Salaried Nonexempt Employees and the Fluctuating Workweek Method

A salaried nonexempt employee is paid a fixed salary but is still entitled to overtime, because being paid a salary does not make someone exempt. Overtime for these employees is calculated from the hours the salary is meant to cover. If the salary covers all hours worked in a fluctuating week, a special rule called the fluctuating workweek method allows overtime at half-time rather than time and a half.

This guide explains both methods, shows each one with dollar examples on a $1,000 weekly salary, and lists the conditions and state restrictions. The fluctuating workweek method is not allowed everywhere, so check with counsel or your state labor department before using it.

Salary does not equal exempt

To be exempt from overtime, an employee must meet a salary basis test, a minimum salary level and a duties test. The federal weekly threshold is $684 ($35,568 per year), but several states set a higher level. An employee who is paid a salary but fails any of those tests is nonexempt and must receive overtime.

Job titles do not decide it. A "supervisor" who spends most of the week on non-management tasks, or an "assistant manager" with no real authority, can be nonexempt on a salary of $60,000. The tests are covered in exempt vs. nonexempt employees.

Method 1: the salary covers a fixed number of hours

The most common approach is that the salary compensates for a fixed schedule, usually 40 hours. In that case, the regular rate is the salary divided by the hours the salary is intended to cover, and each hour over 40 is paid at 1.5 times that rate.

Example: an employee earns $1,000 per week for a 40-hour schedule. The regular rate is $1,000 / 40 = $25.00 per hour. In a week with 50 hours, overtime is 10 x ($25.00 x 1.5 = $37.50) = $375.00. Total pay is $1,000.00 + $375.00 = $1,375.00.

Put the two side by side when you design a pay plan. Method 1 costs more in busy weeks but is simple, predictable and allowed in every state. Method 2 saves money in long weeks, but only if every condition is met and documented, and it demands accurate hours.

This approach is the safest in most states, and it requires a clear understanding about how many hours the salary covers. If that is not documented, the employer may be in a dispute about whether the salary was intended to cover 40 or more hours.

Method 2: the fluctuating workweek

Under 29 CFR 778.114, an employer may pay a fixed salary for all hours worked in a week, even when hours change from week to week, and pay overtime at half the regular rate for hours over 40. Because the salary already pays straight time for every hour, only the extra half is owed.

The regular rate changes every week, because it is the salary divided by the hours actually worked. The more hours the employee works, the lower the regular rate, and the lower the overtime premium per hour.

Fluctuating workweek example

Take the same $1,000 weekly salary. In week 1 the employee works 40 hours. The regular rate is $1,000 / 40 = $25.00, and there is no overtime. Pay is $1,000.00.

In week 2 the employee works 50 hours. The regular rate is $1,000 / 50 = $20.00 per hour. Overtime is 10 hours x 0.5 x $20.00 = $100.00. Total pay is $1,000.00 + $100.00 = $1,100.00.

In week 3 the employee works 55 hours. The regular rate is $1,000 / 55 = $18.1818. Overtime is 15 x 0.5 x $18.1818 = $136.36. Total pay is $1,000.00 + $136.36 = $1,136.36.

Compare week 2 under the two methods: $1,100.00 under the fluctuating workweek against $1,375.00 under the 40-hour method. The difference of $275.00 is why the fluctuating workweek method is attractive to employers, and why it is also a frequent target in disputes.

Conditions for using the fluctuating workweek

The method has strict conditions. If any one is missing, the employer may have to recalculate overtime using the 40-hour method, which can create a large back pay claim. The conditions are:

- Hours fluctuate from week to week, sometimes above and sometimes below 40.

- The salary is fixed and is paid in full, regardless of how many hours are worked in the week.

- The salary is high enough that the regular rate is never below the minimum wage, which is $7.25 per hour federally and higher in many states.

- There is a clear mutual understanding that the fixed salary covers all hours worked, whatever the number.

- Overtime is paid at at least half the regular rate for all hours over 40.

State restrictions and pitfalls

Not all states allow the method. California does not permit half-time overtime for salaried nonexempt employees, and other states have restrictions or require 1.5 times the regular rate. Check your state rule before using it, and if you have employees in several states, apply each state separately. See state wage and hour laws.

Even where it is allowed, problems arise from deductions that make the salary less than fixed, from extra payments like bonuses and differentials that need to be handled correctly, and from missing hour records. If the employer does not record the actual hours worked each week, it cannot compute the rate at all.

Records for salaried nonexempt employees

Salaried does not mean untracked. For nonexempt employees, including those on a salary, you must keep the hours worked each workday and workweek, the regular rate, straight-time earnings, the overtime premium and the total wages. Payroll records are kept for 3 years and time cards for 2 years. See do you have to track employee hours.

A weekly salary with no hour records is one of the worst fact patterns in an audit, because the employer cannot prove how many hours were worked or which method was used. The employee's estimate usually wins when the employer has no data.

How SimpleWorkshift Helps With Salaried Nonexempt Employees

SimpleWorkshift records the actual hours of salaried nonexempt employees as they clock in and out from the iOS or Android app or the web, with a GPS location on each entry. Managers see time entries and exceptions in real time, and automatic overtime calculations flag the weeks that cross 40 hours.

Work schedules per employee show the expected hours, and custom reports and dashboards give payroll the weekly totals needed to apply the method you use. Payroll closing keeps approved hours consistent from week to week. Start a 30-day free trial, with no contracts and cancel anytime, at simpleworkshift.com.