Business Responses to December Overtime Changes may Nullify Employee Protection: A Circumstantial Option that Can Appease Both Parties

Author: Alexander Spaulding, Associate Member, University of Cincinnati Law Review

 On December 1, 2016, the Fair Labor Standards Act (FLSA) will change drastically. In May 2016, the Department of Labor (DOL) and President Obama published their final rule updating overtime regulations, greatly expanding employers’ overtime wage requirements for white collar workers under the FLSA.[1] The December changes are a response to inflation over the past forty years.[2] However, while Obama sought to create a substantial remedy for workers, this legislation will have a greater impact on businesses. Unfortunately, many small businesses cannot absorb substantial new regulatory costs,[3] and will have to restructure their payment in order to comply with the new laws, without actually paying employees more money.[4] In those cases, employers must find the best way to balance the changes in classification, hours, payment, and extra duties so that both the employers and employees are satisfied. While none of the options are perfect, one circumstantial option, the fluctuating work week payment scheme, is comparatively attractive. The primary downside is that the payment scheme may only be used in specific circumstances.

Overtime and White Collar Exemptions: Who is Affected?

Overtime requirements are protectionary benefits that provide extra compensation for employees that work more than forty hours a week.[5] However, not all employees are protected under federal overtime laws; the FLSA provides numerous classifications of employees exempt from overtime protection.[6]

White collar workers, namely executive, administrative, and professional (collectively EAP) employees are exempt from overtime protection.[7] To qualify as EAP employees for exemption purposes, employees must meet three requirements: (1) their salary must be fixed; (2) their paid salary must meet a statutory threshold; and (3) their duties must primarily be executive, administrative, or professional duties as defined by the FLSA.[8]

The Change and its Effects

In December, the second requirement will receive the most notable change—the statutory salary threshold, necessary to be considered an EAP employee, will more than double (from $455 per week to $913 per week).[9] This change will immediately impact millions of individual Americans, as most white collar, salaried workers earning between roughly $24,000 and $48,000 annually, will be owed overtime for the first time. The DOL projects that the number of affected workers will be over four million.[10]

While many individual workers will receive moderate increases in pay, those most affected by the FLSA changes will be businesses.[11] Many businesses implement the EAP exemption on large portions of their employees.[12] Any business that employs white collar workers, that work over forty hours per week for less than $47,476 annually, will have to pay substantially more for each worker in that category. Thus, thousands of businesses are developing new budgetary concerns leading into December.

Business Options and their Effects on Employees

Affected businesses can comply with the new law by: (1) increasing their employees’ annual salaries to $47,476; or (2) paying overtime rates for all work done in excess of forty hours per week. Since neither of these options is optimal (or possibly even feasible) from a business standpoint, businesses will probably need to make substantial changes to their worker classifications[13] and pay schemes.[14] Therefore, although the FLSA changes are meant to help workers, the business responses to the changes may be somewhat unfavorable to workers.

The most obvious way for employers to comply with the law and mitigate the budget concerns is to reduce employee salaries, but make up the reduction in pay with the statutorily mandated overtime payments. However, despite coming with a salary reduction, this option provides employees the best of both worlds—they remain on salary, but also may earn extra compensation from working overtime. Thus, business owners may be reluctant to implement this option in a way that allows employees to make significantly more money than they did before the law changed.

Another option employers have is switching employees onto an hourly pay scheme and limiting the hours that an employee can work. This option requires tenured salaried employees to switch to hourly wages, something many employees never expected. Hourly payment, though it allows for more money to be earned, requires white collar workers to “clock out” to perform non-work responsibilities they normally would have done without scrutiny from their employers, like picking up their kids or going to the dentist. These are issues that many salaried employees never expected to deal with, and will likely cause discontent. Unfortunately, this discontent will be compounded because, regardless of which option a business chooses (other than actually raising all employees’ annual salaries to $47,476), employees will have to start tracking their hours. At many businesses, salaried white collar employees have never clocked in, clocked out, or tracked their hours. Thus, many employees will enjoy extra responsibilities come December 1.

An employer who must restructure to avoid raising costs under the new law has two options: one cuts in favor of the employee—salary plus overtime—while the other cuts in favor of business—hourly pay with limited hours. Unfortunately, neither option strikes a balance that would appease both sides.

The Fluctuating Work Week: A Balanced, but Rare, Option

A third option that may appease both the employee and employer, the fluctuating work week payment plan. Unfortunately, the fluctuating work week payment plan may only see implementation in rare circumstances. Employers may utilize the fluctuating work week payment scheme for workers that work irregular hours. While this option may not work for every (or even any) employee, it is helpful for employers to understand all of the options available for complying with the new law. Especially now, in the wake of the new law, employers will already be reassessing and classifying employees for compensation purposes.[15] The fluctuating work week payment scheme is complex, and even more so, most of the available legal advice on the payment plan is wrong.

The fluctuating work week payment scheme is a way of calculating and distributing payment, including overtime, to employees that work variable hours.[16] Simply put, the employees are paid a fixed base salary, and paid overtime at a rate of 0.5 times their usual wage, rather than the typical 1.5 times, for hours worked over forty hours per week. The premise behind the half-time overtime payments is that employees are supposedly overcompensated in their base pay, because they are paid their base salary regardless of whether they work 0 hours or 60 hours. This pay scheme is mutually beneficial to both the employer and the employee, because it allows the employee to have a stable salary, while mitigating the employer’s overtime payments by 300 percent, and meets the FLSA regulatory standards, even after the FLSA changes in December.

Under 29 C.F.R § 778.114, employers may only use the fluctuating work week payment plan when the following conditions are met:[17]

    1. The employee’s hours fluctuate from week to week;
    2. The employee receives a fixed weekly salary which remains the same regardless of the number of hours the employee works during the week (excluding overtime premiums).

The first and second conditions are topics of contested debate. The primary focus will be on the fluctuation requirement. Many legal professionals have interpreted this requirement to mean that an employee’s hours must fluctuate above and below forty hours a week. However, their position is a misinterpretation of the requirement.[18]

Fluctuation: Correcting Misinformation 

Both the statute[19] and the DOL disagree with the notion that an employee’s hours must fluctuate above and below forty hours a week.[20] The statute is entirely silent on whether an employee’s hours must fluctuate, at any point, below forty hours.[21] On the contrary, until 2008, the statute provided an example of an employee’s hours that abided by the statute, in which the employee never worked under forty hours a week.[22] In 2008, they changed one of the sample weeks from 44 to 37.5 hours (the original example had weeks of 40, 44, 48, and 50 hours).[23] However, the DOL changed the example to demonstrate that employee’s hours should not be approximated, not to demonstrate that hours must fluctuate below forty. Furthermore, a representative at the DOL’s Wage and Hour division confirmed (by telephone, on July 26, 2016) that the payment plan does not require an employee’s hours to fluctuate below forty hours in any weeks. Rather an employer is only responsible for paying the fixed, agreed-upon, salary in the event that the hours fluctuate below forty.

Furthermore, courts have held that companies do not violate the statute when the payment plan is used where their employees’ hours do not fluctuate below forty. In Flood v. New Hanover County[24], the Fourth Circuit found that the employer legally calculated the employee’s salary pursuant to the statute, and that the schedule met the “fluctuating” requirement, when the employee’s weekly hours were 48.3, 56.3, 64.45, and 72.45. In Condo v. Sysco Corp.[25]  the Seventh Circuit stated, “[e]ach of the requirements of the regulation was satisfied in this case. Condo worked fluctuating hours (although Condo never worked fewer than forty hours each week, the amount of overtime that he worked varied) for a fixed salary.”[26] In Aiken v. County of Hampton,[27] the court cited the Wage and Hour Administrator’s opinion from 1967, and explained that “there is no requirement, for purposes of §114, that the hours worked during a workweek fluctuate above and below 40.”[28] These cases demonstrate that the courts have consistently ruled that there is no need for an employee’s hours to fluctuate below forty hours per week to satisfy the fluctuation requirement.

Conclusion

Thus, the payment plan may be implemented even when hours do not fluctuate above and below forty. However, the hours still must actually fluctuate. Finally, if an employer has workers with irregular schedules, come December, that business should consider the fluctuating work week payment scheme, even if its employee’s hours do not ever dip below forty. The pay scheme allows both employers and employees to cope with the changes to the law, and is more appealing than the more traditional options. Given the opportunity, employers should adopt this pay scheme in December.

 

[1] Wage and Hour Division, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act, (2016), https://www.dol.gov/whd/overtime/final2016/.

[2] Rachel Gillett, Experts weigh in on how Obama’s overtime rule change could benefit millions of workers and employers, (Jul. 1, 2015), http://www.businessinsider.com/what-new-overtime-law-means-for-everyone-2015-6.

[3] Curt Finch, How the New Overtime Law Changes Will Affect Small Businesses, (Mar 30, 2014), http://smallbiztrends.com/2014/03/new-overtime-law-2014-small-business.html.

[4] Jeffrey W. Brecher et al., Labor Department Announces Final Rule Amending Overtime Regulations for ‘White Collar’ Workers, (May 18, 2016), http://www.jacksonlewis.com/publication/labor-department-announces-final-rule-amending-overtime-regulations-white-collar-workers; Paul Christiansen, Obama’s Overtime Law Could Mean No More Employees for Startups, (March 24, 2014), http://www.foxbusiness.com/features/2014/03/24/obama-overtime-law-could-mean-no-more-employees-for-startups.html.

[5] Wage and Hour Division, Overtime Pay, (2016), https://www.dol.gov/whd/overtime_pay.htm.

[6] United States Department of Labor, Wages and Hours Worked: Minimum Wage and Overtime Pay, (2016), https://www.dol.gov/compliance/guide/minwage.htm.

[7] Id.

[8] United States Department of Labor, (May 2016), Fact Sheet: Final Rule to Update the Regulations Defining and Delimiting the Exemption for Executive, Administrative, and Professional Employees, https://www.dol.gov/WHD/overtime/final2016/overtime-factsheet.htm.

[9] Id.

[10] Id.

[11] Le Trinh, How Will Obama’s Proposed Overtime Pay Rule Affect Your Business?, (July 1, 2015), blogs.findlaw.com/free_enterprise/2015/07/how-will-obamas-proposed-new-overtime-pay-rule-affect-your-smb.html.

[12] Id.

[13] Brecher et al., supra note 4.

[14] Id.

[15] Id.

[16] Adam Kielich, Fluctuating Work Week FLSA calculations in Dallas and Fort Worth, (October 16, 2016), http://www.kielichlawfirm.com/fluctuating-work-week-flsa-calculations/.

[17] 29 CFR § 778.114

There are three more issues, but they are unlikely to be issues in litigation. They are as follows:

  1. The fixed amount is sufficient to provide compensation at a regular rate not less than minimum wage;

4.The employer and employee have a clear mutual understanding that the employer will pay the employee a             fixed salary regardless of the number of hours worked; and

  1. The employee receives a fifty percent overtime premium in addition to the fixed weekly salary for all hours worked in excess of 40 during the week.

[18] See e.g., James Holahan, The “Fluctuating Work Week” – An FLSA Mirage, (July 9, 2013), http://www.nylaborandemploymentlawreport.com/2013/07/articles/wage-and-hour/the-fluctuating-work-week-an-flsa-mirage/

[19] 29 CFR § 778.114

[20] United States Department of Labor, Updating Regulations Issued Under the Fair Labor Standards Act, (April 5, 2011), http://webapps.dol.gov/federalregister/HtmlDisplay.aspx?DocId=24843&AgencyId=1&DocumentType=2; and this was confirmed via telephone call to the DOL’s wage and hour division.

[21] 29 CFR § 778.114

[22] Fed. Register Vol. 76, No. 65. April 5, 2011. pg. 18849.

[23] Id.

[24] Flood v. New Hanover Cty., 125 F 3d 249, 250 (4th Cir. 1997).

[25] Condo v. Sysco Corp., 1 F. 3d 599, 602 (7th Cir. 1993).

[26] Id.

[27] Aiken v. Cty. Of Hampton, 977 F. Supp. 390, 398 (D.S.C. 1997).

[28] Id.

 

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