Many employers are currently reviewing their options for reacting to the December 1 increase in the minimum salary for claiming exemption from overtime requirements using the executive, administrative and professional exemptions. Retail, hospitality and especially non-profit employers may not have the budget flexibility to simply increase salaries to meet the new minimum. For some employees, conversion to an alternative pay plan could help reduce the impact of new overtime expenses.
The most common of these alternative plans is fluctuating workweek (FWW). Under this plan, employees are paid a guaranteed salary for all hours worked in the week. Because the employees are non-exempt, they still receive overtime after 40 hours, but only at a half-time rather than time and one-half rate. The salary covers the straight-time portion of all ours worked, and the regular rate used to determine overtime divides the salary by the number of hours worked that week (with minimum wage as the floor).
While FWW can reduce overtime expenses by two-thirds or more, it is not appropriate for every situation. First, the employee’s hours must actually fluctuate, meaning that the employee cannot work set hours each week without variation. Second, the salary is guaranteed, and must be paid without deduction if the employee works any hours in the week. Finally, the weekly overtime rate fluctuates, meaning that the employer must have in place payroll resources capable of calculating the changing overtime rate.
The Department of Labor allows some variations to FWW. One common alternative pays a guaranteed salary for a set number of hours (say 45), paying the half-time overtime premium for those hours over 40 up to the set numbers of hours covered under the salary. The employer would then pay time and one-half overtime for work beyond the maximum hours. For any of these alternative pay plans, the employee does not have to consent, but the employer must demonstrate that it provided the employee with a clear explanation of how the system works, and gave an opportunity to ask questions.
A few states such as California do not allow use of FWW or alternative half-time overtime systems. Some employers reject use of these alternatives due to employee dissatisfaction over the reduced amount of overtime in comparison to time and one-half pay. However, companies struggling with their ability to meet the new DOL salary minimums should explore whether an alternative pay plan makes sense for their business.