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Department of Labor Denies Full-day Deductions from Salary of Non-exempt Employees Who Work Fluctuating Workweeks

Volume 5, Issue 7
June 13, 2006

The Fair Labor Standards Act ("FLSA") and its corresponding regulations provide a basis for paying non-exempt employees a fixed weekly salary even though the number of hours worked (regular or overtime) fluctuate from week to week. See 29 C.F.R. § 778.114. With this method of compensation, the employee's regular rate of pay is determined by dividing the number of hours the employee works in the workweek into the weekly salary amount. Overtime is paid at the rate of one-half times the regular rate for hours worked over forty (40) as the employee is deemed to have already received the straight time compensation for all hours worked. Hence, these types of arrangements are often called "0.5 agreements," an arrangement that is attractive to employers because the more hours worked in a workweek, the less the regular rate of pay is for computing overtime. Employees also receive a benefit because during slow weeks they still receive a fixed salary.

As a rule of thumb, many employers who use 0.5 agreements follow the "salary basis" regulation that is used in conjunction with the FLSA's "white collar" exemptions when deciding how to make pay deductions for their fluctuating workweek employees. Although local Department of Labor ("DOL") personnel have authorized this practice, the DOL unfortunately issued an Opinion Letter on May 12, 2006 which renders this procedure improper.

In the Opinion Letter, the DOL addressed the issue of deducting sick leave time from the salaries of non-exempt 0.5 employees. The employer sought an opinion as to whether it could make full day deductions from the salary of a non-exempt employee paid on the fluctuating workweek method after the employee had exhausted his/her sick leave bank, or before he/she had earned enough sick leave to cover the duration. The employer argued that the "salary basis" deductions permitted under 29 C.F.R. § 541.602 for exempt employees should apply to the non-exempt 0.5 employees. The DOL disagreed and explained that the deductions permitted by Section 541.602 apply only to the overtime and minimum wage exemptions. Employees paid on the fluctuating workweek method are not exempt from overtime and minimum wage requirements and an employer may not make full day deductions from their salaries unless the deduction is for "willful absences or tardiness or for infractions of major work rules."

It is important for employers to note this distinction between salaried employees who are exempt from overtime and non-exempt employees paid a salary for fluctuating hours. Nevada employers should also note that state wage and hour laws do not expressly allow for 0.5 agreements, but in several Advisory Opinions, the Labor Commissioner has confirmed that such a payment structure will be deemed to be compliant with state law up and until there is a change in the state statutes or regulations. Finally, employers who use or are considering using such a compensation method should obtain the employee's written acknowledgment of and agreement to such a practice.

The DOL Opinion Letter can be found at:
http://www.dol.gov/esa/whd/opinion/FLSA/2006/2006_05_12_15_FLSA.pdf

Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.