Labor Department Stiffens Incentive Pay for Flex Workweek Employees

Starting May 5 employers who pay workers overtime under a fluctuating workweek system may find themselves facing penalties for providing bonuses and other types of incentive pay to its non-exempt salaried employees—something that was allowable until the U.S. Department of Labor issued new regulations April 5 forbidding the practice.

The system, which is used in a variety of industries from retail to technology to the service sector, allows employers to pay workers a fixed salary regardless of the number of hours actually worked. The new regulations, which amend the Fair Labor Standards Act of 1938, will likely lead employers using this method to eliminate all incentive rewards such as commissions, bonuses or prizes, says Lee Schreter, a shareholder with Littler Mendelson, a labor and employment law firm based in San Francisco.

“Employers will no longer be able to reward employees for doing a good job if they use the fluctuating workweek method and I think that’s unfortunate,” she says.

Schreter says that many employers are unaware of these changes because the Labor Department “has not done a good job” of publicizing them and has provided little guidance on the matter “other than publishing the 100-plus pages of the final rule, which are not user-friendly,” she says. And the department has given employers only 30 days to comply. After that they would be subject to investigation and enforcement, she says.

“The department has done a sleight of hand and employers must make a very quick change if they are using the fluctuating workweek and paying incentives to come into compliance,” she says. Small businesses that may lack a large human resources staff will most likely be caught unaware, according to Schreter.

“They aren’t likely to read the DOL website and unless they belong to a trade association they may not know these rules are going to take effect.”

In addition to changes in the fluctuating workweek, employers with tip-earning workers must now inform the employee if they plan to claim an employer tip credit, which allows employers to use part of a workers tip to pay their minimum wage salary. The new regulations also provide that the maximum tip credit an employer may claim is $5.12 an hour and that the tip credit cannot be larger than the tips the employee actually receives, among other provisions.

While the tip credit notification doesn’t have to be in writing, Schreter says she is telling her clients to put it on paper.

“The penalty for not giving notice is paying the difference between the tip credit claimed and the hourly salary of the employee,” she says. “That kind of liability can put a small business out of business. Employers will want to report the tip credit on their pay stub, which means they have less than 30 days to reformat their pay stub.”  

—Rita Pyrillis