Under new OT rule, this payment method could save you a bundle
There’s one lesser-known tactic out there that some employers are considering to reduce overtime costs under the DOL’s changes to the FLSA overtime exemption rules.
The tactic: The fluctuating workweek approach to paying employees.
The upside to this approach? It can save you a lot of money.
The downside? There are actually three:
- It’s only applicable in very specific circumstances
- It’s an administrative burden (it requires weekly calculations), and
- If the DOL audits you, it will heavily scrutinize your approach to calculating pay and your record keeping practices (the agency will want you to prove that you have been using the approach correctly).
Still, if you’re willing to accept those conditions, the approach can significantly reduce your OT compensation bill.
How it works
To use this method, an employee must be paid a fixed weekly salary, regardless of hours worked.
Then every week the employee works OT, the salary must be divided by the total hours worked. This will give you the employee’s “regular rate.” The regular rate is then divided by two to get the “OT rate.” The OT rate is then multiplied by the number of OT hours worked and paid on top of the weekly salary.
Yes. It sounds a little clunky at first, but here’s how it would work in a real-life scenario:
Say you have an employee making a weekly salary of $500. If he works 50 hours, his regular rate is $10 per hour ($500/50 hours =$10). His OT rate is then $5 per hour ($10/2 =$5). So his pay for the week is ($500+$50 in OT pay) $550.
Now let’s compare that to a similarly situated employee who’d be paid OT using the more standard calculation of paying out 1.5 times the person’s hourly rate for every hour worked over 40 hours in a workweek.
Let’s say the employee is making $12.50 per hour, as that would equal $500 for a 40-hour workweek. And let’s say this person also works 50 hours in a week. The person would earn $18.75 for every OT hour worked ($18.75 x 10 hours = $187.50 in OT pay). Meaning he’d make ($500+$187.50) $687.50 for the week.
Bottom line: The employee who wasn’t paid under the fluctuating workweek approach would earn $137.50 more during the week.
Specific conditions apply
Warning: While the DOL allows the fluctuating approach, all of these specific conditions must be met:
- Your state must not ban its use
- The employee’s salary must be fixed and provided each week, no matter the number of hours worked
- The employee’s hours must fluctuate each week
- The employee must always make the minimum wage, and
- The employee must understand and agree to — in writing — this method of payment.
