The U.S. Department of Labor has released its Final Rule clarifying that the FWW method of calculating overtime pay is consistent with the payment of bonuses, premiums, hazard pay, and other incentive compensation.

Under the FWW method, an employer pays a non-exempt employee a salary intended to cover all hours worked each week. If the employee works overtime, the employer may compensate the employee at a rate of one-half (½) the employee’s “regular rate” of pay for the overtime hours (not 1½ times). That is because the “straight time” pay for such overtime hours has already been included in the regular salary. Notably, the regular rate varies each week as hours vary, decreasing with each additional hour worked that week. This is because the regular rate is calculated by dividing remuneration for the week by the hours it is intended to cover, i.e., the number of hours actually worked that week. As a result, the FWW method disincentivizes inefficiency. Employers must remember, however, that it the FWW is not available under the laws of certain states, including Alaska, California, New Mexico, and Pennsylvania.

The DOL first proposed to clarify that the FWW method was fully compatible with bonuses, premiums, and other incentive pay in 2008. But that proposal was shelved in 2011. In the meantime, courts have taken divergent approaches to whether incentive compensation restricted use of the FWW method. Some courts held that if an employer provides an employee with any bonus compensation, that would render the FWW method unavailable. Other courts concluded that “productivity-based” bonuses were allowed, but “hours-based” bonuses were not, a distinction that the DOL never drew. The Final Rule continues to reject such a distinction.

With the Final Rule, the DOL has included a few new clarifications prompted by public comments, six of which are discussed below:

First, the Final Rule clarifies that the FWW method is merely one example of how to properly compute the regular rate and overtime compensation; it is not an “exception.”

Second, the Final Rule clarifies that use of the FWW method does not require an employee’s hours to ever fluctuate below 40 hours per week. This clarification rejects the view of a few courts that had held that the FWW method is available only if an employee’s hours sometimes fluctuate below 40 hours per week.

Third, the Final Rule incorporates into the regulation the DOL’s longstanding interpretation that occasional disciplinary salary deductions for willful absences or tardiness, or infractions of major work rules, are compatible with the FWW method. An employer must still make certain that such disciplinary deductions do not cut into the required minimum wage or overtime compensation.

Fourth, the Final Rule clarifies that the occasional need for an employer to supplement an employee’s salary to meet the minimum wage does not invalidate use of the FWW method. (The DOL cautions, however, that the FWW method is not available if the employer could have foreseen that the employee’s salary would not meet the minimum wage in all workweeks, or if the salary turns out to in fact not meet the minimum wage “with some degree of frequency.”)

Fifth, the Final Rule adds clarifying text to emphasize that, although the employer and employee must have a clear and mutual understanding that the employee’s fixed salary is compensation for all hours worked, the parties do not need to have such an understanding as to the specific manner in which overtime pay is calculated.

Sixth, the Final Rule revises the regulation’s examples of additional compensation that are compatible with the FWW method to specifically include commissions and hazard pay. These examples are in addition to the original examples of bonuses and premium payments, plus “other additional pay of any kind.”

As U.S. Secretary of Labor Eugene Scalia noted, the timing of this new rule is fortuitous. The new rule gives employers certainty that “they can pay workers’ bonuses in a broader range of circumstances. This rule comes at a time when millions of Americans are returning to work and will benefit from added flexibility in compensation.” Wage and Hour Division Administrator Cheryl Stanton added, “As employers navigate the challenges of the coronavirus, the rule enhances flexibility to provide hazard pay, and to promote health and safety in the workplace through flexible work schedules that stagger start and end times and implement social distancing in the workplace.” Thus, while long-awaited, the new rule may be just in time.