Many employers may believe that there are only two ways to pay their employees: hourly or salary. Hourly employees are entitled to overtime and salaried employees are not, right? Not exactly. While a deeper analysis is needed to properly classify employees pay structure (found elsewhere in this blog), there is also a third option: the Fluctuating Rate Work Week. Implemented properly, this option can save your business money, while still remaining fair to your employees.
HOW IT WORKS
First, let’s explain how the Fluctuating Rate Work Week system works. An employee is paid an agreed set amount per week for all hours worked, regardless of whether they work more or less than 40 hours. However, for hours worked over 40 hours per work week, they are also paid an overtime premium based on a fluctuating regular rate.
To calculate the overtime premium rate, divide the set pay by the total number of hours worked. This gives you the employee’s regular hourly rate for that week (remember, this fluctuates depending on how many hours are worked per week). Then divide that rate by 2. This is their overtime rate for that week. Multiply the overtime rate by the number of hours worked over 40. This is their overtime premium pay. Add the overtime premium pay to the set amount of pay per week and you have the employee’s total compensation for the week. While this sounds complicated, the example below shows the potential savings to your business, when compared to paying an employee on a traditional hourly/time and a half for overtime (or salaried non-exempt) model.
HOURLY:
The employee’s rate of pay is $10.00 per hour. Therefore:
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If the employee works 30 hours, they are paid $300 (30 hours x $10/hour)
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If the employee works 40 hours, they are paid $400 (40 hours x $10/hour).
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If the employee works 50 hours, they are paid $550 (40 hours x $10/hour, plus 10 hours x $15/hour time and a half overtime).
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If the employee works 60 hours, they are paid $700 (40 hours x $10/hour, plus 20 hours x $15/hour time and a half overtime)
FLUCTUATING RATE WORK WEEK:
The employee is paid $400 per week for all hours worked. Therefore:
- If the employee works 30 hours, they are paid $400.
- If the employee works 40 hours, they are paid $400.
- If the employee works 50 hours, they are paid $440. ($400 divided by 50 hours = $8.00 per hour. $8 divided by 2 =$4 for hours worked over 40. 10 hours of overtime x $4 per hour = $40. $400 plus $40 = $440.)
- If the employee works 60 hours, they are paid $555.20 ($400 divided by 60 hours =$6.67 per hour. Since this is less than minimum wage, the minimum wage of $7.93/hour must be paid instead. The resulting calculation is $7.93 per hour x 60 hours = $475.80. $7.93 divided by 2 is $3.97 for hours worked over 40. 20 hours of overtime x $3.97 per hour = $79.40. $475.80 plus $79.40 = $555.20)
As you can see, over the course of these 4 example weeks, the employee is paid a total of $1950 under an hourly plan and $1795.20 under a fluctuating rate work week plan.
WHO IS ELIGIBLE?
Any salaried non-exempt employee can be compensated on a Fluctuating Rate Work Week plan. Other requirements are as follows:
- The employee must be paid a guaranteed and agreed-upon wage for any work performed in a workweek, regardless of the actual number of hours worked. Yes, generally, this means if the employee works 10 hours in a week, you still owe them the entire guaranteed amount. But remember, you’re saving money when the same employee works more than 40 hours in another work week.
- The hours worked must actually fluctuate. The Department of Labor does not indicate how much their hours much fluctuate, but it cannot be the same week after week.
- Minimum wage must always be paid, regardless of how low the calculated regular rate may be. ($7.93 per hour currently in Florida).
- There must be a clear and mutual understanding between the employer and employee regarding the method of pay. A separate signed document outlining exactly how pay will be calculated is a good idea.
FINAL CONSIDERATIONS
Implementing a Fluctuating Rate Work Week can be beneficial to your company and its bottom line. However, for employees to embrace the policy, it must appear fair to them as well. If an employee rarely (or never) works below 40 hours per week, they will quickly see that this method of pay is of no advantage to them. A thoughtful introduction highlighting the benefits of the Fluctuating Rate Work Week will be essential to its acceptance and the happiness of your employees.
If you are currently being paid under a Fluctuating Rate Work Week or as a business would like to see if some of your employees can be placed under a Fluctuating Rate Work Week but want to verify it is done correctly, call Wilson McCoy, P.A. We have the knowledge and experience to help either verify that you are being properly paid under their Fluctuating Rate Work Week or that you correctly and fairly place your employees on the Fluctuating Rate Work Week.