We’ve noticed some cases recently filed challenging employers’ use of the fluctuating workweek method to determine the overtime compensation for employees who receive commission payments. Plaintiffs are alleging that this practice is not permitted by the Fair Labor Standards Act (FLSA) when employees earn commissions in addition to their salaries. However, this issue is unresolved, and precedent seems to favor the employer defendants.

The fluctuating workweek method is permitted by FLSA regulation 29 C.F.R. § 778.114, promulgated by the Department of Labor to implement the Supreme Court’s holding in Overnight Motor Transp. Co. v. Missel, 316 U.S. 572, 580 (1942). This method permits employers to pay non-exempt employees pursuant to the fluctuating hours method if five criteria are met:

  1. The employee’s hours must fluctuate from week to week;
  2. The employee must receive a fixed weekly salary that remains the same regardless of the number of hours worked per week;
  3. The fixed salary must be sufficient to provide compensation at a regular rate not less than the legal minimum wage;
  4. The employee must receive at least 50 percent of his regular hourly pay for all overtime hours worked; and
  5. The employer and the employee must have a clear mutual understanding that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek.

29 C.F.R. § 778.114(a), (c). The regular rate under the fluctuating workweek method is calculated by dividing the employee’s salary by the actual hours worked in a given workweek. The employer need only pay 1/2 this regular rate (as opposed to 1½ times the regular rate) multiplied by the hours worked over 40.

The regulation’s requirement for the payment of a fixed salary does not involve, nor does it seem to contemplate, an employee being paid a fixed salary for fluctuating hours receiving commissions in addition to that salary. However, nothing in the FLSA overtime pay regulations prevents their simultaneous application. The application of the overtime requirements to deferred commission payments is addressed in 29 C.F.R. § 778.119 et seq. Pursuant to 29 C.F.R. §§ 779.117 through 779.121, any amounts due for overtime from commissions or incentive compensation would later be added to the regular rate and applied to the relevant workweeks and paid at ½ the extra hourly rate multiplied by the number of hours of overtime worked for the applicable week.

Additionally, a federal court in Lance v. Scotts Co. clearly approved of the use of the fluctuating workweek with deferred incentive commission payments. 2005 WL 1785315 (N.D. Ill. 2005) (granting summary judgment to an employer that utilized a fluctuating workweek method and paid commissions, explaining, “the hourly rate for calculating overtime pay consisted of adding both the [employee’s] base salary plus any earned commissions, and then dividing that sum by the number of hours worked.”) The court explained that because the earned commissions fluctuated from week to week, the base hourly rate for determining overtime pay necessarily fluctuated as well, and expressly stated: “[t]his is permissible under the relevant DOL regulations,” citing 29 C.F.R. §§ 778.117-778.118.

The Department of Labor proposed a change to the language of 29 C.F.R. § 778.114 that would have permitted bonus and incentive or premium payments to be included in the amount that must be sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage under the fluctuating workweek method. 73 F.R. 43654, 43662 (Jul. 28, 2008). The proposed regulation was never adopted. See 76 F.R. 18832 (April 5, 2011). This proposal, however, only addressed the requirement that bonus and incentive or premium payments could be included in the amount to constitute the sufficient minimum rate of pay. The proposal did not address the situation where a base salary meets the required minimum rate of pay and overtime compensation is paid on both the base rate plus commissions at ½ rather than 1 ½ times the regular rate. Additionally, the Department of Labor focused on “bonus and premium payments” traditionally paid for working weekend, holiday and other undesirable hours, as opposed to “commission” payments, in concluding in the preamble to the final rule that bonus and premium payments are incompatible with the fluctuating workweek method.

Additionally, earlier this year the New York State Department of Labor issued an opinion letter approving the use of the fluctuating workweek method for employees with a base salary who also receive commission pay. The letter was in response to a question raised by an employer of mortgage loan originators, a group of employees who have received quite a bit of attention regarding FLSA status. (See our previous post as well as this link to the DOL opinion letter.)

Clearly, this issue is unresolved and is not as clear cut as plaintiffs’ attorneys suggest in their recent complaints. We will continue to monitor this issue to help employers determine whether to compensate employees who receive a base salary and commission payments for overtime pursuant to the fluctuating workweek method.