In a presentation last fall at the fourth annual conference of the Labor and Employment Law Section of the American Bar Association, Acting Wage and Hour Administrator Nancy Leppink stated that there was a “need for guidance” concerning principles underlying the “fluctuating workweek” method of calculating overtime pay under the Fair Labor Standards Act (“FLSA”). The Wage and Hour Division of the U.S. Department of Labor (“DOL”) has now provided certain aspects of that fluctuating workweek guidance, as well as clarification of the DOL’s “tip credit” proviso and of other miscellaneous regulatory provisions. These “catch-all” regulations, which took effect May 5, for the most part reflect the present DOL’s palpable antipathy to employers and continue the DOL’s attempted recasting and retrenchment of well-established FLSA principles. How courts receive and review this DOL rulemaking, however, remains to be seen.
The DOL’s regulatory pronouncement with the most widespread negative reverberation in the employer community is the agency’s discussion in the regulatory preamble that the payment of bonuses, shift differentials and certain other forms of premium pay are inconsistent with and can invalidate an employer’s use of the fluctuating workweek. This conclusion is directly contrary to the DOL’s proposal in 2008 that would have expressly sanctioned the use of this supplemental compensation in the fluctuating workweek context.
Fluctuating workweek overtime compensation principles permit employers to pay non-exempt employees at one-half of their regular rate of pay for any hours worked over forty in a week, instead of at time and one-half that they would otherwise would have to pay. The “regular rate” is determined by dividing the employee’s weekly salary by the total number of hours worked in the week. Because an employee’s hours vary from week to week, so too does the “regular rate.” Although an employee’s overtime rate decreases with each hour worked, the fluctuating workweek provides predictability for both the employer and employee. The employee receives a fixed salary in each workweek regardless of hours worked, and the employer can lessen and stabilize overtime compensation. To take advantage of this system, under both the new and current regulatory interpretations, employers must meet four primary requirements:
When the DOL requested comments to its proposed 2008 regulations, many employer groups noted that bonuses and incentive pay are sanctioned by the FLSA for other payment practices such as piece rates, hourly rates and day rates, and, therefore, that the DOL should permit them in the fluctuating workweek context as well. Organizations representing employees conversely argued that bonuses were inconsistent with the primary benefit employees derived from the fluctuating workweek method—a dependable, fixed salary—and might encourage employers to “shift a large portion of employees’ compensation into bonus payments, potentially resulting in wide disparities in employees’ pay depending on the particular hours worked.” They also argued that the proposed change would encourage employers to work employees longer hours instead of hiring more workers, thereby decreasing overall employment and frustrating one of the FLSA’s primary policy goals.
After considering these arguments, the DOL wrote that although it “continues to believe that the payment of bonus and premium payments can be beneficial to employees in many other contexts, we have concluded that unless such payments are overtime premiums, they are incompatible with the fluctuating workweek method of overtime compensation.” Thus, the DOL determined that while bonuses might benefit employees, they are too great a departure from the original purpose of the flexible workweek.
The DOL’s discussion of the “fluctuating workweek” is open to serious question in light of the Supreme Court’s decision in Overnight Motor Transp. Co. v. Missel, 316 U.S. 572 (1942) and the prevalence and acceptance of bonus and premium payment programs in the workplace. Careful judicial scrutiny of this DOL policy is a virtual certainty.
When it was first passed into law, the FLSA did not apply to hotels and restaurants. As a compromise leading to their later inclusion, Congress allowed these industries to pay workers less than the minimum wage, and use a “tip credit” to make up the difference between the cash wage paid and the minimum wage.
A subsequent amendment to the FLSA required that employers “inform” employees about the tip credit provision before using it. Courts have disagreed about what this informational requirement means. The new regulations clarify that “informing” employees does not require a written notice, but does require employers to communicate five things to employees:
Note that the presumption that tips are the property of employees differs from a recent Ninth Circuit decision. In Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010), the court held that employees did not have a property interest in tips unless their employer claimed a tip credit.
Currently, employers can only require that employees contribute 15 percent of their tips to a tip pool. Starting May 5, 2011, the new regulations eliminate this cap, though employers still will need to tell employees what percentage of tips they are required to contribute. Further, employees must always receive the minimum wage, regardless of whether it is in the form of cash wages or a combination of cash wages and tips.
Along with altering the rules for tip credits and the fluctuating workweek, the new regulations have other provisions that may affect some employers:
Although the DOL’s regulatory changes may not impact all industries, the agency’s implementation of its regulations provides all employers with an opportunity to ensure that their policies are FLSA-compliant. Specifically, employers who claim a tip credit should make sure they:
Additionally, until the courts have opined on the DOL’s fluctuating workweek policy pronouncement, employers who utilize the fluctuating workweek are also well advised to review their practices if they use non-discretionary bonuses, shift differentials or any other premium payments other than overtime premiums specifically delineated in Section 7(e) of the FLSA.
We hope you find this information helpful. If you have any questions about the material presented in this alert, please contact any member of Baker Hostetler’s Employment and Labor Team.
Authorship Credit: David A. Grant and Andrew T. Johnson
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