In the wake of recent changes to the Fair Labor Standards Act (FLSA), employers—including many Big “I” agencies and their business customers—are reconsidering how to handle employees who are currently classified as exempt but, based on their current salary, will not meet the salary threshold that takes effect Dec. 1. 

Many employers have focused on two solutions: 1) increasing the affected employee’s salary above the new threshold or 2) treating the employee, regardless of job duties, as non-exempt and compensating them at the standard overtime rate of time-and-one-half for hours they work in excess of 40 hours per workweek. Depending on state law, however, employers may have a third option that helps keep their labor costs in check: the fluctuating workweek method.

Regardless of classification or job duties, any employee may receive a salary. If that employee meets the requirements for the fluctuating workweek method, the employer can pay for hours the employee works in excess of 40 hours per workweek at a rate which is not less than one-half times the employee’s regular pay rate, as opposed to the standard time-and-one-half. 

1. The requirements of the fluctuating workweek method are as follows:The employee’s salary is fixed and provided each week, regardless of the number of hours they work.
2. The hours the employee works fluctuate from week to week.
3. The salary is such that in any given week, the employee never receives less than minimum wage pay when the salary is divided by the total hours they work.
4. The employee receives pay at a rate not less than half the regular pay rate for any hours they work in excess of 40 hours in a workweek.
5. The employer and employee have an understanding that the employee will receive a fixed salary for the hours the employee works in a workweek, whether few or many. 

For example, under current law, an employer may classify an employee as exempt if they meet the duties requirements for one of the “white-collar” exemptions under the FLSA and have a salary of $600 per workweek—which amounts to $31,200 per year. Based on the recent changes, however, an employer cannot classify this employee as exempt on or after Dec. 1 because their salary will fall below the new threshold. An increase in the employee’s salary to meet the new threshold of $47,476 would require more than a 50% raise, which may not be feasible for the employer.

If such an employee were to work 60 hours in a workweek, the standard overtime rate of time-and-one-half would require the employer to pay the employee as follows: $600 for the first 40 hours the employee works, which leads to a regular pay rate of $15 per hour. In addition, the employer must pay $22.50 per hour ($15 x 1.5) for 20 hours of overtime. This results in total pay of $1,050 for that workweek.

If the fluctuating workweek method is an option, the employer would pay the employee as follows: $600 for the 60 hours the employee works, which leads to a regular pay rate of $10 per hour. In addition, the employer must pay half the regular pay rate for hours the employee works in excess of 40. Here, that overtime rate is $5 per hour ($10 x .5) for the 20 hours in excess of 40. This results in total pay of $700 for that workweek.

Although federal regulations allow employers to use the fluctuating workweek option, several states, including California, have laws or regulations that prohibit its use. Even if state law allows the option, independent insurance agencies need to consider issues such as:

• How to document the employer and employee’s mutual understanding that the fluctuating workweek method applies.
• Whether the weekly salary is sufficient to ensure that the employee’s regular rate of pay always exceeds the minimum wage.
• Whether or to what extent the employee’s receipt of commissions and other incentive compensation affects the use of the method.
• Whether or to what extent the employer is allowed to deduct from the employee’s fixed salary. 

The fluctuating workweek method may give independent insurance agencies another option for structuring employment relationships and containing their labor costs in light of the recent FLSA changes. However, given the costs and legal risks associated with employee misclassification, independent insurance agencies should consult experienced employment counsel prior to adopting the fluctuating workweek method.    

Joseph Doherty is Big “I” senior counsel. Jennifer Webb is Big “I” federal government affairs counsel.