The Fluctuating Work Week Pay Method

08.10.2013
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There is no question that overtime pay is expensive, around the country, companies have been caught by the Department of Labor using questionable worker classification methods and tried all sorts of things to avoid paying workers overtime. If you have read past columns I have written, you know that most laborers classified as ‘subcontractors’ are improperly classified. You should also know that you cannot put a foreman on salary to avoid the costs of overtime pay. How are companies supposed to be competitive and save money on overtime costs then?

While it is not legally compliant to put a foreman on salary to avoid paying any overtime, there is a similar payment plan called the Fluctuating Work Week plan, which is similar to a salary, but is still compliant with the Fair Labor Standards Act (FLSA).

The Fluctuating Work Week involves paying a worker the same base rate each week they work (similar to a salary), but there is still an overtime payment that must be made when the worker works more than 40 hours in a work week. In order to properly compensate an employee using the Fluctuating Work Week method, four criteria must be met:

1. The employee’s hours must fluctuate from week to week;

2. The employee must receive a fixed salary that does not vary with the number of hours worked during the week (excluding overtime)

3. The fixed salary amount must be sufficient to provide compensation every week at a regular rate that is at least equal to the minimum wage and the employee must receive at least 50% of their regular hourly pay for all over time worker; and

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

5. The worker’s opportunities for profit and loss. True subcontractors have the ability to make more (or less) money on a project depending on how they manage the project. This may mean finding a better price on the materials for their part of the project, or working more efficiently on the project. When a worker is paid an hourly wage, regardless of the amount of time it takes to complete a project, they appear to be an employee. When a worker provides a bid for each individual project, they appear more like a subcontractor.

This seems simple enough, but each factor has some complexities which should be addressed.

The employee’s hours must fluctuate from week to week: In the green industry, this is rarely hard to accomplish. The weekly hours do not need to fluctuate by a large amount, but the workers hours cannot simply be factory style scheduling of a block of hours that never change.

The employee must receive a fixed salary that does not vary with the number of hours worked during the week: This portion of the compensation is similar to that of any other salaried employee. The Employee is paid a flat weekly amount for each week in which work is performed. This means that if the employee works only 1 hour in a given week, they still must be paid their full weekly pay rate. This weekly payment covers all work the employee does, up to 40 hours in a work week. The important part to remember about this factor, is that employee pay cannot be reduced, lowered, or docked if the employee only works a few hours in that week.

The fixed salary amount must be sufficient to provide compensation every week at a regular rate that is at least equal to the minimum wage and the employee must receive at least 50% of their regular hourly pay for all over time worker: There are two parts to this factor. The first is minimum wage. In order for the Fluctuating Work Week compensation plan to be compliant, the employee’s wage must be greater than minimum wage (generally $7.25 per hour), even if they work a large amount of hours in a week. So, (Base pay + Overtime Premium Pay) Divided by Total Hours worked, must come out to be more than $7.25 per hour for all weeks the employee worked. This is important because the overtime premium is “half-time” and consequently has the effect of lowering the employee’s hourly wage the more hours the employee works beyond 40 hours.

The second part of this factor is explains the necessary overtime premium pay. For all hours over 40 in a work week, the employee must be paid “half time”. This is calculated with the following formula.

1. Total base pay divided by the number of hours worked in a week equals half time rate.

2. Half time rate multiplied by the number of hours over 40 in a work week equals overtime premium total for that work week.

3. Base pay plus overtime premium total equals total compensation due to the employee for that particular work week.

This can be confusing because the “half time” pay does not remain consistent but instead changes based on the total number of hours worked in a given work week.

The employer and employee must share a clear, mutual understanding that the employer will pay that fixed salary, regardless of the number of hours worked: In order to be fully compliant, the employee being paid using the Fluctuating Work Week method must understand the terms of their compensation. This does not mean that they must be able to calculate to the penny how much they will earn in a given week, but they must have a general understanding of the system. Included in this understanding must be the knowledge that they will earn the same base rate for every week in which they work at all. Additionally, the employee must understand that they will receive an overtime premium which is “half time” and will not be as high as the traditional time and a half overtime compensation.

The Fluctuating Work Week compensation method may be a bit confusing at first glance, but it is a very useful tool for the green industry and other industries which are seasonal in nature. When properly implemented, it can save a company tens of thousands of dollars per year in overtime payments to employees.

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