7X2PROD with RULES h.) Whether the Final Rule Will Create Confusion for Employers The State AGs argue that the proposed clarification will ‘‘create confusion for employers and courts.’’ State AGs. In particular, the State AGs note that certain states prohibit the fluctuating workweek method, and believe that employers in these states will not understand that the method is prohibited by state law. As such, these employers may ‘‘find themselves embroiled in costly litigation or subject to investigation.’’ Id.22 States may and often do enact labor laws that are more restrictive on employers than the federal standard. Employers routinely are able to navigate both state and federal law. Thus, the Department believes that employers in a state that prohibits the fluctuating workweek method, such as California, will understand that the method remains prohibited by that state’s more restrictive law. It is unlikely such employers will, as the State AGs fear, ‘‘rush to use’’ the fluctuating workweek method in contravention of state law. Instead, commenters that represent employers (or labor compliance professionals) overwhelmingly agreed with the NPRM that this final rule would reduce confusion and enhance clarity regarding the application of the fluctuating workweek method. For instance, the Chamber stated that ‘‘the 2011 Preamble generated substantial confusion and uncertainty for courts and employers alike. Employers saw this as an attack on their ability to reward their salaried nonexempt employees with variable incentive compensation.’’ The CWC explained that ‘‘statements in the preamble to the 22 As set forth in the NPRM and confirmed by the State AGs, Pennsylvania, Alaska, California, and New Mexico do not generally permit employers to use the fluctuating workweek method. VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 [2011] final rule . . . contributed to the growing confusion over how additional compensation should be treated’’ because ‘‘while DOL did not publish any substantive changes to its codified rules, it articulated an explanation directly contrary to past practice.’’ SHRM further stated that the 2011 preamble ‘‘resulted in an initial wave of confusion among HR professionals.’’ SHRM; see also id. (‘‘[T]he source of confusion regarding the interaction of bonuses and fluctuating workweek is the 2011 Preamble.’’). This confusion has deterred employers from paying their workers bonuses. According to SHRM, ‘‘The Department’s statement in the 2011 Final Rule preamble that the payment of any compensation in addition to the salary payment somehow ‘invalidated’ the fluctuating workweek method caused many employers to either (1) eliminate bonuses for employees paid pursuant to the fluctuating workweek method; or (2) pay previously salaried employees an hourly rate (and continue any bonus programs). Although these employers typically did not agree with [the] Department’s legal reasoning, nor believe the restructured pay plans best served the needs of their business and employees, the substantial risk of litigation created solely by the Department’s preamble language forced their hands.’’ Therefore, the Department continues to be confident this final rule will reduce confusion for employers. i.) Whether To Exempt First Responders The International Association of Fire Fighters (IAFF) ‘‘urges the Department to carve out an exception for fire fighters and other public safety personnel should it choose to move forward with the proposed regulation.’’ As explained above, the fluctuating workweek method is merely an example of how regular rate and overtime computation principles apply in certain circumstances. The Department has never had industry or occupational exceptions for the use of the fluctuating workweek method and IAFF has not provided sufficient evidence that the Department should consider such an exception now. The Department is therefore adopting § 778.114(a)(5) as proposed, with two minor changes. First, the Department is adding ‘‘commissions’’ as an example of additional pay that is compatible with the fluctuating workweek method. And second, the Department is replacing ‘‘not incompatible’’ with ‘‘compatible’’ to improve readability. PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 C. Examples of the Fluctuating Workweek Method In the NPRM, the Department proposed two new examples to illustrate how the fluctuating workweek method computes overtime pay when an employee receives (1) a nightshift differential and (2) a productivity bonus in addition to the fixed salary. Fisher Phillips stated in its comment that ‘‘the examples are unnecessarily lengthy’’ and suggested ‘‘that the calculation be performed for only one workweek instead of all four in . . . examples [2 and 3] and/or collapse these examples as the employee could earn both a shift differential and a productivity bonus.’’ The Department agrees that it is unnecessary to show how the fluctuating workweek method computes overtime pay for four different workweeks in examples 2 and 3. But the Department believes it would be useful for each example to compute overtime for one workweek in which hours worked is over 40 and one workweek in which it is under 40. Accordingly, the Department is revising examples 2 and 3 to compute overtime pay in two different workweeks: One workweek where the employee works 37.5 hours and another in which the employee works 48 hours. SHRM requested that the Department add ‘‘an example that addresses payments made for work outside of the employee’s normal schedule.’’ Specifically, SHRM suggested adding the following example to the regulatory text: ‘‘an employer and employee reach an understanding that the salary is intended to cover all hours worked from Monday to Friday, but occasional Saturday work will be paid at a day rate or hourly rate.’’ The Department does not believe the fluctuating workweek method would be appropriate in the scenario SHRM described. This is because the fluctuating workweek method computes overtime pay where the employee and employer both understand that the fixed salary covers all hours worked in the entire workweek, not just ‘‘Monday to Friday’’ as in SHRM’s suggestion. That said, if the parties understand that the fixed salary covers all hours worked in a workweek, an employer may offer a premium for weekend work outside the employee’s normal schedule and still use the fluctuating workweek method to compute the regular rate and overtime pay. D. Revisions to § 778.114(c) In its current form, § 778.114(c) states that ‘‘[w]here all the legal prerequisites for use of the ‘fluctuating workweek’ E:\FR\FM\08JNR1.SGM 08JNR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations 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.’’ 29 CFR 778.114(c). The NPRM proposed non-substantive edits to this language for readability. See 84 FR at 59602 (‘‘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.’’). In its comment, the WHDI stated that, under the fluctuating workweek method, the regular rate varies from week to week based on the number of hours worked, thereby requiring employers to calculate the amount that they owe in overtime premiums each week. WHDI asserted that employers can avoid having to recompute the regular rate each week if they simply divide the employee’s salary (plus any other compensation that must be included in the regular rate) by 40 and then pay one-half the resulting rate for each overtime hour worked. WHDI stated that the Department’s proposed regulatory text in § 778.114(c) ‘‘confuse[d] matters’’ by implying that employers can pay more than half the regular rate in overtime compensation only ‘‘[w]here the conditions for the use of the fluctuating workweek method of overtime payment are present.’’ 84 FR at 59602. WHDI thus requested that the Department clarify that there are no ‘‘legal prerequisites’’ to paying more than the amount of overtime compensation required by the Act. Pursuant to the FLSA, in a workweek that exceeds 40 hours, an employee is entitled to be compensated at his or her regular rate for all hours worked (i.e., straight time) and to receive an overtime premium (i.e., overtime) of at least one half the regular rate for the hours worked in excess of 40. See 29 U.S.C. 207(a). The combination of straight time and overtime equals the one and onehalf time overtime pay required by section 7 of the FLSA. See id. Therefore, to the extent that an employer has already paid straighttime compensation for all hours worked, the employer’s resulting overtime obligation is only an additional half of the regular rate for the hours worked in excess of 40 in the workweek. As noted by WHDI, in an overtime week, an employer using the fluctuating workweek method will always exceed its FLSA overtime obligation if it calculates the regular rate based on 40 hours worked (rather than the higher number of hours actually worked) and VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 pays the half-time overtime premium on that basis. See, e.g., FLSA Opinion Letter, 2002 WL 32255314 (Oct. 31, 2002); FLSA Opinion Letter, 1986 WL 1171085 (Feb. 10, 1986). It is the Department’s longstanding position that employers are always permitted to pay more in overtime premiums than required by the FLSA. The regulatory text at issue in revised § 778.114(c) simply states that this principle is true in the fluctuating workweek context and does not impose any pre-conditions for paying more in overtime compensation than required by law. See 84 FR at 59602. E. Other Comments The Department received a number of comments that were not directed to a specific part of the proposed rule. These comments are addressed below. The American Horse Council and the National Thoroughbred Racing Association requested guidance regarding how a bonus for a period that spans multiple workweeks should be allocated to those workweeks for the purpose of regular rate computation. The WFCA also requested that WHD give employers the choice of either allocating such a bonus to the week in which it is paid or to spread the bonus amount evenly across the covered workweeks (i.e., the period the bonus was earned). However, bonus allocation for the purpose of regular rate computations is not within the scope of the proposed regulation. Instead, WHD’s regulations at 29 CFR 778.209 address how bonuses should be allocated for all methods of regular rate computation, including the fluctuating workweek method. Section 778.209 provides that, where possible, a bonus ‘‘must be apportioned back over the workweeks of the period during which it may be said to have been earned.’’ 29 CFR 778.209(a) (emphasis added). If such apportionment is not possible, ‘‘some other reasonable and equitable method of allocation must be adopted.’’ 29 CFR 778.209(b). Accordingly, a bonus earned over a longer period may not be allocated solely to the workweek in which it was paid. The WFCA requested WHD to clarify that that ‘‘preannouncement of possible bonuses should not make a bonus nondiscretionary and therefore included in the regular rate.’’ However, the principles that govern whether a bonus is or is not discretionary, and therefore excludable from the regular rate, are the same whether an employer is using the fluctuating workweek method or some other method of determining the regular rate. These principles are found in the Department’s regulations at § 778.211, PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 34625 which provides that ‘‘if an employer announces to his employees in January that he intends to pay them a bonus in June, he has thereby abandoned his discretion regarding the fact of payment by promising a bonus to his employees. Such a bonus would not be excluded from the regular rate under section 7(e)(3)(a).’’ This language is clearly inconsistent with the WFCA’s request. The preamble to WHD’s recent Regular Rate final rule, published on December 16, 2019, provides further discussion of the distinction between discretionary and non-discretionary bonuses, with examples of discretionary bonuses common in the workplace, which may also provide employers with helpful guidance on this issue. See 84 FR at 68754–56. The National Newspaper Association requested that the Department add a provision in the revised regulation that ‘‘permit[s] the fluctuating work ‘week’ to be calculated on a biweekly or monthly basis commensurate with the pay periods in many small businesses [to] allow newspaper employers some needed flexibility.’’ The FLSA expressly requires employers to pay overtime compensation for any ‘‘workweek longer than forty hours.’’ 29 U.S.C. 207(a). As such, the regular rate—which is necessary to determine overtime compensation owed—must also be calculated on a weekly basis. See 29 CFR 778.104 (‘‘The Act takes a single workweek as its standard and does not permit averaging of hours over 2 or more weeks.’’). Several commenters urged WHD to state in the final rule that the fluctuating workweek method may be used to compute back wages in failed exemption cases. The commenters explained that, in such cases, an employer may have classified a salaried employee as exempt under the FLSA but it is later determined that such employee is in fact nonexempt (e.g., because he or she is found to have performed nonexempt duties). In such cases, courts must determine how to calculate back wages for the salaried employees. Attorney Daniel Abrahams requested that the Department’s final rule expressly state, consistent with the weight of the case law, that back wages in such cases may be calculated using the fluctuating workweek method.23 23 Many courts have permitted back wages in failed exemption cases to be calculated by using the fluctuating workweek method, although courts are divided as to whether the authority to apply the method is based on the retroactive application of § 778.114 itself or instead arises directly from the Supreme Court’s Missel decision. See, e.g., Black v. Settlepou, P.C., 732 F.3d 492, 496–98 (5th Cir. E:\FR\FM\08JNR1.SGM Continued 08JNR1 34626 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES Other commenters, such as Fisher Phillips and the WHDI, similarly requested that the Department clarify that, while the fluctuating workweek method may be used to calculate back wages in misclassification cases, the specific requirements set forth in § 778.114 do not apply to such back wage computations and instead are applicable only to the use of the fluctuating workweek method as a payroll practice. The Department agrees with the general observation by Fisher Phillips and WHDI that the specific conditions set forth in § 778.114 (e.g., the clear and mutual understanding requirement) are intended to govern the use of the fluctuating workweek method as a prospective payroll practice. See, e.g., Lamonica, 711 F.3d at 1311; UrnikisNegro, 616 F.3d at 678 (explaining that 29 CFR 778.114 ‘‘on its face is not a remedial measure. It says nothing about how a court is to calculate damages where, as here, the employer has breached its obligation to pay the employee an overtime premium. Its focus instead is on how an employer may comply with its statutory obligations in the first instance and avoid liability for breach of those obligations.’’). Accordingly, the Department declines to opine in this final rule on the permissibility of using the fluctuating workweek method to retroactively calculate back wages in failed exemption cases. The Department does not believe it would be appropriate, in the context of this rulemaking, to discuss the method of back wage calculation that courts should use in litigation involving failed exemption status, which necessarily involves fact-specific determinations and analysis. The NPRM did not specifically address back wage computations for misclassification cases, and the Department declines to do so in the final rule. As the Department has explained elsewhere in this preamble, however, to the extent that an employer has paid straight time compensation for all hours worked in the workweek, the employer’s resulting overtime obligation under the Act is only an additional half of the regular rate for the hours worked in excess of 40 in the workweek. This general FLSA 2013) (applying fluctuating workweek method to computation of back wages based on Missel); Lamonica v. Safe Hurricane Shutters, Inc., 711 F.3d 1299, 1310–11 (11th Cir. 2013) (same); UrnikisNegro v. Am. Family Prop. Servs., 616 F.3d 665, 676–84 (7th Cir. 2010) (same); Clements, 530 F.3d at 1230–31 (applying § 778.114 to retroactively calculate back pay); Valerio, 173 F.3d at 39–40 (affirming district court’s retroactive application of section 778.114). VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 principle applies regardless of whether the specific compensation scheme at issue satisfies the technical requirements of § 778.114. IV. 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 final rule 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 did not receive any comments on this determination. V. Executive Order 12866; Regulatory Planning and Review; and Executive Order 13563, Improved Regulation and Regulatory Review 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 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 final rule is economically significant. The Department has prepared a Regulatory Impact Analysis (RIA) in connection with this rule, 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 PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 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 Rule and Potential Affected Employees This rule clarifies that bonuses, premiums, and any other supplemental payments are compatible with the fluctuating workweek method of calculating overtime pay. Prior to this rule, legal uncertainty regarding the compatibility of supplemental pay with the fluctuating workweek method deterred employers from making such payments to employees paid under the fluctuating workweek method. Employers were also deterred from paying employees under the fluctuating workweek method if they regularly paid bonuses and premiums. This rule will 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. This rule makes clear to employers that employees paid under the fluctuating workweek method are eligible for all supplemental payments. As in the NPRM, in order to estimate the impact of this rule, the Department relied on data from the Current Population Survey (CPS) to estimate a total pool of employees who could possibly be affected.24 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.25 First, under 29 CFR 778.113, 24 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. 25 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 E:\FR\FM\08JNR1.SGM 08JNR1 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES 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, (5) are paid on a salary basis; and (6) work hours that ‘‘vary’’ from week to week.26 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. 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 due differs because of the difference in what the salary payment is intended to cover. 26 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., No. 22 WAP 2018, 2019 WL 6139547 (Pa. Nov. 20, 2019); N.M. Dep’t of Labor v. Echostar Commc’ns Corp., 134 P.3d 780, 783 (N.M. Ct. App. 2006). VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 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. All together, 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). The Department lacks data to determine how prevalent this compensation method actually is amongst this group.27 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. The actual number may be higher or lower. This rule 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.28 The 27 The Department received comments with anecdotal information about the prevalence of the fluctuating workweek method. For example, the National Newspaper Association surveyed their member publishers, and found that 11 percent are presently shifting additional employees to the fluctuating workweek method. And Attorney C. Andrew Head indicated that he has represented more than 20,000 fluctuating workweek employees in his litigation practice. While these comments do not provide enough data for the Department to add precision to its illustrative cost-savings estimates, they do indicate that there is significant use of the FWW method by at least some employers, and give the Department more confidence that the economic effects of this rule likely will be significant, even if they cannot be precisely measured. 28 The Department believes that few employers would have switched employees from the fluctuating workweek method to a fixed salary for PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 34627 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.29 In the NPRM, the Department noted that the estimated percentage of U.S. workers compensated under the fluctuating workweek method 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.30 One commenter noted concerns with the Department’s finding that the decline in workers compensated under the fluctuating workweek method is due in part to legal uncertainty. EPI claimed that this finding is based on an unjustified assumption that the share of workers who are paid under the fluctuating workweek method out of all the workers who might be paid under the fluctuating workweek method remains constant at 50 percent over this period. But other commenters, such as SHRM and the Chamber, indicated that uncertainty did affect negatively the number of workers paid under the fluctuating workweek method. Because the Department lacks counts for the precise number of workers paid under the fluctuating workweek method, this analysis merely assumes that half the workers whose characteristics make them not only eligible, but whose hours and earnings data appear similar to what would be expected under the fluctuating workweek, are actually compensated under the fluctuating workweek method. The Department acknowledges that this share could fluctuate over this or any period, and that there are other factors, beyond confusion created by legal uncertainty, that could be responsible for the decline in the share of the labor force compensated under the fluctuating workweek method, and thus does not include workers who might be ‘‘switched’’ to the fluctuating workweek method in its quantified cost savings analysis. For example, the Department recognizes that the total number of nonexempt FLSA full-time salaried workers decreased both in total number a specific number of hours under § 778.113 because those employees would have, by definition, worked hours that varied from week to week. 29 The Department lacks the required CPS data from before 2004. 30 Compare, e.g., Wills, 981 F. Supp. 2d at 256, with Sisson, 2013 WL 945372, at *1. E:\FR\FM\08JNR1.SGM 08JNR1 34628 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES and also as a share of the employee population over this same period.31 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. C. Costs As stated in the proposed rule, the Department believes that, because the rule merely lifts a restriction on employers paying bonuses and other supplemental payments to employees paid under the fluctuating workweek method, 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 the 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 rule by the estimated time to review the rule and the average hourly compensation of a Compensation, Benefits, and Job Analysis Specialist. The Department did not receive any comments about additional costs associated with this rulemaking. To calculate costs associated with reviewing the rule, the Department first estimated the number of establishments likely to review the rule. The most recent data on private sector establishments at the time this final rule was drafted are from the 2016 Statistics of U.S. Businesses (SUSB), which reports 7.8 million establishments with paid employees.32 The Department believes that each of the 7.8 million establishments will review the rule. All employers will give the 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 31 From approximately 27.0 million in 2004 to 19.2 million in 2018. 32 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. VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 interested in using the fluctuating workweek method to pay workers will give the 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 method 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 rule in greater detail. Because the rule is a clarification of 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 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 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 $30.29.33 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 and 33 Bureau of Labor Statistics, May 2018 National Occupational Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_ nat.htm. PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 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%)).34 The Department estimates one-time regulatory familiarization costs in Year 1 of $32.8 million (= 35,100 establishments × 0.5 hours of review time × $49.37 per hour + 7.8 million establishments × 0.083 hours of review time × $49.37 per hour). This rule does 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 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. D. Cost Savings The Department believes that this rule could lead to three categories of potential cost savings: (1) The elimination of opportunity costs for previously forgone activities; (2) reduced management costs for nonhourly employees; and (3) reduced legal costs for employers. The Department uses the assumptions previously discussed in this analysis to develop illustrative estimates of cost savings. Based on these estimates, the Department believes total cost savings are likely to exceed regulatory familiarization costs. First, the rule could 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.35 Legal uncertainty 34 The benefits-earnings ratio is derived from BLS’s Employer Costs for Employee Compensation data using variables CMU1020000000000D and CMU1030000000000D. 35 ‘‘[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. E:\FR\FM\08JNR1.SGM 08JNR1 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations 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 rule would eliminate such costs. In the NPRM, the Department evaluated the potential scope of opportunity costs as the economic value of supplemental incentive pay prevented by current legal uncertainty. The Department assumed 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.36 On the other hand, some 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 were 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 BLS categorizes as ‘‘nonproduction bonuses.’’ 37 The Department lacks sufficient data to estimate the precise deadweight loss attributable to legal uncertainty, including the economic value of work that fluctuating workweek employees do not perform because their employers cannot provide certain supplemental pay. With the publication of the NPRM, the Department published an appendix, which contained a detailed illustrative analysis regarding possible ranges of potential opportunity cost eliminated and the critical variables upon which 34629 these estimates depend. The appendix illustrated that even 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 of 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.38 And if all workers compensated under the fluctuating workweek method received such a bonus, the productivity savings from the elimination of this opportunity cost would exceed $600 million. The Department received comments from some employers indicating that the proposed change would result in more bonuses being paid to workers, but those comments did not discuss the magnitude of such bonuses. The Department received no comments or data specifically addressing the estimates presented in the appendix, and has ultimately decided to continue to include those in the final analysis for illustrative purposes only. The table below reflects the range of potential cost savings that were included in the Appendix to the NPRM.39 TABLE 1—OPPORTUNITY COST ELIMINATED khammond on DSKJM1Z7X2PROD with RULES Scenario A .................................................................. Scenario B .................................................................. Scenario C .................................................................. Scenario 1 Scenario 2 1% Suppl. pay 2% Suppl. pay 349,192 Workers ........................................................ 174,596 Workers ........................................................ 69,838 Workers .......................................................... $305,121,551 152,560,776 61,024,310 $610,243,103 305,121,551 122,048,621 Second, the rule could 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. SHRM affirmed this belief in their comment, saying, ‘‘The Department’s statement in the 2011 Final Rule preamble that the payment of any compensation in addition to the salary payment somehow ‘invalidated’ the fluctuating workweek method caused many employers to either (1) eliminate bonuses for employees paid pursuant to the fluctuating workweek method; or (2) pay previously salaried employees an hourly rate (and continue any bonus programs).’’ Since overtime pay premiums for hourly employees who do not receive supplemental pay 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 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 marginal cost to an employer of each hour of work under the fluctuating workweek is lower than 36 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 any bonus or premium, even 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. 37 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. 38 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. 39 See 84 FR 59601 (Nov. 5, 2019). VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 PO 00000 Frm 00033 Fmt 4700 Sfmt 4700 E:\FR\FM\08JNR1.SGM 08JNR1 khammond on DSKJM1Z7X2PROD with RULES 34630 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations the marginal cost of an hourly employee.40 There was little precedent or data to aid in evaluating these managerial costs, and the Department did not receive any comments about this cost savings. 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 each additional hour of work would be lower than an hourly employee. While the Department does not estimate the precise number of hourly workers whose employers would switch from paying hourly pay to the fluctuating workweek method following this rule, the Department believes that management costs may be reduced for every worker who is switched because their managers can spend less time managing their schedules if such schedule management is intended either to optimize compensation levels or to ensure coverage for less desirable shifts or projects. If, hypothetically, 150,000 workers were switched, employers might reduce their annual managerial costs by over $66 million.41 Third, the clarifying language and updated examples included in this rule 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 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 $3.3 million.42 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 $58.13,43 and the Department adjusted this to $94.75 per hour to account for fringe benefits and overhead.44 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 $3.3 million per year.45 As noted above, this figure is an illustrative example of potential annual cost savings due to reducing legal-review burdens. Even though the Department cannot quantify the precise amount of total cost savings, it is expected that they will significantly outweigh regulatory familiarization costs. Unlike one-time familiarization costs, the calculated and 40 The fluctuating workweek marginal cost for hours 2–40 in a workweek is $0, and for hours 41+, the marginal cost is only the overtime premium, while marginal costs for hourly employees during the same hours is the hourly rate plus any overtime premium for any hours over 40. Conversely, when an hourly-paid employee works less than 40 hours in a workweek, the employer is obligated to pay only the hours worked, while under the fluctuating workweek method, the employer is obligated to pay the full salary for the workweek. 41 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). 42 Although earlier in the economic analysis the Department estimates that it will take employers anywhere from 5–30 minutes to familiarize themselves with the rule, it is likely that lawyers are currently spending significantly more time annually advising their clients on issues related to the fluctuating workweek method. The lawyers need not only be familiar with the rule but must also apply the rule to specific compensation schemes used or proposed by their clients. 43 Bureau of Labor Statistics, May 2018 National Occupational Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_ nat.htm 44 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)). 45 This estimate of establishments is discussed in greater detail in the Costs section, above. VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 other potential cost savings described in this section would continue into the future, saving employers valuable time and resources. This rule also offers increased flexibility to employers in the way that they compensate their employees. However, in the absence of additional data, the Department is unable to precisely quantify all cost savings and other potential effects of the proposed rule. E. Transfers Transfer payments occur when income is redistributed from one party to another. The Department believes this rule may cause transfer payments to flow from some employers to their employees and also may cause transfer payments to flow from employees to some employers. When discussing these transfers in the NPRM, the Department noted that the incidence, magnitude, and ultimate beneficiaries of such transfers is unknown. 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. If employers offer these new bonuses to employees already paid under the fluctuating workweek method, it would constitute a transfer from employers to employees. Some commenters argued that employers will reduce their employees’ salaries paid under the fluctuating workweek and shift compensation to non-guaranteed bonuses, essentially reducing some of that employer’s workers’ earnings. See e.g., EPI, State Attorneys General, Head Law Firm, IAFF, NELA. The commenters assume that employers look only to lower their labor costs, and if they can use bonuses in conjunction with the fluctuating workweek method to pay less for overtime, they are likely to do so. If such a shift were to occur, if the scope of such a shift in comparison to the current fluctuating workweek wage is large, and if bonuses were small, the commenters claim this reduction could constitute a transfer from employees to employers. These comments do not cite any data to show the opposite effect from the 2011 perceived prohibition on paying certain bonuses, nor do they cite data to indicate that employers who pay their employees under the fluctuating workweek method would be willing to risk a drastic downward change in total compensation. The Department acknowledges that, for employees compensated under the fluctuating workweek method, an employer and employee may now agree E:\FR\FM\08JNR1.SGM 08JNR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations to a new allocation of compensation between the fixed salary for all hours of work, bonuses, benefits, supplemental pay, and other job perks. Some allocations could result in their salaries being augmented, but employers could also decrease the fixed portion of the employee’s salary and shift compensation to bonuses and incentive pay. These are merely two of a host of allocations not discussed in the comments. However, even if the agreement could result in somewhat lower compensation, there is a limit to how much employers are able to reduce employees’ total compensation. The fluctuating workweek method still requires that an employee’s fixed salary be at or above the minimum wage for all hours worked, so employers are unable to reduce compensation below the minimum wage (plus overtime for all hours over 40). This supplemental pay is also a way for employers to incentivize employees to do undesirable tasks, or work undesirable shifts. As supplemental pay may be the most efficient means to incentivize employees to perform this valuable work, many employers in such a scenario will be more than willing to pay the extra amount for these valuable services without decreasing employees’ base salaries. Absent data to the contrary, the Department disagrees with commenters’ assertion that permitting new bonus payments to employees paid under the fluctuating workweek method will generally result in those workers being paid less for the same or more work. These same commenters also assert that the proposed rule will encourage the use of overtime because the fluctuating workweek regular rate of pay falls as hours increase. See, e.g., EPI, State Attorneys General, NELP, IAFF, NELA, Head Law Firm. These commenters posit that the marginal cost to the employer of an hour of overtime is lower for employees who are shifted to the fluctuating workweek method and assert that this creates incentives for employers to overwork current employees instead of hiring additional staff, undermining job creation. The Department acknowledges that this rule could encourage more employers to use the fluctuating workweek method to compensate their employees, if they previously chose not to use the fluctuating workweek method because they also wanted to provide incentive pay but believed they were not permitted to do so. However, contrary to the commenters’ assertion, nothing in this rule changes the basic rules for calculating fluctuating workweek wages, including overtime. VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 As such, any ‘‘disincentive’’ to requiring overtime work remains the same as the status quo other than the potential increase in the marginal costs attributable to newly-permitted incentive and bonus payments. Further, these commenters offered no data to support their contentions that, merely because they are now permitted to pay bonuses, employers will increase fluctuating workweek overtime hours and choose not to hire additional workers. F. Benefits The Department believes the rule could 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. This rule will provide a simple standard that permits all supplemental pay under the fluctuating workweek method, and therefore should reduce unnecessary disputes and litigation.46 The Department lacks data to quantify this benefit. The Department also believes that this rule will allow employers and employees to better utilize flexible work schedules. This is especially important as workers return to work during the COVID–19 pandemic. Some employers are likely to promote social distancing in the workplace by having their employees adopt variable work schedules, possibly staggering their start and end times for the day. This rule will make it easier for employers and employees to agree to unique scheduling arrangements while allowing employees to retain access to the bonuses and premiums, including hazard pay, they would otherwise earn. G. Summary This rule will result in a one-time rule-familiarization cost of $32,828,582. The Department estimated average annualized costs of this rule over 10 years and in perpetuity. Over ten years, this rule would have an average annualized cost of $3.7 million at a discount rate of 3 percent, or $4.4 million at a discount rate of 7 percent in 2018 dollars. When the Department uses a perpetual time horizon to allow for cost comparisons under E.O. 13771, 46 The costs of such disputes and litigation are not insignificant, but are not estimated here nor included in the projected regulatory cost savings. PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 34631 the perpetual annualized cost is $1,569,905 at a discount rate of 7 percent in 2016 dollars. VI. 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 rule will 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 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 will be trivial for small business entities, and will 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 rule will 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 rule will also E:\FR\FM\08JNR1.SGM 08JNR1 34632 Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations reduce administrative costs of small businesses that respond by switching hourly employees to the fluctuating workweek method. The 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 will 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, the Department believes such benefits will be limited to few small businesses.47 Based on this determination, the Department certifies that the rule will not have a significant economic impact on a substantial number of small entities. VII. Unfunded Mandate Reform Act Analysis VIII. Executive Order 13132, Federalism khammond on DSKJM1Z7X2PROD with RULES The Department has reviewed this rule in accordance with Executive Order 13132 regarding federalism and determined that it does not have federalism implications. The rule will 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. IX. Executive Order 13175, Indian Tribal Governments This rule will not have substantial direct effects on one or more Indian tribes, on the relationship between the 47 The Department of Labor estimates that only 0.45% of U.S. workers are compensated using fluctuating workweek method. 18:41 Jun 05, 2020 Jkt 250001 List of Subjects in 29 CFR Part 778 Wages. Signed at Washington, DC, this 15th day of May, 2020. Cheryl M. Stanton, Administrator, Wage and Hour Division. For the reasons set out in the preamble, the Department of Labor amends title 29 of the Code of Federal Regulations part 778 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)). ■ 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. VerDate Sep<11>2014 Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. 2. Revise § 778.114 to read as follows: § 778.114 Fluctuating Workweek Method of Computing Overtime. (a) An employer may use the fluctuating workweek method to properly compute overtime compensation based on the regular rate for a nonexempt employee under the following circumstances: (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 the 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, commissions, hazard pay, or other additional pay of any kind not excludable from the regular rate under section 7(e)(l) through (8) of the Act) for the total hours worked each workweek regardless of the number of hours, although the clear and mutual understanding does not need to extend to the specific method used to calculate overtime pay; and (5) The employee receives overtime compensation, in addition to such fixed salary and any bonuses, premium payments, commissions, hazard pay, and additional pay of any kind, for all PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 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 nonexcludable 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, commissions, hazard pay, and additional pay of any kind is compatible 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 stated above 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, commissions, hazard pay, 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 receives no additional compensation and 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 weeks, only additional half-time pay is due for overtime hours. 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 one-half times the regular rate of $13.64 for a total overtime payment of $27.28); for the third week $660 (fixed salary of $600, and 10 hours of overtime pay at one-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 one-half times the regular rate of $12.50 for a total overtime payment of $50). (2) Example. If during the course of 2 weeks this employee works 37.5 and 48 E:\FR\FM\08JNR1.SGM 08JNR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 85, No. 110 / Monday, June 8, 2020 / Rules and Regulations 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 premium pay for the 4 nightshift hours). In this case, the regular rate of pay in each of these weeks is $16.53 and $12.92, respectively, and the employee’s total compensation would be calculated as follows: For the 37.5 hour week the employee is owed $620 (fixed salary of $600 plus $20 of non-overtime premium pay, with no overtime hours); and for the 48 hour week $671.68 (fixed salary of $600 plus $20 of non-overtime premium pay, and 8 hours of overtime at one-half times the regular rate of $12.92 for a total overtime payment of $51.68). This principle applies in the same manner regardless of the reason for the hourly premium rate (e.g., weekend hours). (3) Example. If during the course of 2 weeks this employee works 37.5 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 and $14.58, respectively, and the employee’s total compensation would be calculated as follows: For the 37.5 hour week the employee is owed $700 (fixed salary of $600 plus $100 productivity bonus, with no overtime hours); and for the 48 hour week $758.32 (fixed salary of $600 plus $100 productivity bonus, and 8 hours of overtime at one-half times the regular rate of $14.58 for a total overtime payment of $58.32). (c) Typically, such fixed salaries 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. (d) The fixed salary described in paragraph (a) of this section does not vary with the number of hours worked VerDate Sep<11>2014 18:41 Jun 05, 2020 Jkt 250001 in the workweek, whether few or many. However, employers using the fluctuating workweek method of overtime payment may take occasional disciplinary deductions from the employee’s salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions do not cut into the minimum wage or overtime pay required by the Act. [FR Doc. 2020–10872 Filed 6–5–20; 8:45 am] BILLING CODE 4510–27–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 100 [Docket No. USCG–2020–0157] RIN 1625–AA08 Regattas and Marine Parades; Great Lakes Annual Marine Events Coast Guard, DHS. Notice of enforcement of regulation. AGENCY: ACTION: The Coast Guard will enforce various special local regulations for annual regattas and marine parades in the Captain of the Port Detroit zone. Enforcement of these regulations is necessary and intended to ensure safety of life on the navigable waters immediately prior to, during, and after these regattas or marine parades. During the aforementioned period, the Coast Guard will enforce restrictions upon, and control movement of, vessels in a specified area immediately prior to, during, and after regattas or marine parades. SUMMARY: The regulations in 33 CFR 100.911 will be enforced at specified dates and times between July 10, 2020 and September 26, 2020. FOR FURTHER INFORMATION CONTACT: If you have questions on this document, call or email Tracy Girard, Prevention Department, telephone (313) 568–9564, email Tracy.M.Girard@uscg.mil. SUPPLEMENTARY INFORMATION: The Coast Guard will enforce the following special local regulations listed in 33 CFR part 100, Safety of Life on Navigable Waters, on the following dates and times: (1) § 100.911(a)(4) Motor City Mile, Detroit, MI. This special local regulation will be enforced from 7 a.m. to 12 p.m. on July 10, 2020. (2) § 100.911(a)(6) Roar on the River, Trenton, MI. This special local DATES: PO 00000 Frm 00037 Fmt 4700 Sfmt 4700 34633 regulation will be enforced from 10 a.m. to 6 p.m. each day from July 17, 2020 until July 19, 2020. (3) § 100.911(a)(9) Detroit Hydrofest Power Boat Race, Detroit, MI. This special local regulation will be enforced from 7 a.m. to 7 p.m. each day from August 21, 2020 until August 23, 2020. (4) § 100.911(a)(10) Bay City Rock the River (formerly known as Bay City Grand Prix) Powerboat Races, Bay City, MI. This special local regulation will be enforced from 8 a.m. to 7 p.m. July 11, 2020 and July 12, 2020. In the case of inclement weather on July 11 or July 12, 2020, this special local regulation will be enforced from 8 a.m. to 7 p.m. on July 13, 2020. (5) § 100.911(a)(12) Michigan Championships Swimming Events, Detroit, MI. This special local regulation will be enforced from 7 a.m. to 2 p.m. on September 6, 2020. (6) § 100.911(a)(14) Frogtown Race Regatta, Toledo, OH. This special local regulation will be enforced from 7 a.m. to 5 p.m. on September 26, 2020. Special Local Regulations: In accordance with § 100.901, entry into, transiting, or anchoring within these regulated areas is prohibited unless authorized by the Coast Guard patrol commander (PATCOM). The PATCOM may restrict vessel operation within the regulated area to vessels having particular operating characteristics. Vessels permitted to enter this regulated area must operate at a nowake speed and in a manner that will not endanger race participants or any other craft. The PATCOM may direct the anchoring, mooring, or movement of any vessel within this regulated area. A succession of sharp, short signals by whistle or horn from vessels patrolling the area under the direction of the PATCOM shall serve as a signal to stop. Vessels so signaled shall stop and shall comply with the orders of the PATCOM. Failure to do so may result in expulsion from the area, a Notice of Violation for failure to comply, or both. If it is deemed necessary for the protection of life and property, the PATCOM may terminate the marine event or the operation of any vessel within the regulated area. In accordance with the general regulations in § 100.35 of this part, the Coast Guard will patrol the regatta area under the direction of a designated Coast Guard Patrol Commander (PATCOM). The PATCOM may be contacted on Channel 16 (156.8 MHz) by the call sign ‘‘Coast Guard Patrol Commander.’’ E:\FR\FM\08JNR1.SGM 08JNR1

Agencies

[Federal Register Volume 85, Number 110 (Monday, June 8, 2020)]
[Rules and Regulations]
[Pages 34610-34633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10872]


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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: Final rule.

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SUMMARY: The Department of Labor (the Department) is revising its 
regulation for computing overtime compensation of salaried nonexempt 
employees who work hours that vary each week (fluctuating workweek) 
under the Fair Labor Standards Act (FLSA or the Act). The final rule 
clarifies 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 Department also adds examples 
and makes minor revisions to make the rule easier to understand.

DATES: This final rule is effective on August 7, 2020.

FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director, 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; telephone: (202) 693-0406 (this is not a 
toll-free number). Copies of this final 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 log onto WHD's website for a nationwide listing of WHD 
district and area offices at http://www.dol.gov/whd/america2.htm.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

    Section 7(a) of the FLSA requires employers to pay their nonexempt 
employees overtime pay of at least ``one and one-half times the regular 
rate at which [the employee] is employed'' for all hours worked in 
excess of 40 in a workweek. 29 U.S.C. 207(a). In other words, for each 
hour over 40 an employee works in a workweek, the employee is entitled 
to straight-time compensation at the regular rate and an additional 50 
percent of the regular rate for that hour. Where an employee receives a 
fixed salary for fluctuating hours, an employer may use the 
``fluctuating workweek method'' to compute overtime compensation owed, 
if certain conditions are met. 29 CFR 778.114.
    Under current 29 CFR 778.114, an employer may use the fluctuating 
workweek method if the employee works fluctuating hours from week to 
week and receives, pursuant to a clear and mutual understanding with 
the employer, a fixed salary as straight time compensation 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,'' the regular rate ``is determined by 
dividing the number of hours worked in the workweek into the amount of 
the salary,'' and 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 overtime hour. 29 CFR 778.114(a). 
Because the employee's hours of work fluctuate from week to week, the 
regular rate must be determined separately each week based on the 
number of hours actually worked each week. Id.
    The payment of additional bonus and premium payments on top of the 
fixed salary to employees compensated under the fluctuating workweek 
method has presented challenges to employers and the courts alike, as 
set forth in more detail below. In the Notice of Proposed Rulemaking 
(NPRM), the Department proposed to clarify that bonus payments, premium 
payments, and other additional pay are consistent with the use of the 
fluctuating workweek method of compensation. See 84 FR 59590, 59591 
(Nov. 5, 2019). Such supplemental payments and the fixed salary provide 
straight-time compensation for all hours worked and the regular rate is 
determined by dividing that amount by the hours worked in the workweek. 
Additional bonuses or premium 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 an 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). The preamble to the 2011 final 
rule further stated, for the first time in rulemaking by the 
Department, that all straight-time bonus and premium payments were 
incompatible with the fluctuating workweek method, while maintaining 
that the preamble ``restore[d] the current rule.'' The decision in that 
rulemaking not to make any substantive changes to the regulatory text, 
however, caused courts to interpret the 2011 final rule in different 
ways and to reach 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 considered anew the need for 
a clarification, particularly in light of the 2011 final rule and its 
interpretation by courts, now finds the reasons articulated in 2011 to 
be unpersuasive, and is therefore finalizing revisions that are 
substantially similar to those initially proposed in 2008. 
Specifically, the Department is adding 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 is also adding examples to Sec.  
778.114(b) to illustrate the fluctuating workweek method of calculating 
overtime where an employee is paid (1) a nightshift differential, (2) a 
productivity bonus in

[[Page 34611]]

addition to a fixed salary, and (3) premium pay for weekend work. The 
Department is further making non-substantive revisions to Sec.  
778.114(a) and (c) that were not proposed in the 2008 NPRM to enhance 
clarity. Specifically, revised Sec.  778.114(a) will now list each of 
the requirements for using the fluctuating workweek method, while 
duplicative text is being removed from revised Sec.  778.114(c). 
Finally, the Department is changing the title of the regulation from 
``Fixed salary for fluctuating hours'' to ``Fluctuating Workweek Method 
of Computing Overtime.''
    The Department also believes that this rule will allow employers 
and employees to better utilize flexible work schedules. This is 
especially important as workers return to work following the COVID-19 
pandemic. Some employers are likely to promote social distancing in the 
workplace by having their employees adopt variable work schedules, 
possibly staggering their start and end times for the day. This rule 
will make it easier for employers and employees to agree to unique 
scheduling arrangements while allowing employees to retain access to 
the bonuses and premiums they would otherwise earn.
    This final rule is an Executive Order (E.O.) 13771 deregulatory 
action. Details on the estimated reduced burdens and cost savings of 
this final rule can be found in the rule's economic analysis.
    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs has designated this 
rule as a ``major rule'' as defined by 5 U.S.C. 804(2).

II. Background

A. Principles of Computing Overtime Pay Based on the Regular Rate

    Section 7(a) of the FLSA requires employers to pay their nonexempt 
employees overtime premium pay of at least ``one and one-half times the 
regular rate at which [the employee] is employed'' for all hours worked 
in excess of 40 in a workweek. 29 U.S.C. 207(a). The regular rate is 
computed for each workweek and is defined as ``all remuneration for 
employment,'' save for eight statutory exclusions, divided by the 
number of hours worked. 29 U.S.C. 207(e); see also Bay Ridge Operating 
Co. v. Aaron, 334 U.S. 446, 458 (1948) (stating that the ``regular rate 
must be computed by dividing the total number of hours worked into the 
total compensation received'').\1\ For each hour over 40 an employee 
works in a workweek, the employee is entitled to straight time 
compensation at the regular rate and an additional 50 percent of the 
regular rate for that hour. See, e.g., Walling v. Youngerman-Reynolds 
Hardwood Co., 325 U.S. 419, 423-24 (1945). Dividing non-excludable 
remuneration by hours worked is the only proper method to compute the 
regular rate and the Department's regulations at Sec. Sec.  778.110-
778.115 ``give some examples of the proper method of determining the 
regular rate of pay in particular instances.'' 29 CFR 778.109.\2\
---------------------------------------------------------------------------

    \1\ The preamble to the Department's 2019 rulemaking concerning 
``Regular Rate under the Fair Labor Standards Act'' discusses in 
greater detail the legislative and regulatory history of the regular 
rate. See 84 FR 68736, 68737-39 (Dec. 16, 2019).
    \2\ Total non-excludable remuneration is divided by all hours 
worked to determine the regular rate where all hours worked have 
been compensated. This will always be the case under the fluctuating 
workweek method because the fixed salary covers all hours worked 
and, when combined with non-excludable bonuses and premiums, 
constitutes all straight time pay. When an employee is paid a salary 
for fixed hours, however, the salary is divided by the hours that it 
covers, not the total hours worked, and additional straight time is 
due for any additional hours, as well as any overtime premium. 29 
CFR 778.113. Similarly, if an employee who is paid hourly, for 
example, has worked uncompensated hours, the uncompensated hours are 
not included in determining the regular rate and the employee is 
owed their regular rate for the uncompensated hours as well as any 
overtime premium. See 29 CFR 778.109 (regular rate is non-excludable 
remuneration divided ``by the total number of hours actually worked 
by [the employee] in that workweek for which such compensation was 
paid'') (emphasis added).
---------------------------------------------------------------------------

    One of the examples is Sec.  778.114, which concerns instances 
where the employee is paid a fixed salary that is understood to be 
compensation for a variable number of hours worked each week, whether 
few or many, as opposed to a specific number of hours. The regular rate 
equals the quotient of the weekly salary and the number of hours worked 
and necessarily changes as the number of hours vary week to week. For 
each overtime hour worked, the employee is entitled to straight-time 
pay plus an additional 50 percent of the regular rate as an overtime 
premium. Because the weekly salary is compensation for all hours worked 
in a workweek, the employee would have already received straight-time 
pay for any overtime hours worked, so he or she is entitled to 
additional compensation at one-half of the regular rate for overtime 
hours. This method of computing overtime pay is the subject of this 
rulemaking and is known as the fluctuating workweek method.
    The fluctuating workweek method is not the only such example where 
additional overtime compensation is properly computed as one-half the 
regular rate because the straight time portion of the required ``one 
and one-half times the regular rate'' has already been paid. This 
method of computation is also appropriate where an employee is 
compensated through piece rate, job rate, or day rate arrangements.
    Section 778.110 concerns instances where the employee is paid an 
hourly wage. If an hourly wage were the sole component of compensation, 
the regular rate would simply be the hourly wage. 29 CFR 778.110(a). 
Compensation for each overtime hour would equal one times the hourly 
rate as straight-time pay plus an additional one-half times the hourly 
rate, for a total of ``one and one-half times the regular rate.'' 29 
U.S.C. 207(a).
    Section 778.111 concerns instances where the employee is paid on a 
piece rate basis plus an hourly premium for time spent waiting. In 
Sec.  778.111(a)'s scenario, the regular rate for each week is computed 
by adding piece rate compensation to the total waiting premium and then 
dividing that sum by the number of hours worked. This constitutes the 
employee's straight time pay and ``[o]nly additional half-time pay is 
required'' for overtime hours worked. 29 CFR 778.111.\3\
---------------------------------------------------------------------------

    \3\ Section 778.111(b) further provides that, for any workweek 
in which a piece rate employee receives an hourly guarantee in lieu 
of the piece rate compensation, the regular rate is equal to the 
guaranteed hourly rate.
---------------------------------------------------------------------------

    Section 778.112 concerns instances where the employee is paid a 
flat amount for a day's work or a specific job, regardless of how many 
hours were actually worked on a particular day or for a particular job. 
The regular rate is computed as the sum of all day rate or job rate 
compensation in a workweek divided by the total number of hours worked. 
As with piece rate pay, this constitutes straight-time pay for all 
hours worked. Accordingly, the employee ``is then entitled to extra 
half-time pay at this [regular] rate for all hours worked in excess of 
40 in the workweek.'' 29 CFR 778.112.
    Section 778.113 concerns instances where the employee is paid a 
salary for a specific number of hours each week. In this scenario, the 
salary can be expressed as a constant hourly rate equal to the salary 
amount divided by the specific number of hours that the salary is 
intended to compensate.\4\ Since the salary covers a specific number of 
hours, and not all hours in a workweek, it would not cover straight-
time compensation for hours in excess of that specific number, 
including any such

[[Page 34612]]

overtime hours. Accordingly, the employee must receive straight-time 
pay at the regular rate in addition to one-half of the regular rate as 
overtime premium for each such overtime hour.
---------------------------------------------------------------------------

    \4\ If the salary covers a period longer than a week, an hourly 
rate can still be computed by dividing the salary by the number of 
hours covered in the period, whether that is a month, a year, or 
something else.
---------------------------------------------------------------------------

    Finally, Sec.  778.115 concerns instances where an employee 
receives straight-time pay at multiple different rates in the same 
workweek. In such cases, the ``regular rate for that week is the 
weighted average of such rates'' and the employee is entitled to 
additional half-time for overtime hours. 29 CFR 778.115.\5\
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    \5\ Under certain circumstances, an employer may also pay 
overtime to an employee who is employed at two different rates ``at 
a rate not less than one and one-half times the hourly nonovertime 
rate established for the type of work [the employee] is performing 
during such overtime hours.'' 29 CFR 778.419(a); see 29 U.S.C. 
207(g)(2).
---------------------------------------------------------------------------

    These examples all apply the same fundamental principle for 
computing the regular rate: The regular rate for each workweek is 
calculated by dividing non-excludable remuneration by the number of 
hours worked. They also apply the same fundamental principle for 
computing overtime pay: Overtime pay for each hour worked above 40 is 
equal to straight-time pay for that hour plus an additional 50 percent 
of the regular rate as overtime premium. With these examples and 
principles in mind, the Department turns to the background specific to 
the fluctuating workweek method of computing overtime pay under Sec.  
778.114.

B. History of the Fluctuating Workweek Method

    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 Overnight Motor 
Transp. Co., v. Missel, 316 U.S. 572, 580 (1942). 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.\6\ 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.
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    \6\ As discussed above, 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 nonexempt 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)).\7\ 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).
---------------------------------------------------------------------------

    \7\ Note that Belo concerned a different type of flexible pay 
agreement, now codified under section 7(f) of the FLSA, under which 
an employee was paid on an hourly basis with a guaranteed weekly 
sum. The Department cites Belo here only 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. To the 
contrary, as explained more fully below, in both the 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 adds 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 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 FLSA, 
in requiring that `not less than' the prescribed premium of 50 percent 
for overtime hours worked be paid, does not prohibit paying more.'' \8\ 
As another example, courts have applied and endorsed the fluctuating 
workweek method when employees received additional bonus payments. 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.'')); Black v. Comdial Corp., Civ. A. No. 92-O81-C, 1994 
WL 70113, at *5 (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.'').
---------------------------------------------------------------------------

    \8\ 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 therefore, any extra 
compensation would violate this ``fixed amount'' requirement. Id. 
(quoting 29 CFR 778.114(a)).

[[Page 34613]]

    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 understood to 
compensate them for a specific--rather than fluctuating--number of 
hours each week. Id. However, the Department's brief did not address 
whether bonus pay beyond the ``fixed amount'' required was incompatible 
with the fluctuating workweek method.\9\
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    \9\ 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 v. Putnam Assocs. Inc., 173 F.3d 35, 39 (1st 
Cir. 1999); Martin v. Tango's Restaurant, 969 F.2d 1319, 1324 (1st 
Cir. 1992)). Section 778.113 should be used to compute overtime owed 
based on the regular rate where a fixed salary is understood to 
cover a certain number of hours. 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 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, 1994 WL 70113, at *2 (``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,\10\ while 
others continued to hold that bonuses were compatible with that 
method.\11\ These inconsistent decisions appeared to have created 
practical confusion for employers.
---------------------------------------------------------------------------

    \10\ 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).
    \11\ 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 43656, 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. Id. at 
18853. 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.'' Id. 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.'' Id.
    The 2011 preamble's reference to the ``current rule'' appears to 
have generated further confusion among the 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 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, as explained in the NPRM, 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

[[Page 34614]]

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 explained in the NPRM, the divergent views of the Department and 
the courts--and even among courts--have created considerable 
uncertainty for employers regarding the compatibility of various types 
of supplemental pay with the fluctuating workweek method. As discussed 
below, comments received from several commenters support this 
assessment and document the confusion. 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. The Department is therefore issuing this final rule to 
clarify that bonus and premium payments (whether hours-based, 
production-based, or other) are compatible with the use of the 
fluctuating workweek method of compensation.

C. The Department's Proposal

    On November 5, 2019, the Department issued an NPRM proposing to 
revise its existing regulation at Sec.  778.114(a) to clarify 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). See 84 
FR at 59591. The NPRM further proposed to add 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. Id. The Department also proposed 
simplifying revisions Sec.  778.114 by listing each required 
circumstance for the fluctuating workweek method to correctly compute 
overtime pay and removing duplicative text from revised Sec.  
778.114(c). Id. Finally, the Department proposed 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. Id.
    Approximately 36 individuals and organizations commented on the 
NPRM during the 30-day comment period that ended on December 5, 2019. 
The Department received comments from a diverse array of 
constituencies, including individual employees, employer and industry 
associations, employee advocacy groups, non-profit organizations, law 
firms, professional associations, and other interested members of the 
public. Many of the commenters supported the Department's efforts to 
clarify the fluctuating workweek regulation, while other commenters 
opposed the proposed rule. All timely comments received may be viewed 
on www.regulations.gov, docket ID WHD-2019-0006. The Department has 
carefully considered the timely-submitted comments on the proposed 
changes.
    The Department received a few comments that are beyond the scope of 
this rulemaking, such as requests to raise the federal minimum wage. 
The Department does not have authority to effectuate such a statutory 
change and therefore did not consider doing so as part of the proposed 
rule. This final rule does not address comments that are out of scope 
of this rulemaking.
    Significant issues raised in the comments on the Department's 
proposal are discussed below, along with the Department's response to 
those comments.

III. Final Regulatory Revisions

    The Department is finalizing its proposal to revise and update the 
regulation at Sec.  778.114 to 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 sections below discuss, in turn, the major issues raised by 
commenters and the Department's responses.

A. Section 778.114 Is an Example of Computing Overtime Pay Based on the 
Regular Rate

    The NPRM proposed to revise Sec.  778.114(a) to state that ``[t]he 
fluctuating workweek method may be used to calculate overtime 
compensation for a nonexempt employee if the [listed] conditions are 
met[.]'' 84 FR 59602. The purpose of the revision was to provide a list 
of conditions which, if present, ensure that overtime pay is correctly 
computed under the FLSA. But the proposed revision appears to have 
created, or at least did not dispel, the misconception that the 
fluctuating workweek method deviates from the standard ``one and one-
half times'' overtime payment obligation under the FLSA. Some 
commenters, for instance, characterized the fluctuating workweek method 
as an ``exception'' or ``alternative'' to the overtime premium 
requirement. See, e.g., Center for Workplace Compliance (CWC), National 
Employment Lawyers Association (NELA), National Employment Law Project 
(NELP).
    Other commenters observed that the fluctuating workweek method in 
Sec.  778.114 is merely an example of how to compute the regular rate 
and overtime compensation in certain circumstances. The U.S. Chamber of 
Commerce (Chamber) requested that the Department ``make clear that 
[Sec.  ] 778.114 (like the other examples in the interpretive bulletin 
of which it is a part) merely provides an example of how to calculate 
overtime in the particular circumstances described in the example.'' 
Associated Builders and Contractors (ABC) similarly urged the 
Department ``to clarify that examples given in the final rule are just 
that: examples.'' The Chamber further requested that the Department 
clarify that, because the fluctuating workweek method in Sec.  778.114 
merely provides an example, it ``does not impose any restrictions, 
conditions, or limitations on the `wages divided by hours' approach to 
calculating the regular rate and the resulting overtime premium.'' See 
also ABC at 3 (``The department should make clear that examples given 
do not impose limitations, restrictions or other conditions on applying 
the overtime calculation.'').
    The Department agrees that Sec.  778.114 is an example of how to 
properly compute overtime compensation based on the regular rate. 
Section 778.109 states, ``The following sections give some examples of 
the proper method of determining the regular rate of pay in particular 
instances,'' and Sec.  778.114 is one of these examples. See Allen v. 
Bd. of Pub. Educ. for Bibb Cty., 495 F.3d 1306, 1313 (11th Cir. 2007) 
(``[R]eading section 778.115 in the context of section 778.109, it 
becomes apparent that the former is one of the examples mentioned in 
the latter as a way that the regular rate may be calculated in certain 
cases.''). The Department briefly discussed these examples in the 
background section of this preamble, to make clear that the fluctuating 
workweek method under Sec.  778.114 is merely one of several examples 
of how to properly compute the regular rate and overtime pay to satisfy 
the FLSA's statutory pay requirements.
    As an example of correct computation of overtime pay based on the 
regular rate, Sec.  778.114 cannot impose

[[Page 34615]]

requirements that are inconsistent with overtime pay requirements under 
the FLSA. See Allen, 495 F.3d at 1312. That said, Sec.  778.114 can 
impose restrictions that are consistent with how overtime pay is 
computed under the FLSA. When an employee is paid a fixed salary as 
straight-time compensation for all hours worked and then receives a 
bonus, the fluctuating workweek method described in Sec.  778.114 
correctly computes the regular rate and overtime owed under the FLSA.
    For the foregoing reasons, the Department is clarifying that the 
fluctuating workweek method under Sec.  778.114 is just one example of 
how to properly compute overtime pay owed under the FLSA in the 
circumstances described therein. To make this point clearer, the 
Department is revising Sec.  778.114(a) to state: ``An employer may use 
the fluctuating workweek method to properly compute overtime 
compensation based on the regular rate for a nonexempt employee under 
the following circumstances: . . .''

B. Circumstances Where an Employer May Use the Fluctuating Workweek 
Method To Compute Overtime Pay

    Proposed Sec.  778.114(a)(1) through (5) lists five circumstances 
which, if all are met, enable an employer to use the fluctuating 
workweek method to properly compute the regular rate and overtime pay 
owed under the FLSA. Each of these circumstances is discussed below.
1. Hours That Fluctuate From Week to Week
    Current Sec.  778.114(a) states that the fluctuating workweek 
method is appropriate where, inter alia, an employee ``ha[s] hours of 
work which fluctuate from week to week.'' The NPRM proposed to retain 
this requirement in Sec.  778.114(a)(1), which lists ``the employee 
works hours that fluctuate from week to week'' as a condition that must 
be met. 84 FR at 59602.
    Some commenters, such as Jackson Lewis, expressed concern that the 
NPRM did not specify whether the employee's fluctuation in hours worked 
per week could involve any range of hours or whether the hours worked 
must sometimes fluctuate below forty hours in the workweek. Although 
neither the current nor the proposed regulatory language require an 
employee's hours to sometimes fluctuate below forty hours per week, 
commenters pointed out that there has been uncertainty about this 
point. Commenters requested that the Department clarify that employers 
are able to use the fluctuating workweek method even for employees 
whose hours worked rarely, if ever, go below forty in the workweek.
    The Department has long held the position that there is no 
requirement that the employee's hours of work must fluctuate below 
forty hours per week. The Department has consistently stated that the 
fluctuating workweek method remains appropriate even when it is only 
the number of overtime hours that fluctuate. See WHD Opinion Letter 
FLSA (October 27, 1967) (``There is no requirement that the hours of 
work of an employee compensated on the fluctuating workweek basis 
fluctuate above and below 40 hours in a workweek as there is for 
employees employed pursuant to section 7(f) (formerly section 7(e)) of 
the Act.''); WHD Opinion Letter FLSA2009-3, 2009 WL 648995 (Jan. 14, 
2009) (stating that the fluctuating workweek method can be used to 
compute back wages for workers whose hours fluctuated, but who were 
generally expected to work a minimum of fifty hours per week).
    Moreover, although a few courts have held that an employee's hours 
must fluctuate below forty hours per week before his or her overtime 
can be computed using the fluctuating workweek method,\12\ courts have 
more frequently found that the fluctuating workweek method does not 
actually require that the employee's hours fluctuate below forty hours. 
See, e.g., Aiken v. County of Hampton, 172 F.3d 43, 1998 WL 957458, at 
*3 (4th Cir. 1998) (unpublished) (holding that an employer can use the 
fluctuating workweek method when the employee reliably works a base 
number of hours over forty per week, so long as the number of overtime 
hours per week fluctuate); Condo v. Sysco Corp., 1 F.3d 599, 602 (7th 
Cir. 1993) (stating that the employer may use the fluctuating workweek 
method when an employee's hours fluctuate above but not below forty 
hours per week); Mitchell v. Abercrombie & Fitch Co., 428 F. Supp. 2d 
725, 735 (S.D. Ohio 2006), aff'd 225 F. App'x 362 (6th Cir. 2007) (per 
curiam) (finding no support for the argument that an employee's hours 
must fluctuate both above and below forty hours per week for the 
fluctuating workweek method to be used); Ramos v. Telegian Corp., 176 
F. Supp. 3d 181, 195 (E.D.N.Y. Mar. 31, 2016) (holding that the 
fluctuating workweek regulation does not require or even suggest a 
requirement that an employee's hours fluctuate both above and below 
forty in the workweek).
---------------------------------------------------------------------------

    \12\ See, e.g., Blotzer v. L-3 Comms. Corp., No. CV-11-274-TUC-
JGZ, 2012 WL 6086931, at *12 (D. Ariz. Dec. 6, 2012); Hasan v. GPM 
Investments, LLC, 896 F. Supp. 2d 145, 150 (D. Conn. 2012); Costello 
v. Home Depot USA, Inc., 944 F. Supp. 2d 199, 208 (D. Conn. 2013).
---------------------------------------------------------------------------

    Having reviewed and considered the comments, the Department is 
adopting its proposed regulatory language regarding the requirement 
that an employee must receive a fixed salary that does not vary with 
the number of hours worked in the workweek, whether few or many, for 
the fluctuating workweek method to be applicable. To prevent any 
further misunderstanding, however, the Department is also clarifying 
that the regulation does not require that an employee's hours must 
sometimes fluctuate below forty hours per week, so long as the 
employee's hours worked do vary.

2. Fixed Salary That Does Not Vary With the Number of Hours Worked

    Section 778.114(a) currently provides that, in order for an 
employer to calculate overtime pay pursuant to the fluctuating workweek 
method, the employee must be paid a ``fixed salary . . . for the hours 
worked each workweek, whatever their number.'' 29 CFR 778.114(a). The 
regulation also requires employers using the fluctuating workweek 
method to pay the guaranteed salary even where ``the workweek is one in 
which a full schedule of hours is not worked.'' 29 CFR 778.114(c). The 
NPRM proposed to modify the current regulation to clarify that 
employers may pay bonuses, premium payments, and other additional pay 
of any kind in addition to the fixed salary. See 84 FR 59602. The NPRM 
did not propose, however, to substantively change the current 
requirement that an employee must be paid a ``fixed salary'' 
representing compensation for all of the hours worked in the workweek. 
The proposed regulatory text in the NPRM stated that one of the 
conditions that must be satisfied in order to use the fluctuating 
workweek method is that the employee be paid ``a fixed salary that does 
not vary with the number of hours worked in the workweek.'' Id.
    A few commenters, including ABC and the Chamber, requested that the 
Department state in the final rule that the fluctuating workweek method 
may be used as long as the employee is paid on a salary basis as 
defined in 29 CFR 541.602. They asked the Department to replace the 
current ``fixed salary'' requirement with, or to define the ``fixed 
salary'' requirement by, reference to the salary basis test that is 
used for the minimum wage and overtime exemption for executive, 
administrative, and professional employees in section 13(a)(1) of the 
FLSA. 29 U.S.C. 213(a).

[[Page 34616]]

The Chamber urged the adoption of the salary basis test as defined in 
29 CFR 541.602 in the fluctuating workweek context so that employers 
could make deductions from the ``fixed salary'' under the fluctuating 
workweek method on the same basis that deductions are permitted under 
part 541. The Wage & Hour Defense Institute (WHDI) similarly requested 
that the Department provide in the final rule that deductions from the 
salary for full days not worked (e.g., due to illness) are permissible 
while using the fluctuating workweek method.
    The Department has carefully considered these commenters' requests 
to incorporate the salary basis definition and to allow the same types 
of deductions permissible under part 541 from the ``fixed salary'' in 
Sec.  778.114 and has determined not to adopt such a change at this 
time. The Department has consistently rejected the argument that the 
executive, administrative, and professional exemption's salary basis 
requirements and the permitted deductions from salary set forth in 
Sec.  541.602 should apply to the fluctuating workweek method. See, 
e.g., FLSA2006-15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 
2006); FLSA Opinion Letter, 1999 WL 1002415, at *1-2 (May 28, 1999); 
FLSA Opinion Letter, 1991 WL 11648489, at *1 (Aug. 20, 1991). Adoption 
of the part 541 salary basis requirements and permitted pay deductions 
would be contrary to the Department's longstanding interpretation that 
salary deductions for days or hours not worked are generally 
incompatible with the payment of a ``fixed'' salary under the 
fluctuating workweek method. See, e.g., FLSA2006-15 Opinion Letter, 
2006 WL 1488849, at *1 (May 12, 2006); FLSA Opinion Letter, 1991 WL 
11648489, at *1 (Aug. 20, 1991); FLSA Opinion Letter, 1983 WL 802650, 
at *1 (Nov. 30, 1983); FLSA Opinion Letter, 1978 WL 388412, at *1 (Dec. 
29, 1978).
    As the Department has explained, ``[I]t is the longstanding 
position of the Wage and Hour Division that an employer utilizing the 
fluctuating workweek method of payment may not make deductions from an 
employee's salary for absences occasioned by the employee.'' FLSA2006-
15 Opinion Letter, 2006 WL 1488849, at *1 (May 12, 2006). For example, 
an employer using the fluctuating workweek method may not make 
deductions from an employee's salary when the employee has exhausted 
his or her sick leave bank or has not yet earned sufficient sick leave 
to cover an absence due to illness. Id.; see also FLSA Opinion Letter, 
1978 WL 388412, at *1 (Dec. 29, 1978) (explaining that deductions made 
for ``excused absences, even for personal reasons (such as time off to 
visit a relative who is ill) would be inconsistent'' with the 
requirement in Sec.  778.114 that an employee be paid a full, ``fixed'' 
salary for any week in which he or she performs work).
    The Department has for many years advised, however, that an 
employer using the fluctuating workweek method of computing overtime 
pay ``may take a disciplinary deduction from an employee's salary for 
willful absences or tardiness or for infractions of major work rules, 
provided that the deductions do not cut into the required minimum wage 
or overtime compensation.'' FLSA2006-15 Opinion Letter, 2006 WL 
1488849, at *1 (May 12, 2006) (emphasis added); see also FLSA Opinion 
Letter, 1983 WL 802650, at *1 (Nov. 30, 1983) (same); WHD Field 
Operations Handbook 32b04b(b) (same); Samson v. Apollo Resources, Inc., 
242 F.3d 629, 639 (5th Cir. 2001) (concluding that occasional 
deductions from pay for willful absences or tardiness ``do not run 
afoul of the guidelines governing the [fluctuating workweek] method''). 
If such deductions are consistently or frequently made, however, then 
``the practice of making such deductions would raise questions as to 
the validity of the compensation plan.'' FLSA2006-15 Opinion Letter, 
2006 WL 1488849, at *1 (May 12, 2006) (citing 29 CFR 778.306(b)); FLSA 
Opinion Letter, 1983 WL 802650, at *1 (Nov. 30, 1983) (same).
    Replacing the ``fixed salary'' requirement of the fluctuating 
workweek method with the salary basis definition in Sec.  541.602, 
thereby expanding the types of pay deductions that would be permissible 
under Sec.  778.114, could have a significant effect on the scope and 
applicability of the fluctuating workweek method. Because the request 
to adopt the salary basis test and to permit new deductions not 
previously recognized as compatible with the ``fixed salary'' 
requirement in the fluctuating workweek context would constitute a 
significant change to the current regulation and the Department's 
longstanding interpretation of that regulation, the Department would 
want to solicit and carefully consider public comment on the issue 
before adopting such a revision.
    Accordingly, the Department declines to grant the request to apply 
the salary basis requirements of Sec.  541.602 to Sec.  778.114 at this 
time. The Department has, however, determined that it would be helpful 
to the public to expressly incorporate in the regulation itself its 
longstanding interpretation that employers using the fluctuating 
workweek method may take occasional disciplinary deductions from an 
employee's salary for willful absences or tardiness or for infractions 
of major work rules, provided that the deductions do not cut into the 
required minimum wage or overtime compensation. The Department has 
therefore decided to add such clarifying language to the regulatory 
text in Sec.  778.114(d).
3. The Fixed Salary Satisfies the Minimum Wage
    Current Sec.  778.114(a) states that the fluctuating workweek 
method is appropriate where, inter alia, ``the amount of the 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.'' 29 CFR 778.114(a). The NPRM included nearly identical text 
in proposed Sec.  778.114(a)(3) as one of the circumstances that must 
be met for using the fluctuating workweek method.
    A few commenters noted that, because the regular rate falls as 
hours increase under the fluctuating workweek method, in occasional 
workweeks in which an employee works extremely high hours, the regular 
rate may fall below the minimum wage, even where employers have 
endeavored to ensure that the payment system generally is compliant 
with minimum wage requirements. See, e.g., Chamber; ABC. These 
commenters acknowledge that, in such situations, the employer would 
violate the FLSA unless it provides additional payments to satisfy the 
minimum wage. The commenters request, however, that the Department 
clarify that an employer's intermittent need to provide supplemental 
payments to ensure the minimum wage is met would not retroactively 
invalidate the fluctuating workweek method. They further request that 
the Department add language providing that the fixed salary need only 
be ``reasonably calculated'' to provide compensation at a rate not less 
than the applicable minimum wage.
    After careful consideration, the Department has decided to adopt 
the language as proposed. As the commenters acknowledge, in any given 
workweek where the employee's fixed salary does not at least meet the 
applicable minimum wage, the employer must make an additional payment 
to bring the employee up to the applicable minimum wage. See WHD 
Opinion Letter FLSA 945 (Feb. 6, 1969); WHD Opinion Letter FLSA (June 
12,

[[Page 34617]]

1969); Cash, 2 F. Supp. 2d at 894. Therefore, the proposed regulation 
maintains the requirement for the use of the fluctuating workweek 
method that the fixed salary be sufficient to compensate the employee 
for all hours worked at a rate not less than the applicable minimum 
wage.
    In explaining that the fixed salary must be sufficient to 
compensate the employee at a rate not less than the minimum wage for 
the fluctuating workweek method to be used, however, the proposed 
regulatory language does not indicate that an occasional failure to 
meet this requirement retroactively invalidates the use of the 
fluctuating workweek method in previous workweeks or prevents the 
employer from continuing to use the fluctuating workweek method for 
that employee in subsequent workweeks. On the contrary, the Department 
has already determined that where an employer has reasonably calculated 
the fixed salary to cover at least the minimum wage for all hours 
worked, an occasional workweek where the fixed salary does not at least 
equal the applicable minimum wage, due to unusual and unforeseeable 
circumstances, does not invalidate the use of the fluctuating workweek 
method in other workweeks in which the salary equals or exceeds the 
applicable minimum wage as anticipated. See WHD Opinion Letter FLSA-883 
(Aug. 30, 1966) (stating that the employer ``must not only in fact 
assure that no workweek will be worked in which the salary fails to 
provide at least the current statutory minimum hourly rate of $1.25, 
but the salary must also be so arranged that it is reasonably 
calculated to provide for such a statutory minimum''); WHD Opinion 
Letter FLSA (Feb. 6, 1969) (finding that ``the bona fides of the pay 
plan will not fail solely on the grounds that in five weeks in an 
annual period, due to unforeseen circumstances beyond the control or 
the anticipation of the employer and employee, the salary failed to 
provide at least the applicable statutory minimum hourly rate of 
pay'').
    The courts have also consistently held that the employer is not 
prohibited from using the fluctuating workweek method in other 
workweeks merely due to infrequent workweeks where the fixed salary did 
not at least equal the minimum wage for all hours worked due to 
unforeseen circumstances. See, e.g., Cash, 2 F. Supp. 2d at 894 
(finding that the employer's use of the fluctuating workweek method was 
still appropriate in most workweeks despite ``infrequent occasions when 
unforeseen events cause the employee to work so many hours that her 
salary fails to support an average hourly rate at least equal to the 
applicable minimum wage''); Perez v. Radio Shack Corp., 2005 WL 
3750320, at *5 (N.D. Ill. Dec. 14, 2005) (declining to conclude that 
the employer should have foreseen that employees' hours worked would be 
so high that their fixed salary would not cover the applicable minimum 
wage in all workweeks, when all employees in the potential class 
received less than the minimum wage approximately forty-nine times in a 
four-year time period); Aiken, 172 F.3d 43, 1998 WL 957458, at *5-6 
(according substantial weight to the Department's opinion letters that 
suggest that ``making a minimum wage adjustment on five occasions in a 
two-year period does not defeat the validity of the fluctuating 
workweek plan,'' and concluding that employees are not entitled to any 
additional compensation beyond the minimum wage straight time and 
overtime adjustments they had already received for those workweeks); 
Davis v. Friendly Exp., Inc., 2003 WL 21488682, at *2 (11th Cir. 2003) 
(finding that an employer does not have to adopt another method of 
computing overtime where the fixed salary did not at least equal the 
applicable minimum wage for all hours worked in a few, isolated 
workweeks due to unforeseen events).
    The overall use of the fluctuating workweek method is thus not 
invalidated by occasional and unforeseeable workweeks in which the 
employee's fixed salary did not provide compensation to the employee at 
a rate not less than the applicable minimum wage, so long as the fixed 
salary was reasonably calculated to compensate the employee at or above 
the applicable minimum wage in the foreseeable circumstances of the 
employee's work. It is important to note, however, that the employer 
will not be able to use the fluctuating workweek method in 
circumstances where the employer could have foreseen that the 
employee's salary would not at least equal the applicable minimum wage 
in all workweeks, or where the employee's salary in fact did not at 
least equal the applicable minimum wage with some degree of frequency. 
In such circumstances, the employer and the employee must reach a new 
understanding, either as to the number of hours that the employee is to 
work or the amount of fixed salary to be paid, or the employer must use 
a different method to compute overtime. See WHD Opinion Letter FLSA 
(Feb. 6, 1969) (stating that the fluctuating workweek method ``would be 
inapplicable where the employer could have foreseen or anticipated that 
the salary would be insufficient to yield the minimum wage even in a 
nominal number of workweeks such as five in an annual period''); WHD 
Opinion Letter FLSA (June 12, 1969) (finding that ``the fact that the 
employee's salary failed to equal the statutory minimum wage in as many 
as 27 workweeks[ ] in one year would render moot any consideration that 
such a situation could not have been anticipated . . . [and] to ensure 
that his fluctuating workweek plan will be valid in the future, the 
employer must reach a new understanding with the employee''); Davis v. 
Friendly Exp., Inc., No. 02-14111, 2003 WL 21488682, at *2 (11th Cir. 
2003) (per curiam) (``If, however, the need for a minimum wage 
supplement becomes common, the fluctuating workweek calculation may not 
apply unless the employer and the employee reach a new 
understanding.''); Aiken, 172 F.3d 43, 1998 WL 957458, at *5 (rejecting 
an employee's argument that an employer and employee must reach a new 
understanding regarding the use of the fluctuating workweek method if 
there is even a single workweek in which the employee's fixed salary 
falls below the minimum wage, stating instead that the validity of such 
a pay plan is defeated only if such workweeks are foreseeable or 
frequent); Perez v. Radio Shack Corp., No. 02 C 7884, 2005 WL 3750320, 
at *3 (N.D. Ill. Dec. 14, 2005) (``If the breaches become too common, 
however, the employer must cease using the fluctuating workweek method 
and reach a new understanding with the employee.'').
4. Clear and Mutual Understanding
    In its current form, Sec.  778.114(a) provides that, to use the 
fluctuating workweek method of computing overtime, an employer and 
employee must, inter alia, possess ``a clear mutual understanding . . . 
that the fixed salary is compensation (apart from overtime premiums) 
for the hours worked each workweek, whatever their number, rather than 
for working 40 hours or some other fixed weekly work period.'' 29 CFR 
778.114(a). The current regulation further explains that the 
fluctuating workweek method may not be used ``unless the employee 
clearly understands that the salary covers whatever hours the job may 
demand in a particular workweek and the employer pays the salary even 
though the workweek is one in which a full schedule of hours is not 
worked.'' 29 CFR 778.114(c).
    The NPRM proposed to modify the current language regarding the 
clear and mutual understanding requirement for readability and to 
clarify that employers may pay bonuses, premium payments,

[[Page 34618]]

and other additional pay of any kind in addition to the fixed salary. 
See 84 FR 59602. The NPRM did not, however, propose to substantively 
change the current requirement that an employee and employer must 
clearly understand that the fixed salary represents compensation for 
all of the hours worked in the workweek, whether many or few. See id. 
(proposing that the employee and employer must ``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'').
    A few commenters, including the WHDI and Fisher Phillips, requested 
that this clear and mutual understanding requirement be removed or 
modified in the final rule. WHDI stated that, as previously interpreted 
by the Department and courts, an employer is not required to prove an 
employee's state of mind in order to satisfy this requirement. In other 
words, WHDI asserted that the fluctuating workweek method ``is 
established via objective evidence, not state of mind evidence'' and 
thus the reference to a clear and mutual understanding between the 
employer and employee is misleading and should be deleted. Fisher 
Phillips similarly argued that the NPRM's proposed ``clear and mutual 
understanding'' language would erroneously create a heightened 
``requirement'' for use of the fluctuating workweek method. Fisher 
Phillips requested that WHD simply use the term ``understanding'' to 
avoid future litigation over the meaning of this provision.
    The ``clear mutual understanding'' language has appeared in Sec.  
778.114 since 1968. See 33 FR 986, 991 (Jan. 26, 1968). The 
Department's longstanding position is that the mutual understanding 
that must exist between the employer and employee is that the fixed 
salary paid to the employee represents compensation for all the hours 
worked in that workweek, however many or few. See, e.g., FLSA2009-3 
Opinion Letter, 2009 WL 648995, at *2 (Jan. 14, 2009); FLSA Opinion 
Letter, 1999 WL 1002399, at *1 (May 10, 1999). The clear and mutual 
understanding requirement does not, however, extend to the specific 
method used to compute the overtime pay. See FLSA2009-3 Opinion Letter, 
2009 WL 648995, at *2 (Jan. 14, 2009). In other words, the current 
regulation does not impose a requirement that the employee needs to 
fully understand the precise payroll method by which his or her 
overtime compensation is calculated. Id. Numerous courts have reached 
the same conclusion in analyzing the current regulation. See, e.g., 
Garcia v. Yachting Promotions, Inc., 662 F. App'x 795, 797 (11th Cir. 
2016) (per curiam) (``An employee does not have to understand every 
contour of how the fluctuating workweek method is used . . . so long as 
the employee understands that his base salary is fixed regardless of 
the hours worked.''); Clements v. Serco, Inc., 530 F.3d 1224, 1230-31 
(10th Cir. 2008) (same); Valerio v. Putnam Assocs. Inc., 173 F.3d 35, 
40 (1st Cir. 1999) (``The parties must only have reached a `clear 
mutual understanding' that while the employee's hours may vary, his or 
her base salary will not.''); Bailey v. Cnty. of Georgetown, 94 F.3d 
152, 156 (4th Cir. 1996) (``Neither [section 778.114] nor the FLSA in 
any way indicates that an employee must also understand the manner in 
which his or her overtime pay is calculated.''). The NPRM did not 
propose to substantively modify this longstanding interpretation or to 
create a new heightened requirement with respect to the nature of the 
understanding that must exist between the parties.
    The Department believes that the clear and mutual understanding 
requirement is an important condition placed upon the usage of the 
fluctuating workweek method. The commenters requesting deletion of this 
requirement did not present evidence that courts, employers, or 
employees are unduly challenged in understanding or applying the 
requirement. Accordingly, the Department declines to substantively 
modify its proposal to incorporate the existing clear and mutual 
understanding requirement in the regulatory text. The Department has 
decided, however, to add clarifying text in Sec.  778.114(a) to 
emphasize that, although the parties must have a clear and mutual 
understanding that the fixed salary is compensation for all hours 
worked in the workweek, they need not possess such an understanding as 
to the specific method used to calculate overtime pay.
5. Computing Overtime Pay Owed Under the Fluctuating Workweek Method
    Proposed Sec.  778.114(a)(5) requires that ``[t]he 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.'' It further 
clarifies that ``[p]ayment 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.'' Proposed Sec.  778.114(a)(5) also 
revises the current rule's explanation of how the regular rate and 
overtime pay would be computed under the fluctuating workweek method to 
account for cases where the employee receives non-excludable 
supplemental payments. Specifically, ``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'' and ``[p]ayment 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.'' 84 FR at 59602.\13\
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    \13\ By comparison, current Sec.  778.114(a) states that ``the 
regular rate of the employee will vary from week to week and is 
determined by dividing the number of hours worked in the workweek 
into the amount of the salary to obtain the applicable hourly rate 
for the week'' and ``[p]ayment for overtime hours at one-half such 
rate in addition to the salary satisfies the overtime pay 
requirement because such hours have already been compensated at the 
straight time regular rate, under the salary arrangement.'' 29 CFR 
778.114(a).
---------------------------------------------------------------------------

    As discussed above, the fluctuating workweek method computes 
overtime pay where an employee receives a weekly salary that is 
understood to be compensation for all hours worked. Accordingly, Sec.  
778.114 is an example of a scenario where additional overtime 
compensation is properly computed as one-half the regular rate because 
the straight-time portion of the required ``one and one-half times the 
regular rate'' has already been paid. Any pay arrangement that provides 
compensation for all hours worked in a workweek would cover the 
straight-time portion of required overtime pay, leaving the need to pay 
only an additional half-time premium for each overtime hour. See 29 CFR 
778.111, 778.112. The fact that an employee received a bonus or premium 
payment as part of such an arrangement would not negate the fact that 
he or she has already received the straight-time portion of required 
overtime pay as long at the additional payment is appropriately 
included in the regular rate. In other words, payment of bonuses, 
premiums, and other

[[Page 34619]]

additional pay under the fluctuating workweek method will not change 
the half-time overtime calculation, as long as those payments are 
appropriately included in the regular rate, because the employees will 
have already received the straight-time due to them for all hours 
worked, and only additional half-time needs to be computed for overtime 
hours to comply with the FLSA.
    For example, suppose an employee were paid $491 in fixed weekly 
salary plus an $8 per hour nightshift premium. In a week in which the 
employee works 50 hours, including 4 hours for which the employee 
receives the nightshift premium, the employee's straight time pay is 
$523 ($491 salary plus $32 nightshift premium), and the regular rate is 
$10.46. The employer need only pay an additional $5.23, half time the 
regular rate, for each of the 10 overtime hours, for a total of $52.30. 
The payment of the $8 nightshift premium is reflected in this 
fluctuating workweek method computation. The fluctuating workweek 
method therefore correctly computes overtime pay owed under the FLSA 
when an employee receives a fixed salary and hours based premiums that 
compensate him or her for all hours worked. This is the same result as 
would occur if the employee were paid, for example, on a piece rate 
basis but also received additional pay for specific hours. See 29 CFR 
778.111(a) (providing a regulatory example of payment of waiting time 
in addition to piece rate and explaining that only additional half time 
is due for overtime hours).
    Many commenters welcomed the proposed clarification in Sec.  
778.114(a)(5). According to the Society for Human Resource Management 
(SHRM), ``employees and employers are best served by a system that 
promotes maximum flexibility in structuring employee pay and benefits 
and clarity for employers when preparing total compensation packages'' 
and the proposed clarification ``will provide much-needed clarity to 
the regulated community.'' The Society of Independent Gasoline 
Marketers of America (SIGMA) stated that ``[t]reating all such bonus 
payments consistently will reduce employer confusion and regulatory 
burdens and facilitate compliance with overtime rules.'' See also CWC, 
World Floor Covering Association (WFCA).
    Some of the commenters supporting the clarification in proposed 
Sec.  778.114(a)(5) requested that the Department further clarify the 
types of ``additional pay of any kind'' that would be compatible with 
the fluctuating workweek method. SHRM requested that the Department 
``specifically referenc[e] `commissions' as a permissible form of 
additional pay. . . to eliminate any confusion over whether such 
commission payments are compatible with the fluctuating workweek 
method.'' As noted in the NPRM, the Department agrees that commissions 
constitute a type of ``additional pay of any kind'' that would be 
compatible with the fluctuating workweek method. See 84 FR at 59594 
(``[e]xamples of `additional pay of any kind' may include 
commissions'').\14\ Additionally, the Department believes hazard pay 
also would be compatible with the fluctuating workweek method. Id. at 
59601 (listing additional pay ``for hazard duty, graveyard shifts, and 
so forth'' as types of premiums that would be permitted under this 
final rule). Accordingly, the Department is revising the phrase ``any 
bonuses, premium payments, or other additional pay of any kind'' in 
proposed Sec.  778.114 to ``any bonuses, premium payments, commissions, 
hazard pay, or other additional pay of any kind.''
---------------------------------------------------------------------------

    \14\ 29 CFR 778.117 (``Commissions (whether based on a 
percentage of total sales or of sales in excess of a specified 
amount, or on some other formula) are payments for hours worked and 
must be included in the regular rate. This is true regardless of 
whether the commission is the sole source of the employee's 
compensation or is paid in addition to a guaranteed salary or hourly 
rate, or on some other basis, and regardless of the method, 
frequency, or regularity of computing, allocating and paying the 
commission.'').
---------------------------------------------------------------------------

    The WFCA requested that the Department restrict ``additional pay of 
any kind'' that would not invalidate the fluctuating workweek method 
``to what is ultimately included in the definition of the regular 
rate.'' Such a restriction would imply that supplemental payments that 
are excludable from the regular rate under section 207(e)--such as 
overtime premiums under section 207(e)(5)-(7), or ``payments in the 
nature of gifts made at Christmas time'' under section 207(e)(1)--would 
invalidate the fluctuating workweek method. Such supplemental pay, 
however, does not impact the employee's straight time compensation 
because it is excludable from the regular rate. The Department has 
never interpreted such payments as being inconsistent with the use of 
the fluctuating workweek method of compensation.
    The requested restriction would also have the effect of 
discouraging employers using the fluctuating workweek method from 
offering excludable supplemental pay. But as explained more fully in 
the Department's recent rulemaking regarding the regular rate, 84 FR 
68736, excludable payments such as on-site medical care, wellness 
programs, and contributions to health and retirement plans, benefit 
workers immensely. See 29 CFR 778.215, 778.224. The Department believes 
such excludable remuneration should be encouraged and not discouraged. 
As such, the Department declines to restrict the types of additional 
pay that would be compatible with the fluctuating workweek method.
    Several commenters objected to the proposed clarification that 
``[p]ayment of bonuses, premium payments, and additional pay of any 
kind is not incompatible with the fluctuating workweek method of 
overtime payment'' and requested that the Department rescind the 
proposed revisions to Sec.  778.114(a)(5). These commenters raised a 
number of arguments, which the Department addresses below.
a.) Whether Use of the Fluctuating Workweek Method Is Consistent With 
the Purpose of the FLSA
    Comments submitted by NELA, NELP, Economic Policy Institute (EPI), 
and 18 State Attorneys General (State AGs) contend that, by making it 
easier for employers to use the fluctuating workweek method, the 
proposed clarification in Sec.  778.114(a)(5) is contrary to the FLSA's 
remedial purpose. For instance, NELA asserts that the proposed rule 
would undermine ``the primary purposes of the FLSA's overtime 
provisions,'' which are ``to protect workers from long hours of work 
and to spread employment.'' See also NELP, EPI, State AGs.
    As an initial matter, the Department emphasizes, as previously 
discussed, that the fluctuating workweek method does not deviate from 
the standard method of computing overtime pay under the FLSA. As has 
always been clear in the regulatory text, because the employee has 
received straight time compensation for all hours in the workweek, the 
overtime payment obligation is met by payment of an additional one-half 
the regular rate for all hours over 40 in the workweek.
    Far from being contrary to the purpose of the FLSA's overtime 
requirement, half-time overtime under the fluctuating workweek method 
furthers that purpose. As the Supreme Court has explained, ``[B]y 
increasing the employer's labor costs by 50% at the end of the 40-hour 
week and by giving the employees a 50% premium for all excess hours, 
Section 7(a) achieves its dual purpose of inducing the employer to 
reduce the hours of work and to employ more men and of compensating the 
employees for the burden of a long

[[Page 34620]]

workweek.'' Youngerman-Reynolds Hardwood, 325 U.S. at 423-24. The 
Supreme Court has further warned against the ``flawed premise that the 
FLSA pursues its remedial purpose at all costs.'' Encino Motorcars, LLC 
v. Navarro, 138 S. Ct. 1134, 1142 (2018) (internal quotation marks 
omitted). In this case, the FLSA pursues its remedial purpose in its 
overtime requirement at a clearly defined cost: ``increasing the 
employer's labor costs by 50% . . . for all [overtime] hours.'' 
Youngerman-Reynolds Hardwood, 325 U.S. at 423. That is precisely what 
the fluctuating workweek method achieves. As such, the fluctuating 
workweek method is consistent with the FLSA, and the Department 
believes that any increased use of the method by employers in response 
to this final rule will not conflict with the purposes of the Act.
b.) Whether the Final Rule Is Consistent With Supreme Court Precedent
    In its comment, NELA states that the final rule is inconsistent 
with the Supreme Court's decision in Missel, 316 U.S. 572. According to 
NELA, ``the [Missel] Court held that an employer may pay a diminishing 
half-time overtime premium only if the employee receives a fixed weekly 
wage amount that never varies based on work performed.'' In support of 
this conclusion, NELA stated that ``[n]owhere in Missel did the Court 
consider, let alone authorize, the scenario of an employer paying a 
fixed salary [plus] other variable hours-based compensation under a 
half-time pay scheme.'' NELA further contended that the Missel Court 
``directly answered'' the question of ``whether an employer can ever 
pay any amount other than base salary while still availing itself of 
[the fluctuating workweek method].'' The plaintiff in Missel received a 
$2.50 per week allowance for supper money in addition to the fixed 
salary, which NELA argued is a type of supplemental pay that does not 
vary with respect to hours worked.\15\ According to NELA, since the 
Missel Court permitted non-hours-based additional compensation under 
the fluctuating workweek method provided that the employee's total 
compensation was fixed in advance and guaranteed, it must also have 
prohibited all hours-based additional compensation under that method. 
See NELA (arguing that Missel held that additional compensation is 
permitted under the fluctuating workweek method ``if (and only if) the 
additional compensation amounts--like the base salary--are fixed and do 
not vary based on the number or type of hours worked'').
---------------------------------------------------------------------------

    \15\ The Department notes that the Supreme Court's opinion in 
Missel made no mention of the allowance for supper money, which was 
noted in the lower court opinions. The fixed salary amount 
referenced in the Court's opinion, however, included the weekly 
allowance. The Department also notes that under certain 
circumstances supper money can be excluded from the regular rate. 29 
CFR 778.217(b)(4).
---------------------------------------------------------------------------

    The Department agrees with NELA that the Missel Court did not 
consider the scenario where an employee receives hours-based 
supplemental pay on top of a fixed salary, and so could not have 
expressly authorized such payments under the fluctuating workweek 
method. But for that same reason, the Missel Court could not have 
precluded such payments. 84 FR at 59593 (``Missel did not even address 
the issue of bonus or incentive payments beyond the fixed salary, let 
alone preclude certain types of payments.''); see also Smith, 2011 WL 
11528539, at *2 (``Nothing in Missel prohibits the use of the 
fluctuating work week method for calculating [overtime owed] whenever 
an employer gives a bonus to an employee.'').
    The Department does not agree that the Missel Court's decision 
means that all hours-based compensation must be forbidden. As NELA 
conceded, Missel did not address hours-based compensation. As such, the 
Court could not have ``directly answered'' any question concerning 
hours-based supplemental pay. Therefore, Missel does not support NELA's 
contention that a half-time overtime premium is appropriate ``only if 
the employee receives a fixed weekly wage amount that never varies 
based on work performed.''
c.) Whether the Final Rule Is Inconsistent With Other Legal Precedent
    Several commenters, including NELP, argued that ``since Missel, 
courts have consistently been clear in their application of the 
[fluctuating workweek] rule. Under the [fluctuating workweek method], 
the employer's regular rate of pay can vary only with the number of 
hours worked per week, not the type of work performed during those 
hours or any premiums paid for those hours.'' See also State AGs. These 
commenters list several court cases holding that the fluctuating 
workweek method is not compatible with hours-based bonuses. See, e.g., 
NELP; State AGs.
    However, since Missel, courts have taken a wide range of approaches 
regarding the payment of bonuses and premium payments under the 
fluctuating workweek method and have not been consistent in their 
application of the fluctuating workweek rule. For example, some courts 
held that bonus and premium payments were permitted under the 
fluctuating workweek method, and did not make the distinction between 
hours-based and production-based payments that some courts later 
developed. See, e.g., Cash, 2 F. Supp. 2d at 908 (applying fluctuating 
workweek method where employee received incentive bonuses in addition 
to fixed salary); Black, 1994 WL 70113, at *5 (applying fluctuating 
workweek method where employee received straight-time bonuses for long 
hours in addition to fixed salary). Conversely, other courts have 
categorically prohibited such pay. See 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 because employee ``received 
various bonus payments and commissions'').
    In 2003, the First Circuit held that the fluctuating workweek 
method may be used only where an employee receives a `` `fixed amount 
as straight time pay for whatever hours [the employee] is called upon 
to work in a workweek.' '' O'Brien, 350 F.3d at 288 (quoting 29 CFR 
778.114(a)). Following O'Brien, and citing the 2011 final rule preamble 
in their reasoning, some courts have developed a dichotomy that permits 
production-based bonuses but prohibits hours-based bonuses under the 
fluctuating workweek method. See Dacar, 914 F.3d at 926; Lalli, 814 
F.3d at 10. The Department notes, however, that neither the 
Department's regulations nor the FLSA distinguish between production-
based and hours-based bonuses. Further, and perhaps most importantly, 
this legal precedent was based on the wording of the regulation prior 
to this rulemaking, and was exacerbated by the unclear preamble 
discussion in the 2011 final rule, both of which the Department is 
addressing in this rulemaking.\16\
---------------------------------------------------------------------------

    \16\ NELP states in a footnote that courts issuing case law that 
is inconsistent with the final rule ``have been interpreting Supreme 
Court precedent, not the regulation.'' But, as explained above, 
Supreme Court precedent does not directly address the compatibility 
of bonus and premium payments with the fluctuating workweek method. 
And the courts cited by NELP ground their analysis in the 
Department's fluctuating workweek regulation. For instance, the 
O'Brien court explained that ``the parties limit their arguments to 
whether the compensation scheme . . . comports with the regulation, 
and we confine ourselves to the same question.'' 350 F.3d 287 n.15.
---------------------------------------------------------------------------

    As these divergent approaches demonstrate, and contrary to the 
assertions of some commenters, the case law is neither consistent nor 
clear. These inconsistent interpretations by

[[Page 34621]]

courts have created practical confusion and challenges for employers. 
Comments received in this rulemaking document the confusion caused by 
the judicially-developed distinction between productivity-based and 
hours-based bonuses. See CWC (``Some courts have permitted additional 
payments, others have prohibited them. S[t]ill other courts have drawn 
distinctions between permitted and prohibited additional payments based 
on the purpose of the payments. This widely divergent case law has 
created a greater disincentive for employers to consider the 
fluctuating workweek [method].''). One of the reasons for this 
rulemaking is to clear up the confusion caused by the divergent case 
law.
    This final rule makes clear that permitting all supplemental pay 
while using the fluctuating workweek method is consistent with how 
overtime pay is computed based on the regular rate under the FLSA.
    The Department recognizes that this clarification is inconsistent 
with certain legal precedent, such as those cases that adhere to the 
judicially-developed dichotomy between hours-based and productivity-
based bonuses.\17\ However, as discussed above, neither the 
Department's regulations nor the FLSA distinguish between production- 
and hours-based bonuses when computing the regular rate and overtime 
pay. Indeed, this dichotomy lacks support and is in tension with all of 
the Department's prior written guidance on the issue. The 
clarifications provided in this preamble discussion and the 
corresponding explicit revisions to the regulatory text will bring much 
needed clarity regarding the compatibility of all types of bonuses with 
the fluctuating workweek method to the courts, employers, and employees 
alike.
---------------------------------------------------------------------------

    \17\ Indeed, given courts' different approaches, no rule here 
can be consistent with all the case law since Missel, and the 
Department does not attempt to do so. Rather, the Department's 
objective is to provide a rule that gives clear guidelines to 
employers and employees.
---------------------------------------------------------------------------

d.) Whether the Final Rule Is Consistent With the Department's Prior 
Position
    NELA argues that the final rule is inconsistent with the 
Department's prior position, particularly the position taken in the 
2011 final rule. But as explained in the NPRM and below, it is not 
clear what precise position was taken in that final rule. In fact, that 
is the point of this rulemaking: to clarify the Department's position 
on whether payments of bonuses and premiums are permissible under the 
fluctuating workweek method.
    Since 1968, the regulatory text of Sec.  778.114 has explained 
that, under the fluctuating workweek method, ``[p]ayment for overtime 
hours at one-half [the regular] rate in addition to the salary 
satisfies the overtime pay requirement because such hours have already 
been compensated at the straight time regular rate, under the salary 
arrangement.'' In the 2008 NPRM, the Department proposed to clarify 
that the payment of additional bonuses and premiums was compatible with 
the fluctuating workweek method. This was because, as explained in the 
2009 opinion letter, ``[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.''
    In the 2011 final rule, the Department did not adopt the proposed 
clarifying language to Sec.  778.114, and instead 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 clarifications 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.'' Id. Because the Department had stated clearly 
in both the 2008 NPRM and the 2009 opinion letter that payment of 
bonuses was permissible under the same regulatory language in Sec.  
778.114 that the Department retained in the 2011 final rule, the 
Department's reference to the ``current rule'' prohibiting such 
payments was unclear. See 73 FR at 43662; WHD Opinion Letter FLSA2009-
24 (Jan. 16, 2009) (withdrawn Mar. 2, 2009). As explained in the 
background section of this preamble, the apparent misalignment between 
the 2011 preamble language and the substantively unchanged final 
regulatory text created substantial confusion for the regulated 
community. See CWC (``[S]tatements in the preamble to the [2011] final 
rule . . . contributed to the growing confusion over how additional 
compensation should be treated'' because ``while DOL did not publish 
any substantive changes to its codified rules, it articulated an 
explanation directly contrary to past practice.'').
    Attempting to make sense of the 2011 final rule, the court in 
Sisson concluded that the 2011 final rule actually ``present[ed] an 
about-face'' that ``alters the DOL's interpretation.'' 2013 WL 945372, 
at *6; Switzer, 2012 WL 3685978, at *4 (describing the Department as 
having ``shifted course'' in the 2011 final rule). This interpretation, 
however, ignores the ``restore the current rule'' language and the 
unchanged regulatory text. The Wills court concluded that ``the status 
quo was being maintained,'' but defined the status quo as then-emerging 
case law permitting production-based bonuses while prohibiting hours-
based ones. 981 F. Supp. 2d at 262; see Lalli, 814 F.3d at 9 (``DOL's 
decision to leave the regulation alone means that the bulletin would 
have done nothing to change the federal courts' existing `treatment of 
that precise issue''') (quoting Wills, 981 F. Supp. 2d at 252). Many 
subsequent courts have affirmed the distinction between production-
based and hours-based bonuses. See, e.g., Dacar, 914 F.3d at 926; 
Lalli, 814 F.3d at 8-10. But the Department has never endorsed the 
distinction between hours-based bonuses and production-based bonuses. 
In fact, as NELA points out, the Department's documented intent to file 
an amicus curiae brief in support of the appeal of the Wills decision 
evinces the Department's disagreement with Wills.
    The Department's clarification in this final rule is consistent 
with its interpretations in the 2008 NPRM and the 2009 opinion letter 
and, importantly, is also consistent with the regulatory text as 
reaffirmed in the 2011 rule, which explained that employers that paid a 
fixed salary to employees whose hours fluctuated from week to week 
would satisfy their overtime payment obligation by paying an additional 
50 percent of the employee's regular rate for all overtime hours. The 
Department's clarification in this final rule does not alter this 
fundamental principle of overtime compensation. Instead, it clarifies 
that the employee's straight time compensation may include bonus and 
premium payments in addition to a fixed salary. In such situations, 
where the regular rate includes all payments that are not excludable 
under section 207(e)(1)-(8), the employer's overtime payment obligation 
will be met by the payment of an additional 50 percent of the 
employee's regular rate for all overtime hours. Thus the Department 
does not agree that the current rule is inconsistent with its prior 
positions.
e.) Whether the Inverse Relationship Between the Regular Rate and Hours 
Worked Undermines the FLSA
    Several commenters expressed concern that, under the fluctuating

[[Page 34622]]

workweek method, the regular rate decreases when hours increase. For 
instance, the State AGs stated that the fluctuating workweek method of 
calculating overtime ``is therefore the only method whereby the 
employee's regular rate of pay and the employee's overtime rate of pay 
actually decrease as the hours worked increase.'' These commenters 
assert that this inverse relationship is in tension with the remedial 
purposes of the FLSA's overtime requirement and harms workers paid 
under that method. NELA, for example, stated that the inverse 
relationship between the regular rate and hours worked ``provides a 
strong financial incentive to employers to require ever more overtime 
hours and to limit the number of employees.''
    As discussed above, however, the fluctuating workweek method is not 
the only method under which the regular rate decreases as hours worked 
increase. For instance, the regular rate of an employee paid through a 
day-rate arrangement under Sec.  778.112 is equal to the fixed day-rate 
amounts per week divided by hours worked. Because the day rate does not 
increase for longer work days, the regular rate necessarily falls as 
hours worked increase. Thus, there is some degree of inverse 
relationship between the regular rate and hours worked in every 
overtime compensation example listed in Sec. Sec.  778.110-778.115 
except where the employee is paid exclusively through an hourly rate, 
in Sec. Sec.  778.110(a) and 778.113. Whenever an employee receives any 
compensation in addition to or in lieu of hourly pay--such as a fixed 
bonus, or a day rate--the regular rate likely would vary inversely with 
hours worked. But that does not mean such compensation arrangements are 
at odds with the FLSA. Indeed, it is a function of the FLSA's 
definition of the regular rate as non-excludable compensation divided 
by hours worked. Furthermore, nothing in this rule changes the basic 
rules for calculating pay under the fluctuating workweek method, 
including overtime. As such, any ``financial incentive'' to requiring 
overtime work would remain the same as in the status quo.
    The Department further disagrees that the inverse relationship 
``provides a strong financial incentive to employers to require ever 
more overtime hours and to limit the number of employees.'' NELA. While 
the overtime premium per hour decreases as hours increase, the employer 
must still pay an overtime premium that is designed to discourage 
overtime work and spread employment, and the total amount of overtime 
premium an employer owes continues to increase as hours increase.
    The Department notes that the payment of hours-based bonuses to 
employees compensated under the fluctuating workweek method--which this 
final rule clarifies is permitted--may diminish or even eliminate the 
inverse relationship between hours worked and the regular rate that 
commenters find objectionable. Consider the compensation scheme in 
Black, which the court upheld as compatible with the fluctuating 
workweek method, see 1994 WL 70113, at *2, *5: The Employee was paid a 
fixed salary for all hours worked in a workweek plus a straight-time 
bonus for each hour worked in excess of 45. The bonus rate equals the 
weekly salary divided by 40 (which equals 0.025 of the fixed weekly 
salary per hour). If the employee works more than 45 hours, the regular 
rate equals:
[GRAPHIC] [TIFF OMITTED] TR08JN20.004

    Under this this compensation scheme, so long as the employee works 
enough hours to receive the bonus, the regular rate would actually 
increase for each additional hour of overtime work. For example, an 
employee who works 50 hours and receives a fixed salary of $600 plus a 
straight-time bonus of $15 for each hour worked in excess of 45 would 
have a regular rate of $13.50. But if he or she works five additional 
hours, the regular rate would rise to $13.63.
f.) Effects on Workers Who Switch to the Fluctuating Workweek Method
    The proposed clarification in Sec.  778.114(a)(5) would make it 
more attractive for employers to use the fluctuating workweek method, 
so employers would be more likely to start using the method. While some 
commenters welcomed greater regulatory clarity, others, including EPI, 
State AGs, and NELP, expressed concern that when an employee switches 
to being paid under the fluctuating workweek method, the ``employee . . 
. will lose the time-and-a-half overtime premium.'' EPI; see also State 
AGs, NELP. EPI further described how, in its view, a worker switched to 
the fluctuating workweek method could face reduced earnings: 
``Employers will . . . be unlikely to switch to the fluctuating 
workweek method unless their employees tend to work more hours above 
their usual hours than below their usual hours. That means workers 
whose employers choose to switch to the fluctuating workweek method are 
likely to receive lower earnings than they receive under the usual 
method.''
    The Department does not believe this scenario is likely to be 
widespread, if it occurs at all. It is certainly true that an employer 
theoretically could reduce an employee's overall earnings by switching 
that employee from hourly pay to the fluctuating workweek method. But 
the same employer could also reduce the employee's earnings by the 
exact same amount by lowering the employee's hourly rate of pay. As 
such, the ability to switch an employee to the fluctuating workweek 
method should not make the employer more able or willing to reduce the 
employee's earnings.
    Such an employee would be agnostic as to the method behind an 
earning reduction: Having the hourly wage reduced or being switched to 
the fluctuating workweek method with an equivalently low salary would 
both make the employee equally dissatisfied because the negative effect 
on earnings is the same. Worker dissatisfaction may affect morale, 
turnover, and other productivity factors. The employer would also be 
agnostic: The employer's labor cost savings are the same and the 
employee is equally dissatisfied. So the employer faces the same 
tradeoff between labor costs savings, on one hand, and worker 
dissatisfaction on the other. The Department therefore finds no reason 
why the ability to switch an hourly worker to the fluctuating workweek 
method (an ability already present without the new rule) would make an 
employer any more able or willing to reduce the employee's earnings as 
compared to simply reducing the hourly rate of pay.\18\
---------------------------------------------------------------------------

    \18\ While this possibility was not raised by EPI, the 
Department posits that some hourly employees may be willing to forgo 
a small amount of earnings to be switched to the fluctuating 
workweek method, perhaps because the employee prefers a fixed salary 
to unstable hourly pay. In this instance, an employer could 
theoretically switch the employee to the fluctuating workweek method 
while reducing the employee's earnings by the exact amount the 
employee was willing to forgo without having a net effect on the 
employee's satisfaction. But the Department does not believe that 
the employer could convince the employee to forgo the entire amount 
he or she is willing to forgo because an employer's market power--
while often substantial--is rarely absolute. As long as the employee 
has even a small degree of market power, the employee is likely to 
forgo less earnings than he or she was willing to be switched to the 
fluctuating workweek method, leaving the employee more satisfied 
than before. This hypothetical scenario does not raise significant 
worker welfare concerns because the end outcome reflects the 
employee's preferences as much as the employers. Indeed, by the 
terms of the hypothetical scenario, switching to the fluctuating 
workweek method is guaranteed to leave the employee at least as 
satisfied as before.

---------------------------------------------------------------------------

[[Page 34623]]

    As such, the Department believes employers switching hourly 
employees to the fluctuating workweek method should not, on balance, 
reduce workers' earnings. To the contrary, overall earnings are likely 
to increase. As explained below, the final rule is likely to reduce 
labor market inefficiency, i.e., deadweight loss, by reducing 
employers' need to manage the hours of employees who are switched to 
the fluctuating workweek method and enabling employers to incentivize 
work not presently being performed. The benefit of this deadweight loss 
reduction will be distributed among both capital and labor factors, 
meaning that, on average, employers' profits and workers' earnings will 
both rise. See SHRM (``employees and employers are best served by a 
system that promotes maximum flexibility in structuring employee pay 
and benefits'').
g.) Effects on Workers Paid Under the Fluctuating Workweek Method
    Several commenters, including State AGs and NELA, expressed concern 
that the final rule would encourage employers to shift the compensation 
of employees already being paid under the fluctuating workweek method 
away from the fixed salary and towards bonuses and premiums. The NPRM 
expressly considered this possibility, which was also raised in the 
2011 final rule, but ultimately concluded that any compensation 
shifting would not be significant. The Department's conclusion in this 
regard relied on 2019 Bureau of Labor Statistics (BLS) data showing 
that supplemental pay of the type permitted by the final rule--i.e., 
nonproduction bonuses and shift differentials--constitutes a relatively 
small portion of employees' overall compensation nationwide, no more 
than five percent of any occupation.\19\
---------------------------------------------------------------------------

    \19\ Bureau of Labor Statistics, Employer Costs for Employee 
Compensation--June 2019, https://www.bls.gov/news.release/pdf/ecec.pdf.
---------------------------------------------------------------------------

    The Department reasoned that, if the prohibition against 
nonproduction bonuses and shift differentials under the fluctuating 
workweek method were lifted, employers using that method would, at 
most, shift compensation away from the salary and towards such 
supplemental pay to approximately the same extent as employers 
nationwide who are not similarly restricted. Since BLS data show 
employers nationwide have not shifted compensation away from base pay 
towards nonproduction bonuses and shift differentials to a significant 
degree (again, no more than five percent for any occupation), the 
Department concluded that lifting the restriction for employers using 
the fluctuating workweek method would not result in significant 
compensation shifting towards those types of pay.
    Some commenters agreed with this conclusion. See, e.g., SIGMA 
(``The Association concurs with DOL's assessment, which is based upon 
data from the Bureau of Labor statistics, that permitting employers to 
pay bonuses, premiums, and additional pay to employees compensated with 
the fluctuating workweek method will not lead employers to shift large 
portions of salaries into those types of supplemental payments.''). 
Other commenters disputed the Department's use of certain BLS data in 
this rulemaking. NELA asserted, ``The fact that the Bureau's statistics 
show employers currently pay civilians nonproduction bonuses as 1.8% of 
compensation and shift differentials as 0.2% does not constitute 
evidence or indication of any kind that employers will not shift 
compensation to non-guaranteed bonuses and supplementary compensation 
if given the opportunity to do so'' under the fluctuating workweek 
method. The State AGs further argued that the Department's reliance on 
the BLS data ``ignores . . . that the rule [the Department] is changing 
has prevented employers from exploiting the [fluctuating workweek] 
method and acted as a deterrent against shifting more pay towards 
hours-based premiums.''
    These commenters appear to believe that the perceived prohibition 
of supplemental pay under the fluctuating workweek method is 
responsible for the low rate at which employees nationwide receive 
nonproduction bonuses and shift differentials in comparison to base pay 
reflected in the BLS data. But that cannot be true because over 99 
percent of employees nationwide are not paid under the fluctuating 
workweek method and so do not face its perceived restrictions against 
paying nonproduction bonuses and shift differentials.\20\ Even though 
the vast majority of employees nationwide face no restrictions from 
receiving nonproduction bonuses and shift differentials, their 
employers have not shifted a significant portion of their compensation 
towards such supplemental pay. Accordingly, the Department continues to 
believe that BLS data indicate that, if employees paid using the 
fluctuating workweek method of compensation begin to receive 
supplemental pay, there would not be significant compensation shifting.
---------------------------------------------------------------------------

    \20\ The RIA estimates that 698,393 workers are compensated 
using the fluctuating workweek method, which represents 0.4 percent 
of U.S. workers.
---------------------------------------------------------------------------

    NELA further argued that ``the fact that the Bureau of Statistics 
was reporting the same (and even lower) average figures of supplemental 
pay as a percentage of total compensation when the 2008 NPRM issued . . 
. and when the Department issued its 2011 Final Rule, proves that the 
same Bureau statistics . . . are simply not evidence of the proposition 
they are cited to purportedly support.'' According to NELA, this is 
because ``those figures were reported and available to commenters and 
the Department alike when it determined in 2011 that employers would 
likely reduce salaries and shift compensation to non-guaranteed bonus 
and other supplemental pay if given the opportunity to do so'' under 
the fluctuating workweek method.\21\
---------------------------------------------------------------------------

    \21\ Citing Bureau of Labor Statistics, Employer Costs for 
Employee Compensation Historical Tables June 2019, Table 1, https://www.bls.gov/web/ecec/ececqrtn.pdf (reporting for ``all workers'' 
supplemental pay as percentage of total compensation at 2.5% (2008), 
2.5% (2009), 2.3% (2010), 2.4% (2011); shift differentials at .2% 
(2008-11); and nonproduction bonuses at 1.4% (2008), 1.5% (2009), 
1.3% (2010), and 1.4% (2011)).
---------------------------------------------------------------------------

    The Department agrees with NELA that the rate at which employers 
nationwide have paid nonproduction bonuses and shift differentials as 
compared to base pay has been very low for at least the past decade. 
That supports the Department's conclusion that employers using the 
fluctuating workweek method would not shift more compensation to 
nonproduction bonuses and shift differentials if given the same 
opportunity to do so as employers nationwide. The Department disagrees 
with NELA that the availability of similar BLS data between 2008 and 
2011 meant that the Department's concern regarding compensation 
shifting was informed by such BLS data. No commenter presented BLS data 
to the Department, and the Department's 2011 final rule did not cite

[[Page 34624]]

any such data. The 2011 final rule did not state that it relied on any 
data whatsoever to conclude that the proposed regulation ``could have 
had the unintended effect of permitting employers to pay a greatly 
reduced fixed salary and shift a large portion of employees' 
compensation into bonus and premium payments.'' 76 FR at 18850.
    For these reasons, the Department continues to have confidence in 
BLS data indicating that the final rule's clarification that employees 
paid under the fluctuating workweek method may receive supplemental pay 
would not result in significant shifting of compensation away from the 
fixed salary towards supplemental pay.
h.) Whether the Final Rule Will Create Confusion for Employers
    The State AGs argue that the proposed clarification will ``create 
confusion for employers and courts.'' State AGs. In particular, the 
State AGs note that certain states prohibit the fluctuating workweek 
method, and believe that employers in these states will not understand 
that the method is prohibited by state law. As such, these employers 
may ``find themselves embroiled in costly litigation or subject to 
investigation.'' Id.\22\
---------------------------------------------------------------------------

    \22\ As set forth in the NPRM and confirmed by the State AGs, 
Pennsylvania, Alaska, California, and New Mexico do not generally 
permit employers to use the fluctuating workweek method.
---------------------------------------------------------------------------

    States may and often do enact labor laws that are more restrictive 
on employers than the federal standard. Employers routinely are able to 
navigate both state and federal law. Thus, the Department believes that 
employers in a state that prohibits the fluctuating workweek method, 
such as California, will understand that the method remains prohibited 
by that state's more restrictive law. It is unlikely such employers 
will, as the State AGs fear, ``rush to use'' the fluctuating workweek 
method in contravention of state law.
    Instead, commenters that represent employers (or labor compliance 
professionals) overwhelmingly agreed with the NPRM that this final rule 
would reduce confusion and enhance clarity regarding the application of 
the fluctuating workweek method. For instance, the Chamber stated that 
``the 2011 Preamble generated substantial confusion and uncertainty for 
courts and employers alike. Employers saw this as an attack on their 
ability to reward their salaried nonexempt employees with variable 
incentive compensation.'' The CWC explained that ``statements in the 
preamble to the [2011] final rule . . . contributed to the growing 
confusion over how additional compensation should be treated'' because 
``while DOL did not publish any substantive changes to its codified 
rules, it articulated an explanation directly contrary to past 
practice.''
    SHRM further stated that the 2011 preamble ``resulted in an initial 
wave of confusion among HR professionals.'' SHRM; see also id. (``[T]he 
source of confusion regarding the interaction of bonuses and 
fluctuating workweek is the 2011 Preamble.''). This confusion has 
deterred employers from paying their workers bonuses. According to 
SHRM, ``The Department's statement in the 2011 Final Rule preamble that 
the payment of any compensation in addition to the salary payment 
somehow `invalidated' the fluctuating workweek method caused many 
employers to either (1) eliminate bonuses for employees paid pursuant 
to the fluctuating workweek method; or (2) pay previously salaried 
employees an hourly rate (and continue any bonus programs). Although 
these employers typically did not agree with [the] Department's legal 
reasoning, nor believe the restructured pay plans best served the needs 
of their business and employees, the substantial risk of litigation 
created solely by the Department's preamble language forced their 
hands.'' Therefore, the Department continues to be confident this final 
rule will reduce confusion for employers.
i.) Whether To Exempt First Responders
    The International Association of Fire Fighters (IAFF) ``urges the 
Department to carve out an exception for fire fighters and other public 
safety personnel should it choose to move forward with the proposed 
regulation.'' As explained above, the fluctuating workweek method is 
merely an example of how regular rate and overtime computation 
principles apply in certain circumstances.
    The Department has never had industry or occupational exceptions 
for the use of the fluctuating workweek method and IAFF has not 
provided sufficient evidence that the Department should consider such 
an exception now. The Department is therefore adopting Sec.  
778.114(a)(5) as proposed, with two minor changes. First, the 
Department is adding ``commissions'' as an example of additional pay 
that is compatible with the fluctuating workweek method. And second, 
the Department is replacing ``not incompatible'' with ``compatible'' to 
improve readability.

C. Examples of the Fluctuating Workweek Method

    In the NPRM, the Department proposed two new examples to illustrate 
how the fluctuating workweek method computes overtime pay when an 
employee receives (1) a nightshift differential and (2) a productivity 
bonus in addition to the fixed salary. Fisher Phillips stated in its 
comment that ``the examples are unnecessarily lengthy'' and suggested 
``that the calculation be performed for only one workweek instead of 
all four in . . . examples [2 and 3] and/or collapse these examples as 
the employee could earn both a shift differential and a productivity 
bonus.''
    The Department agrees that it is unnecessary to show how the 
fluctuating workweek method computes overtime pay for four different 
workweeks in examples 2 and 3. But the Department believes it would be 
useful for each example to compute overtime for one workweek in which 
hours worked is over 40 and one workweek in which it is under 40. 
Accordingly, the Department is revising examples 2 and 3 to compute 
overtime pay in two different workweeks: One workweek where the 
employee works 37.5 hours and another in which the employee works 48 
hours.
    SHRM requested that the Department add ``an example that addresses 
payments made for work outside of the employee's normal schedule.'' 
Specifically, SHRM suggested adding the following example to the 
regulatory text: ``an employer and employee reach an understanding that 
the salary is intended to cover all hours worked from Monday to Friday, 
but occasional Saturday work will be paid at a day rate or hourly 
rate.''
    The Department does not believe the fluctuating workweek method 
would be appropriate in the scenario SHRM described. This is because 
the fluctuating workweek method computes overtime pay where the 
employee and employer both understand that the fixed salary covers all 
hours worked in the entire workweek, not just ``Monday to Friday'' as 
in SHRM's suggestion. That said, if the parties understand that the 
fixed salary covers all hours worked in a workweek, an employer may 
offer a premium for weekend work outside the employee's normal schedule 
and still use the fluctuating workweek method to compute the regular 
rate and overtime pay.

D. Revisions to Sec.  778.114(c)

    In its current form, Sec.  778.114(c) states that ``[w]here all the 
legal prerequisites for use of the `fluctuating workweek'

[[Page 34625]]

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.'' 29 CFR 778.114(c). The 
NPRM proposed non-substantive edits to this language for readability. 
See 84 FR at 59602 (``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.'').
    In its comment, the WHDI stated that, under the fluctuating 
workweek method, the regular rate varies from week to week based on the 
number of hours worked, thereby requiring employers to calculate the 
amount that they owe in overtime premiums each week. WHDI asserted that 
employers can avoid having to recompute the regular rate each week if 
they simply divide the employee's salary (plus any other compensation 
that must be included in the regular rate) by 40 and then pay one-half 
the resulting rate for each overtime hour worked. WHDI stated that the 
Department's proposed regulatory text in Sec.  778.114(c) ``confuse[d] 
matters'' by implying that employers can pay more than half the regular 
rate in overtime compensation only ``[w]here the conditions for the use 
of the fluctuating workweek method of overtime payment are present.'' 
84 FR at 59602. WHDI thus requested that the Department clarify that 
there are no ``legal prerequisites'' to paying more than the amount of 
overtime compensation required by the Act.
    Pursuant to the FLSA, in a workweek that exceeds 40 hours, an 
employee is entitled to be compensated at his or her regular rate for 
all hours worked (i.e., straight time) and to receive an overtime 
premium (i.e., overtime) of at least one half the regular rate for the 
hours worked in excess of 40. See 29 U.S.C. 207(a). The combination of 
straight time and overtime equals the one and one-half time overtime 
pay required by section 7 of the FLSA. See id. Therefore, to the extent 
that an employer has already paid straighttime compensation for all 
hours worked, the employer's resulting overtime obligation is only an 
additional half of the regular rate for the hours worked in excess of 
40 in the workweek.
    As noted by WHDI, in an overtime week, an employer using the 
fluctuating workweek method will always exceed its FLSA overtime 
obligation if it calculates the regular rate based on 40 hours worked 
(rather than the higher number of hours actually worked) and pays the 
half-time overtime premium on that basis. See, e.g., FLSA Opinion 
Letter, 2002 WL 32255314 (Oct. 31, 2002); FLSA Opinion Letter, 1986 WL 
1171085 (Feb. 10, 1986). It is the Department's longstanding position 
that employers are always permitted to pay more in overtime premiums 
than required by the FLSA. The regulatory text at issue in revised 
Sec.  778.114(c) simply states that this principle is true in the 
fluctuating workweek context and does not impose any pre-conditions for 
paying more in overtime compensation than required by law. See 84 FR at 
59602.

E. Other Comments

    The Department received a number of comments that were not directed 
to a specific part of the proposed rule. These comments are addressed 
below.
    The American Horse Council and the National Thoroughbred Racing 
Association requested guidance regarding how a bonus for a period that 
spans multiple workweeks should be allocated to those workweeks for the 
purpose of regular rate computation. The WFCA also requested that WHD 
give employers the choice of either allocating such a bonus to the week 
in which it is paid or to spread the bonus amount evenly across the 
covered workweeks (i.e., the period the bonus was earned). However, 
bonus allocation for the purpose of regular rate computations is not 
within the scope of the proposed regulation. Instead, WHD's regulations 
at 29 CFR 778.209 address how bonuses should be allocated for all 
methods of regular rate computation, including the fluctuating workweek 
method. Section 778.209 provides that, where possible, a bonus ``must 
be apportioned back over the workweeks of the period during which it 
may be said to have been earned.'' 29 CFR 778.209(a) (emphasis added). 
If such apportionment is not possible, ``some other reasonable and 
equitable method of allocation must be adopted.'' 29 CFR 778.209(b). 
Accordingly, a bonus earned over a longer period may not be allocated 
solely to the workweek in which it was paid.
    The WFCA requested WHD to clarify that that ``preannouncement of 
possible bonuses should not make a bonus nondiscretionary and therefore 
included in the regular rate.'' However, the principles that govern 
whether a bonus is or is not discretionary, and therefore excludable 
from the regular rate, are the same whether an employer is using the 
fluctuating workweek method or some other method of determining the 
regular rate. These principles are found in the Department's 
regulations at Sec.  778.211, which provides that ``if an employer 
announces to his employees in January that he intends to pay them a 
bonus in June, he has thereby abandoned his discretion regarding the 
fact of payment by promising a bonus to his employees. Such a bonus 
would not be excluded from the regular rate under section 7(e)(3)(a).'' 
This language is clearly inconsistent with the WFCA's request. The 
preamble to WHD's recent Regular Rate final rule, published on December 
16, 2019, provides further discussion of the distinction between 
discretionary and non-discretionary bonuses, with examples of 
discretionary bonuses common in the workplace, which may also provide 
employers with helpful guidance on this issue. See 84 FR at 68754-56.
    The National Newspaper Association requested that the Department 
add a provision in the revised regulation that ``permit[s] the 
fluctuating work `week' to be calculated on a biweekly or monthly basis 
commensurate with the pay periods in many small businesses [to] allow 
newspaper employers some needed flexibility.'' The FLSA expressly 
requires employers to pay overtime compensation for any ``workweek 
longer than forty hours.'' 29 U.S.C. 207(a). As such, the regular 
rate--which is necessary to determine overtime compensation owed--must 
also be calculated on a weekly basis. See 29 CFR 778.104 (``The Act 
takes a single workweek as its standard and does not permit averaging 
of hours over 2 or more weeks.'').
    Several commenters urged WHD to state in the final rule that the 
fluctuating workweek method may be used to compute back wages in failed 
exemption cases. The commenters explained that, in such cases, an 
employer may have classified a salaried employee as exempt under the 
FLSA but it is later determined that such employee is in fact nonexempt 
(e.g., because he or she is found to have performed nonexempt duties). 
In such cases, courts must determine how to calculate back wages for 
the salaried employees. Attorney Daniel Abrahams requested that the 
Department's final rule expressly state, consistent with the weight of 
the case law, that back wages in such cases may be calculated using the 
fluctuating workweek method.\23\

[[Page 34626]]

Other commenters, such as Fisher Phillips and the WHDI, similarly 
requested that the Department clarify that, while the fluctuating 
workweek method may be used to calculate back wages in 
misclassification cases, the specific requirements set forth in Sec.  
778.114 do not apply to such back wage computations and instead are 
applicable only to the use of the fluctuating workweek method as a 
payroll practice.
---------------------------------------------------------------------------

    \23\ Many courts have permitted back wages in failed exemption 
cases to be calculated by using the fluctuating workweek method, 
although courts are divided as to whether the authority to apply the 
method is based on the retroactive application of Sec.  778.114 
itself or instead arises directly from the Supreme Court's Missel 
decision. See, e.g., Black v. Settlepou, P.C., 732 F.3d 492, 496-98 
(5th Cir. 2013) (applying fluctuating workweek method to computation 
of back wages based on Missel); Lamonica v. Safe Hurricane Shutters, 
Inc., 711 F.3d 1299, 1310-11 (11th Cir. 2013) (same); Urnikis-Negro 
v. Am. Family Prop. Servs., 616 F.3d 665, 676-84 (7th Cir. 2010) 
(same); Clements, 530 F.3d at 1230-31 (applying Sec.  778.114 to 
retroactively calculate back pay); Valerio, 173 F.3d at 39-40 
(affirming district court's retroactive application of section 
778.114).
---------------------------------------------------------------------------

    The Department agrees with the general observation by Fisher 
Phillips and WHDI that the specific conditions set forth in Sec.  
778.114 (e.g., the clear and mutual understanding requirement) are 
intended to govern the use of the fluctuating workweek method as a 
prospective payroll practice. See, e.g., Lamonica, 711 F.3d at 1311; 
Urnikis-Negro, 616 F.3d at 678 (explaining that 29 CFR 778.114 ``on its 
face is not a remedial measure. It says nothing about how a court is to 
calculate damages where, as here, the employer has breached its 
obligation to pay the employee an overtime premium. Its focus instead 
is on how an employer may comply with its statutory obligations in the 
first instance and avoid liability for breach of those obligations.''). 
Accordingly, the Department declines to opine in this final rule on the 
permissibility of using the fluctuating workweek method to 
retroactively calculate back wages in failed exemption cases. The 
Department does not believe it would be appropriate, in the context of 
this rulemaking, to discuss the method of back wage calculation that 
courts should use in litigation involving failed exemption status, 
which necessarily involves fact-specific determinations and analysis. 
The NPRM did not specifically address back wage computations for 
misclassification cases, and the Department declines to do so in the 
final rule. As the Department has explained elsewhere in this preamble, 
however, to the extent that an employer has paid straight time 
compensation for all hours worked in the workweek, the employer's 
resulting overtime obligation under the Act is only an additional half 
of the regular rate for the hours worked in excess of 40 in the 
workweek. This general FLSA principle applies regardless of whether the 
specific compensation scheme at issue satisfies the technical 
requirements of Sec.  778.114.

IV. 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 final rule 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 did not receive any comments on this determination.

V. Executive Order 12866; Regulatory Planning and Review; and Executive 
Order 13563, Improved Regulation and Regulatory Review

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 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 final rule is economically significant. The 
Department has prepared a Regulatory Impact Analysis (RIA) in 
connection with this rule, 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 Rule and Potential Affected Employees

    This rule clarifies that bonuses, premiums, and any other 
supplemental payments are compatible with the fluctuating workweek 
method of calculating overtime pay. Prior to this rule, legal 
uncertainty regarding the compatibility of supplemental pay with the 
fluctuating workweek method deterred employers from making such 
payments to employees paid under the fluctuating workweek method. 
Employers were also deterred from paying employees under the 
fluctuating workweek method if they regularly paid bonuses and 
premiums. This rule will 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.
    This rule makes clear to employers that employees paid under the 
fluctuating workweek method are eligible for all supplemental payments. 
As in the NPRM, in order to estimate the impact of this rule, the 
Department relied on data from the Current Population Survey (CPS) to 
estimate a total pool of employees who could possibly be affected.\24\ 
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.\25\ First, under 29 CFR 778.113,

[[Page 34627]]

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, (5) are paid on a salary basis; and (6) 
work hours that ``vary'' from week to week.\26\ 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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    \24\ 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.
    \25\ 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.
    \26\ 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., No. 22 WAP 2018, 2019 WL 6139547 (Pa. Nov. 
20, 2019); 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.
    All together, 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). The Department lacks data to 
determine how prevalent this compensation method actually is amongst 
this group.\27\ 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. The actual number may be higher or lower.
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    \27\ The Department received comments with anecdotal information 
about the prevalence of the fluctuating workweek method. For 
example, the National Newspaper Association surveyed their member 
publishers, and found that 11 percent are presently shifting 
additional employees to the fluctuating workweek method. And 
Attorney C. Andrew Head indicated that he has represented more than 
20,000 fluctuating workweek employees in his litigation practice. 
While these comments do not provide enough data for the Department 
to add precision to its illustrative cost-savings estimates, they do 
indicate that there is significant use of the FWW method by at least 
some employers, and give the Department more confidence that the 
economic effects of this rule likely will be significant, even if 
they cannot be precisely measured.
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    This rule 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.\28\ 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.\29\
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    \28\ 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.
    \29\ The Department lacks the required CPS data from before 
2004.
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    In the NPRM, the Department noted that the estimated percentage of 
U.S. workers compensated under the fluctuating workweek method 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.\30\
---------------------------------------------------------------------------

    \30\ Compare, e.g., Wills, 981 F. Supp. 2d at 256, with Sisson, 
2013 WL 945372, at *1.
---------------------------------------------------------------------------

    One commenter noted concerns with the Department's finding that the 
decline in workers compensated under the fluctuating workweek method is 
due in part to legal uncertainty. EPI claimed that this finding is 
based on an unjustified assumption that the share of workers who are 
paid under the fluctuating workweek method out of all the workers who 
might be paid under the fluctuating workweek method remains constant at 
50 percent over this period. But other commenters, such as SHRM and the 
Chamber, indicated that uncertainty did affect negatively the number of 
workers paid under the fluctuating workweek method. Because the 
Department lacks counts for the precise number of workers paid under 
the fluctuating workweek method, this analysis merely assumes that half 
the workers whose characteristics make them not only eligible, but 
whose hours and earnings data appear similar to what would be expected 
under the fluctuating workweek, are actually compensated under the 
fluctuating workweek method. The Department acknowledges that this 
share could fluctuate over this or any period, and that there are other 
factors, beyond confusion created by legal uncertainty, that could be 
responsible for the decline in the share of the labor force compensated 
under the fluctuating workweek method, and thus does not include 
workers who might be ``switched'' to the fluctuating workweek method in 
its quantified cost savings analysis.
    For example, the Department recognizes that the total number of 
nonexempt FLSA full-time salaried workers decreased both in total 
number

[[Page 34628]]

and also as a share of the employee population over this same 
period.\31\ 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.
---------------------------------------------------------------------------

    \31\ From approximately 27.0 million in 2004 to 19.2 million in 
2018.
---------------------------------------------------------------------------

C. Costs

    As stated in the proposed rule, the Department believes that, 
because the rule merely lifts a restriction on employers paying bonuses 
and other supplemental payments to employees paid under the fluctuating 
workweek method, 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 the 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 rule by the estimated time to review the rule and the average 
hourly compensation of a Compensation, Benefits, and Job Analysis 
Specialist. The Department did not receive any comments about 
additional costs associated with this rulemaking.
    To calculate costs associated with reviewing the rule, the 
Department first estimated the number of establishments likely to 
review the rule. The most recent data on private sector establishments 
at the time this final rule was drafted are from the 2016 Statistics of 
U.S. Businesses (SUSB), which reports 7.8 million establishments with 
paid employees.\32\
---------------------------------------------------------------------------

    \32\ 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.
---------------------------------------------------------------------------

    The Department believes that each of the 7.8 million establishments 
will review the rule. All employers will give the 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 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 method 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 rule in greater detail. Because the rule is a 
clarification of 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 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 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.\33\ 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 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%)).\34\
---------------------------------------------------------------------------

    \33\ Bureau of Labor Statistics, May 2018 National Occupational 
Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm.
    \34\ The benefits-earnings ratio is derived from BLS's Employer 
Costs for Employee Compensation data using variables 
CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------

    The Department estimates one-time regulatory familiarization costs 
in Year 1 of $32.8 million (= 35,100 establishments x 0.5 hours of 
review time x $49.37 per hour + 7.8 million establishments x 0.083 
hours of review time x $49.37 per hour). This rule does 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 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.

D. Cost Savings

    The Department believes that this rule could lead to three 
categories of potential cost savings: (1) The elimination of 
opportunity costs for 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 analysis to develop illustrative estimates of cost savings. 
Based on these estimates, the Department believes total cost savings 
are likely to exceed regulatory familiarization costs.
    First, the rule could 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.\35\ Legal uncertainty

[[Page 34629]]

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 rule would eliminate such costs.
---------------------------------------------------------------------------

    \35\ ``[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.
---------------------------------------------------------------------------

    In the NPRM, the Department evaluated the potential scope of 
opportunity costs as the economic value of supplemental incentive pay 
prevented by current legal uncertainty. The Department assumed 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.\36\ On the other hand, some 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 were 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 BLS 
categorizes as ``nonproduction bonuses.'' \37\
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    \36\ 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 
any bonus or premium, even 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.
    \37\ 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 estimate the precise 
deadweight loss attributable to legal uncertainty, including the 
economic value of work that fluctuating workweek employees do not 
perform because their employers cannot provide certain supplemental 
pay. With the publication of the NPRM, the Department published an 
appendix, which contained a detailed illustrative analysis regarding 
possible ranges of potential opportunity cost eliminated and the 
critical variables upon which these estimates depend. The appendix 
illustrated that even 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 of 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.\38\ And if all workers compensated 
under the fluctuating workweek method received such a bonus, the 
productivity savings from the elimination of this opportunity cost 
would exceed $600 million. The Department received comments from some 
employers indicating that the proposed change would result in more 
bonuses being paid to workers, but those comments did not discuss the 
magnitude of such bonuses. The Department received no comments or data 
specifically addressing the estimates presented in the appendix, and 
has ultimately decided to continue to include those in the final 
analysis for illustrative purposes only. The table below reflects the 
range of potential cost savings that were included in the Appendix to 
the NPRM.\39\
---------------------------------------------------------------------------

    \38\ 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.
    \39\ See 84 FR 59601 (Nov. 5, 2019).

                                      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
----------------------------------------------------------------------------------------------------------------

    Second, the rule could 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. SHRM 
affirmed this belief in their comment, saying, ``The Department's 
statement in the 2011 Final Rule preamble that the payment of any 
compensation in addition to the salary payment somehow `invalidated' 
the fluctuating workweek method caused many employers to either (1) 
eliminate bonuses for employees paid pursuant to the fluctuating 
workweek method; or (2) pay previously salaried employees an hourly 
rate (and continue any bonus programs).'' Since overtime pay premiums 
for hourly employees who do not receive supplemental pay 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 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 marginal cost to an 
employer of each hour of work under the fluctuating workweek is lower 
than

[[Page 34630]]

the marginal cost of an hourly employee.\40\
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    \40\ The fluctuating workweek marginal cost for hours 2-40 in a 
workweek is $0, and for hours 41+, the marginal cost is only the 
overtime premium, while marginal costs for hourly employees during 
the same hours is the hourly rate plus any overtime premium for any 
hours over 40. Conversely, when an hourly-paid employee works less 
than 40 hours in a workweek, the employer is obligated to pay only 
the hours worked, while under the fluctuating workweek method, the 
employer is obligated to pay the full salary for the workweek.
---------------------------------------------------------------------------

    There was little precedent or data to aid in evaluating these 
managerial costs, and the Department did not receive any comments about 
this cost savings. 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 
each additional hour of work would be lower than an hourly employee. 
While the Department does not estimate the precise number of hourly 
workers whose employers would switch from paying hourly pay to the 
fluctuating workweek method following this rule, the Department 
believes that management costs may be reduced for every worker who is 
switched because their managers can spend less time managing their 
schedules if such schedule management is intended either to optimize 
compensation levels or to ensure coverage for less desirable shifts or 
projects. If, hypothetically, 150,000 workers were switched, employers 
might reduce their annual managerial costs by over $66 million.\41\
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    \41\ 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).
---------------------------------------------------------------------------

    Third, the clarifying language and updated examples included in 
this rule 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 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 $3.3 million.\42\ 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,\43\ and the Department adjusted 
this to $94.75 per hour to account for fringe benefits and 
overhead.\44\ 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 $3.3 million per year.\45\ As 
noted above, this figure is an illustrative example of potential annual 
cost savings due to reducing legal-review burdens.
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    \42\ Although earlier in the economic analysis the Department 
estimates that it will take employers anywhere from 5-30 minutes to 
familiarize themselves with the rule, it is likely that lawyers are 
currently spending significantly more time annually advising their 
clients on issues related to the fluctuating workweek method. The 
lawyers need not only be familiar with the rule but must also apply 
the rule to specific compensation schemes used or proposed by their 
clients.
    \43\ Bureau of Labor Statistics, May 2018 National Occupational 
Employment and Wage Estimates, United States, https://www.bls.gov/oes/current/oes_nat.htm
    \44\ 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)).
    \45\ This estimate of establishments 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 is expected that they will significantly 
outweigh regulatory familiarization costs. Unlike one-time 
familiarization costs, the calculated and other potential cost savings 
described in this section would continue into the future, saving 
employers valuable time and resources. This rule also offers increased 
flexibility to employers in the way that they compensate their 
employees. However, in the absence of additional data, the Department 
is unable to precisely quantify all cost savings and other potential 
effects of the proposed rule.

E. Transfers

    Transfer payments occur when income is redistributed from one party 
to another. The Department believes this rule may cause transfer 
payments to flow from some employers to their employees and also may 
cause transfer payments to flow from employees to some employers. When 
discussing these transfers in the NPRM, the Department noted that the 
incidence, magnitude, and ultimate beneficiaries of such transfers is 
unknown.
    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. If employers offer these new bonuses to employees 
already paid under the fluctuating workweek method, it would constitute 
a transfer from employers to employees.
    Some commenters argued that employers will reduce their employees' 
salaries paid under the fluctuating workweek and shift compensation to 
non-guaranteed bonuses, essentially reducing some of that employer's 
workers' earnings. See e.g., EPI, State Attorneys General, Head Law 
Firm, IAFF, NELA. The commenters assume that employers look only to 
lower their labor costs, and if they can use bonuses in conjunction 
with the fluctuating workweek method to pay less for overtime, they are 
likely to do so. If such a shift were to occur, if the scope of such a 
shift in comparison to the current fluctuating workweek wage is large, 
and if bonuses were small, the commenters claim this reduction could 
constitute a transfer from employees to employers. These comments do 
not cite any data to show the opposite effect from the 2011 perceived 
prohibition on paying certain bonuses, nor do they cite data to 
indicate that employers who pay their employees under the fluctuating 
workweek method would be willing to risk a drastic downward change in 
total compensation.
    The Department acknowledges that, for employees compensated under 
the fluctuating workweek method, an employer and employee may now agree

[[Page 34631]]

to a new allocation of compensation between the fixed salary for all 
hours of work, bonuses, benefits, supplemental pay, and other job 
perks. Some allocations could result in their salaries being augmented, 
but employers could also decrease the fixed portion of the employee's 
salary and shift compensation to bonuses and incentive pay. These are 
merely two of a host of allocations not discussed in the comments. 
However, even if the agreement could result in somewhat lower 
compensation, there is a limit to how much employers are able to reduce 
employees' total compensation. The fluctuating workweek method still 
requires that an employee's fixed salary be at or above the minimum 
wage for all hours worked, so employers are unable to reduce 
compensation below the minimum wage (plus overtime for all hours over 
40).
    This supplemental pay is also a way for employers to incentivize 
employees to do undesirable tasks, or work undesirable shifts. As 
supplemental pay may be the most efficient means to incentivize 
employees to perform this valuable work, many employers in such a 
scenario will be more than willing to pay the extra amount for these 
valuable services without decreasing employees' base salaries. Absent 
data to the contrary, the Department disagrees with commenters' 
assertion that permitting new bonus payments to employees paid under 
the fluctuating workweek method will generally result in those workers 
being paid less for the same or more work.
    These same commenters also assert that the proposed rule will 
encourage the use of overtime because the fluctuating workweek regular 
rate of pay falls as hours increase. See, e.g., EPI, State Attorneys 
General, NELP, IAFF, NELA, Head Law Firm. These commenters posit that 
the marginal cost to the employer of an hour of overtime is lower for 
employees who are shifted to the fluctuating workweek method and assert 
that this creates incentives for employers to overwork current 
employees instead of hiring additional staff, undermining job creation.
    The Department acknowledges that this rule could encourage more 
employers to use the fluctuating workweek method to compensate their 
employees, if they previously chose not to use the fluctuating workweek 
method because they also wanted to provide incentive pay but believed 
they were not permitted to do so. However, contrary to the commenters' 
assertion, nothing in this rule changes the basic rules for calculating 
fluctuating workweek wages, including overtime. As such, any 
``disincentive'' to requiring overtime work remains the same as the 
status quo other than the potential increase in the marginal costs 
attributable to newly-permitted incentive and bonus payments. Further, 
these commenters offered no data to support their contentions that, 
merely because they are now permitted to pay bonuses, employers will 
increase fluctuating workweek overtime hours and choose not to hire 
additional workers.

F. Benefits

    The Department believes the rule could 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. This rule will provide a simple standard that permits 
all supplemental pay under the fluctuating workweek method, and 
therefore should reduce unnecessary disputes and litigation.\46\ The 
Department lacks data to quantify this benefit.
---------------------------------------------------------------------------

    \46\ The costs of such disputes and litigation are not 
insignificant, but are not estimated here nor included in the 
projected regulatory cost savings.
---------------------------------------------------------------------------

    The Department also believes that this rule will allow employers 
and employees to better utilize flexible work schedules. This is 
especially important as workers return to work during the COVID-19 
pandemic. Some employers are likely to promote social distancing in the 
workplace by having their employees adopt variable work schedules, 
possibly staggering their start and end times for the day. This rule 
will make it easier for employers and employees to agree to unique 
scheduling arrangements while allowing employees to retain access to 
the bonuses and premiums, including hazard pay, they would otherwise 
earn.

G. Summary

    This rule will result in a one-time rule-familiarization cost of 
$32,828,582. The Department estimated average annualized costs of this 
rule over 10 years and in perpetuity. Over ten years, this rule would 
have an average annualized cost of $3.7 million at a discount rate of 3 
percent, or $4.4 million at a discount rate of 7 percent in 2018 
dollars. When the Department uses a perpetual time horizon to allow for 
cost comparisons under E.O. 13771, the perpetual annualized cost is 
$1,569,905 at a discount rate of 7 percent in 2016 dollars.

VI. 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 rule will 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 
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 will be 
trivial for small business entities, and will 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 rule will 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 rule will also

[[Page 34632]]

reduce administrative costs of small businesses that respond by 
switching hourly employees to the fluctuating workweek method. The 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 will 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, 
the Department believes such benefits will be limited to few small 
businesses.\47\ Based on this determination, the Department certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \47\ The Department of Labor estimates that only 0.45% of U.S. 
workers are compensated using fluctuating workweek method.
---------------------------------------------------------------------------

VII. Unfunded Mandate 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.

VIII. Executive Order 13132, Federalism

    The Department has reviewed this rule in accordance with Executive 
Order 13132 regarding federalism and determined that it does not have 
federalism implications. The rule will 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.

IX. Executive Order 13175, Indian Tribal Governments

    This rule will 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.

List of Subjects in 29 CFR Part 778

    Wages.

    Signed at Washington, DC, this 15th day of May, 2020.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.

    For the reasons set out in the preamble, the Department of Labor 
amends title 29 of the Code of Federal Regulations part 778 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:


Sec.  778.114  Fluctuating Workweek Method of Computing Overtime.

    (a) An employer may use the fluctuating workweek method to properly 
compute overtime compensation based on the regular rate for a nonexempt 
employee under the following circumstances:
    (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 the 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, commissions, 
hazard pay, or other additional pay of any kind not excludable from the 
regular rate under section 7(e)(l) through (8) of the Act) for the 
total hours worked each workweek regardless of the number of hours, 
although the clear and mutual understanding does not need to extend to 
the specific method used to calculate overtime pay; and
    (5) The employee receives overtime compensation, in addition to 
such fixed salary and any bonuses, premium payments, commissions, 
hazard pay, 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, commissions, hazard pay, and additional pay of any 
kind is compatible 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 stated above 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, commissions, hazard pay, 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 receives 
no additional compensation and 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 weeks, only additional 
half-time pay is due for overtime hours. 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 one-half times the regular rate of $13.64 for a total 
overtime payment of $27.28); for the third week $660 (fixed salary of 
$600, and 10 hours of overtime pay at one-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 one-half times the 
regular rate of $12.50 for a total overtime payment of $50).
    (2) Example. If during the course of 2 weeks this employee works 
37.5 and 48

[[Page 34633]]

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 premium pay for the 4 nightshift hours). In this case, 
the regular rate of pay in each of these weeks is $16.53 and $12.92, 
respectively, and the employee's total compensation would be calculated 
as follows: For the 37.5 hour week the employee is owed $620 (fixed 
salary of $600 plus $20 of non-overtime premium pay, with no overtime 
hours); and for the 48 hour week $671.68 (fixed salary of $600 plus $20 
of non-overtime premium pay, and 8 hours of overtime at one-half times 
the regular rate of $12.92 for a total overtime payment of $51.68). 
This principle applies in the same manner regardless of the reason for 
the hourly premium rate (e.g., weekend hours).
    (3) Example. If during the course of 2 weeks this employee works 
37.5 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 and $14.58, 
respectively, and the employee's total compensation would be calculated 
as follows: For the 37.5 hour week the employee is owed $700 (fixed 
salary of $600 plus $100 productivity bonus, with no overtime hours); 
and for the 48 hour week $758.32 (fixed salary of $600 plus $100 
productivity bonus, and 8 hours of overtime at one-half times the 
regular rate of $14.58 for a total overtime payment of $58.32).
    (c) Typically, such fixed salaries 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.
    (d) The fixed salary described in paragraph (a) of this section 
does not vary with the number of hours worked in the workweek, whether 
few or many. However, employers using the fluctuating workweek method 
of overtime payment may take occasional disciplinary deductions from 
the employee's salary for willful absences or tardiness or for 
infractions of major work rules, provided that the deductions do not 
cut into the minimum wage or overtime pay required by the Act.

[FR Doc. 2020-10872 Filed 6-5-20; 8:45 am]
BILLING CODE 4510-27-P