Compliance Update

DOL Issues Fluctuating Workweek & Retail OT Rule

Posted on June 9, 2020

The U.S. Department of Labor (DOL) has issued two final rules. The first determines whether employers qualify as "retail or service" establishments for purposes of an overtime exemption for commission-based employees. The other allows employers to offer bonuses or other incentive pay to employees who are paid overtime under the fluctuating workweek method. Click each of the updates below to learn more.

The DOL has issued a final rule for determining whether employers qualify as "retail or service" establishments for purposes of an overtime exemption for commission-based employees. The final rule takes effect immediately.

Background:

The Fair Labor Standards Act, (FLSA) generally requires employers to pay employees overtime pay whenever they work more than 40 hours in a workweek. However, the FLSA includes an exemption from the overtime pay requirement for certain employees of retail or service establishments paid primarily on a commission basis. To qualify for the exemption, an employee at a retail or service establishment must have:

  • A regular rate of pay that exceeds 1.5 times the "federal minimum wage"; and
  • More than half of their compensation for a representative period (no less than one month) be commissions on goods or services.

The DOL has interpreted "retail or service establishment" as requiring that the establishment have a "retail concept." In 1961, the DOL issued regulations that included a lengthy but non-exhaustive list of 89 types of establishments that it viewed as lacking a "retail concept" and categorically unable to qualify as retail or service establishments eligible to claim the exemption. The list included establishments in various industries, such as dry cleaners, tax preparers, laundries, roofing companies, travel agencies, and more.

The regulations also included a separate non-exhaustive list of 77 types of establishments that "may be recognized as retail." This list included establishments in industries such as coal yards, fur repair and storage shops, household refrigerator service and repair shops, masseur establishments, piano tuning establishments, taxidermists, and more.

Final Rule:

The final rule withdraws both of the above lists from the regulations. The DOL will no longer consider these lists, and instead will apply a single analysis to determine whether an entity qualifies as a retail establishment. This analysis will involve the interpretations set forth in 29 CFR § 779.318 and elsewhere in Part 779, which states that a "retail or service establishment" is typically one that:

  • Sells goods or services to the general public.
  • Serves the everyday needs of the community in which it's located.
  • Is at the very end of the stream of distribution.
  • Disposes its products and skills in small quantities.
  • Doesn't take part in the manufacturing process.
  • Sells its good to the public and performs incidental services on such goods when necessary.
  • Provides the general public its repair services for the comfort and convenience of the public.

Any establishment may be recognized as retail if they satisfy these criteria, according to the DOL.

Compliance Recommendations:

Employers should ensure their business is properly classified, and those that were previously on the excluded list and now wish to assert the exemption should ensure that they satisfy the criteria set forth in 29 CFR § 779.318 and elsewhere in Part 779.

The DOL has issued a final rule that allows employers to offer bonuses or other incentive pay to employees who are paid overtime under the fluctuating workweek method of the Fair Labor Standards Act (FLSA). The final rule takes effect August 7, 2020.

Background:

To use the fluctuating workweek method of calculating overtime under the FLSA:

  • The employee's hours must fluctuate from week to week;
  • The employee must receive a fixed salary for whatever hours they are called upon to work in a workweek, regardless of how few or how many;
  • The employee and employer must have a clear mutual understanding (which should be in writing) that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek;
  • The salary must be sufficient enough to meet the applicable minimum wage for each hour worked in the workweeks in which the number of hours worked is greatest; and
  • The employee must receive extra pay for overtime hours worked at a rate no less than one-half times their regular rate of pay. Since the salary is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the employee's regular rate will vary from week to week. To obtain an employee's regular rate for a particular workweek, divide the number of hours they worked into their salary.

Previous administrations and courts have taken different views about whether bonuses and other incentive pay were compatible with the fluctuating workweek method.

Final Rule:

The final rule clarifies that:

  • Bonuses, premium payments, commissions, and hazard pay on top of fixed salaries are compatible with the fluctuating workweek method.
  • Employers must include these payments when calculating the regular rate of pay if otherwise required under the FLSA.
  • While the fixed salary may not vary with the number of hours worked in the workweek, employers using the fluctuating workweek method 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 don't cut into the minimum wage or overtime pay required by the FLSA.
  • To use the fluctuating workweek method, an employee's hours don't necessarily need to fluctuate below forty hours per week, so long as the employee's hours worked do vary.
  • The "clear and mutual understanding" of the fluctuating workweek arrangement doesn't need to extend to the specific method used to calculate overtime pay.

Examples:

The final rule also includes examples to help illustrate these principles. Here's one example:

An employee receives a weekly salary of $600 with the understanding that the salary is compensation for all hours worked in the workweek (apart from overtime (OT), bonuses, and other incentive pay). The employee's work hours never exceed 50 hours per week. The employee works 37.5 hours during week one, and 48 hours during week two. During weeks one and two, the employee works four night-shift hours per week, which are compensated at the premium rate of $5 per hour.

Calculating Straight Time Earnings, Regular Rates of Pay, and Total Compensation

Straight Time Earnings

$600 (Fixed salary) + $20 (4 nightshift hours x $5 premium pay = $620
 

Week 1

Week 2

Regular Rate of Pay

$620/37.5 hours = $16.53 per hour

$620/48 hours = $12.92 per hour

Total Compensation

No Overtime:

$600 (salary) + $20 (4 night-shift hours x $5 in premium pay) = $620

With Overtime:

Calculate overtime pay by multiplying the hours of overtime worked by one-half the regular rate of pay:

8 hours of overtime x ($12.92 regular rate of pay x .5) = $51.68

Then, add the overtime pay to straight-time earnings (in this case, $600 salary plus $20 night-shift pay) to determine total pay.

$620 straight-time earnings and $51.68 overtime pay = $671.68

Compliance Recommendations:

The DOL says the final rule on the fluctuating workweek can help employers navigate the challenges of the COVID-19 pandemic by offering an alternative pay method to address varied schedules implemented to promote social distancing. While the fluctuating workweek method can seem like an attractive option for reducing overtime costs when compared with the standard overtime calculation, there are some things to consider. For example, some states, including California, expressly prohibit employers from using the fluctuating workweek method for paying overtime. Additionally, this method is also a common source of employee lawsuits. Employers should check their state (and local) law and consult legal counsel as necessary before using it.

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