The Fluctuating Workweek: Common Mistakes Employers Make

05.21.2015
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The Fluctuating Workweek

Calculating and trying to budget overtime for salaried employees can be a headache. However, implementing a Fluctuating Workweek (FWW) method of calculation may alleviate some of your stress and help add predictability to your budget. The Fluctuating Workweek method of calculating overtime is an alternative to the traditional “time and one-half” method used for paying non-exempt employees who consistently work 40 or more hours in one week. It allows you, as an employer, to set the employee’s salary upfront and make the employee’s regular pay rate dependent of the number of hours worked, keeping the employee’s compensation at a predictable level. To determine whether or not this method will work for you, review these guidelines.

The Fluctuating Workweek applies if:

1. There is a mutual understanding between you and your employee that the employee will be paid on a salary basis, but that employee’s overtime pay rate will fluctuate based on the number of hours the employee works in one week.
2. The salary paid to the employee is large enough that the employee’s regular rate of pay never drops below minimum wage
3. The number of hours the employee works in one week fluctuates above and below 40 hours from week to week
Please note that if your employee consistently works 40 or more hours and rarely, if ever, drops below 40 hours weekly, this method cannot be used. There must be evidence of fluctuation to implement this method.

FWW examples

How is overtime calculated under each system?

The “straight time rate,” the rate of pay per hour without overtime, of an employee is calculated by dividing the weekly salary by the number of hours the employee worked during that week. In the traditional “time and one-half” method, this number is calculated by dividing the weekly salary by 40.

The “time and one-half” method of calculating overtime payment looks like this:
• Shelby worked 50 hours this week and her weekly salary is $1500.
• 1500/40= $37.50 per hour (her “straight time rate”)
• 10 hours (the amount she worked over 40) at “time and one-half” rate is (10*$56.25)= $562.50
• The total pay would be her regular salary plus her ten hours at the “time and one-half” rate.
• $1500 + $562.50= $2,062.50.

Under the Fluctuating Workweek method, the salary is divided by the total number of hours worked that week, including the hours over 40. This way, the employee has been compensated at the straight time rate for all of the hours worked that week. Now, the employee is owed the half-time overtime premium. That is simply calculated by multiplying the employee’s regular rate by .5 and by the number of extra hours worked. Here is an example:

• Shelby worked 50 hours this week and her weekly salary is $1500.
• 1500/50= $30 per hour (her “straight time rate”)
• She would be compensated half time in addition to her normal hourly rate for the 10 extra hours she worked this week: (10*30*.5) = $150.
• Therefore, the total pay would be her regular salary plus her 10 extra hours at salary plus half time compensation: $1500 + $150= $1650 is the total amount she would get paid for this week. $1500 is her weekly salary and $150 is the amount she would be paid for overtime using the Fluctuating Workweek method.

Although some employers will pay less using the Fluctuating Workweek method, this method is not a means of avoiding paying overtime. Instead, it is a way to average out compensation as the employee’s hours fluctuate.

Common Mistakes Made When Implementing the Fluctuating Workweek
1. The first mistake most people make is applying this method to an employee whose work schedule does not fluctuate from week to week. If the employee’s schedule is not actually fluctuating, this method cannot be used. This method should work in both the favor of the employer and the employee, so that the employee receives an average rate of compensation that is greater than what their hourly wage would be in short weeks while also being less than it would be in long weeks. It is not a way for employers to avoid overtime expenses. There will be weeks when the employee is getting paid the full salary for working less than 40 hours.
2. The next common mistake is using this method to calculate overtime for employees who consistently work less than 40 hours per week and are not paid on a fixed salary. This overtime calculation method requires that the employer pay the employee a fixed salary each week regardless of the number of hours worked.
3. Another typical error is using this method when the employee receives any form of extra compensation. You cannot pay your employees holiday pay, double time, or commission while implementing this method. By paying your employees extra money in these situations, the employee is no longer working on a fixed salary.
4. The fourth common error when using this method is not notifying the employee about using the fluctuating workweek method of calculating overtime pay. The employer and the employee must have a mutual and clear understanding for this method to be implemented. It would be beneficial, for you, as an employer, to explain the method to your employee and have them sign a document indicating that they understand and agree to the fluctuating workweek method being applied to them.
5. This point should be reiterated because it is very important. The rate of pay for your employee can never drop below minimum wage. This means that an employee cannot work so many hours in one week that the earned hourly wage would fall below state or federal minimum wage levels. The federal minimum wage is currently $7.25 per hour. In Minnesota, the minimum wage rate for a large employer is $8 per hour. A large employer is any enterprise with an annual gross revenue of $500,000 or higher. Smaller businesses must use the federal minimum wage rate.
6. The last common error is using the method in a state that prohibits its use. This method of calculating overtime is allowed in Minnesota, but if you reside in a different state, you should consult an attorney licensed in your state regarding your state’s overtime payment laws.

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