Target Audience: Manufacturing and Development Companies, M&D Industry, Management Personnel, Strategic Decision Makers, Accounting & Consulting Firm Interest, payroll, manufacturing industry employees, manufacturing industry employeers
As every manufacturer is well aware, employees who put in more than 40 hours in a week are entitled to overtime pay. If your production schedule varies, you may be able to reduce your compensation expenses considerably by putting your nonexempt employees on salary and using the fluctuating workweek method of paying overtime. This is an often-overlooked option that keeps employees’ paychecks more consistent when their hours vary, while reducing the overtime you’re required to pay.
How Does It Work?
You can implement the fluctuating workweek method if:
- Workers’ hours fluctuate from week to week,
- You and your employees understand that the fixed salary is their pay for whatever hours (up to 40) they work each week,
- The salary is at least equivalent to the applicable minimum wage for the hours worked, and
- You pay employees their salary even if they don’t work a full week.
The law doesn’t define the degree of fluctuation in hours required to qualify. It just says that employees cannot customarily work regular hours.
If an employee works more than 40 hours a week, calculating pay under the fluctuating workweek method is more complicated than paying straight time-and-a-half for the extra hours. In this case, the base salary stays the same no matter how many hours are worked.
To calculate the additional overtime pay, divide the base salary by the total hours worked to determine that week’s hourly rate. Because the hours worked change every week, the rate changes every week, as well. Half this hourly rate is the overtime rate per hour, and applies to any time worked after 40 hours.
For example, John has a salary of $500 per week. The rate of pay for a 45-hour week is $11.11 ($500/45), and the week’s pay is $527.80 ($500 in salary plus additional half-time of $5.56 per hour for five hours of overtime). For a 50-hour week, however, the same $500 salary results in an hourly rate of only $10 per hour, and the week’s pay totals $550 ($500 in base salary plus $5 per hour for 10 hours). Of course, his hourly rate would rise if he worked fewer than 40 hours. For example, it would be $14.29 per hour for a 35-hour week.
By comparison, if John is an hourly worker earning $12.50 per hour, his paycheck equals only $437.50 for a 35-hour week ($12.50 per hour x 35 hours), but $593.75 for a 45-hour week ($12.50 per hour x 40 hours, plus time-and-a-half of $18.75 per hour x five hours) and $687.50 for a 50-hour week. The costs can clearly add up in a hurry.
One caveat: The rate for fluctuating hours can never dip below minimum wage. Keep in mind that your state’s minimum wage may be higher than the federal mandate. If so, you must stay at or above the state requirement.
What’s The Catch?
If your production schedule requires your crews to likely work more short weeks than long ones, or if you want to deduct pay for any hours your employees miss, you’re better off paying hourly rates. Also, the fluctuating workweek method doesn’t allow you to exclude paid leave from regular-rate calculations as you could with hourly wages.
If the labor market in your area is tight, or you have trouble finding skilled workers, you may be forced to pay hourly wages and time-and-a-half overtime to stay competitive. If you have more qualified applicants than positions, however, you may find that a steady paycheck is all that’s required.
Finally, the regular rate of pay will change every week for each employee on the fluctuating hours plan. You’ll need to assign someone to do the computations — both for overtime and to be sure the rate is above minimum wage — if your payroll software can’t handle them.
The fluctuating workweek method isn’t a new one. It has been legal since 1938, when overtime legislation reflected a New Deal desire to spread available work to the unemployed 30% of the population. And the potential benefits to your bottom line make it worth exploring.
Sidebar: Salaried Employees Receive Overtime, Too
Conventional wisdom has it that salaried employees are exempt from overtime pay. Conventional wisdom is only partly right. The Department of Labor recognizes only four classes of employees that are exempt from overtime:
- Executive, which applies to employees who oversee large segments of operations,
- Administrative, which includes the controller, chief financial officer or any employee whose mistakes could result in the demise of the company,
- Professional, such as doctors, lawyers, architects and engineers, and
- Outside salespeople.
The exemptions are unrelated to how the employees are paid, and salaried employees are entitled to overtime if they don’t fall into these categories. You may have avoided paying overtime to salaried employees for years, but if you continue to do so you risk being required to come up with back pay or penalties.
Back to M&D Newsletters
Back to Tax and Business Update Summaries
contact Feeley & Driscoll, please click here or call us at 1 (888) 875-9770.