U.S. Department of Labor Announces Two New Overtime Rules

Labor & Employment @lert

Date: May 27, 2020

Key Notes:

  • The U.S. Department of Labor announced two rules relating to overtime calculations and exemption eligibility under the FLSA.
  • The first rule, which will take effect 60 days after publication, includes bonuses and other incentive-based pay within the “regular rate of pay” for salaried, non‑exempt employees who work “fluctuating workweeks.”
  • The second rule, which became effective May 19, 2020, establishes uniform criteria for determining which businesses are considered “retail or service establishments” and whose commissioned employees may be exempt from the FLSA’s overtime requirements.

Last week, the U.S. Department of Labor (DOL) released two new rules relating to overtime calculations and exemption eligibility under the Fair Labor Standards Act (FLSA). The first rule allows employers to pay bonuses or other incentive-based pay to salaried, non-exempt employees whose hours vary from week to week. The second rule provides uniform criteria for determining which employers constitute “retail or service establishments,” and whose commissioned employees may be exempt from the FLSA’s overtime requirements.

Fluctuating Workweeks

On May 20, 2020, the DOL announced a final rule that expressly states that employers can pay bonuses, premium payments, or other additional pay (like commissions or hazard pay) to salaried, non-exempt employees who work “fluctuating workweeks.”

The FLSA identifies two methods for calculating overtime: the “time and a half” method and the “fluctuating workweek” (FWW) method. Under the more commonly used time and a half method, an employee’s regular rate of pay is based primarily on the employee’s hourly rate or salary. When an employee receives a fixed salary for fluctuating hours, however, the FLSA permits the employer to use the FWW for computing overtime compensation. Under this alternative method of compensation, an employer may determine an employee’s regular rate of pay (and therefore potential overtime pay due) each week based on the employee’s hours worked for that week, so long as certain criteria are met.

Under the DOL’s new rule, bonuses, premium payments, and other pay (such as commissions, hazard pay, or nighttime differentials) are included in the calculation of the FWW employee’s regular rate of pay for overtime purposes, unless they may be excluded under FLSA sections 7(e)(1) through (8) (excluding, for example, gifts, vacation pay, or holiday premiums).

Although this rule appears to primarily benefit FWW employees—as their hourly rate for certain weeks, and thus their potential overtime pay, will increase—it will also benefit employers. Once the new rule goes into effect, employers can shift substantial portions of an FWW employee’s compensation structure to bonus and other incentive payments, which will reduce an employee’s fixed weekly salary for other weeks of the year without a corresponding reduction in hours of service to the business.

The rule is scheduled to go into effect 60 days after publication in the Federal Register.

Retail and Service Establishments

In another final rule that went into effect on May 19, 2020, the DOL removed from its existing regulations two non‑exhaustive lists of industries intended as examples of which employers may be considered “retail or service establishments” under the FLSA.

Section 7(i) of the FLSA exempts employees of certain “retail and service establishments” who are paid in part via commissions from the Act’s overtime requirements. The FLSA does not define what constitutes a “retail or service establishment,” and the DOL’s Wage and Hour Division (WHD) vaguely defined the term as “an establishment 75 per centum of whose annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.” The DOL interprets the term as requiring the establishment to have a “retail concept,” (i.e., it sells goods and services to the general public, is at the end of the stream of distribution, and does not take part in the manufacturing process, among other factors).

In an effort to provide further guidance, the DOL issued a non-exhaustive list of 134 industries that it viewed as having “no retail concept”—a designation that left employers unable to claim the Section 7(i) exemption—and a separate non-exhaustive list of 77 types of businesses that “may be recognized as retail” for the purposes of the exemption. In practice, however, these rules left industries and courts confused over which types of employers were considered “retail or service establishments.” By removing these lists, the DOL will now subject all establishments to the same standards. Businesses that previously viewed themselves as ineligible for treating their commissioned employees as Section 7(i) exempt can now reevaluate their methods of compensation and whether their business could be eligible for this exemption. On the other side of the coin, businesses that have relied on this exemption are now encouraged to review the nature of their business to ensure they still fit within the DOL’s interpretive guidance.


For more information, please contact:

Bryan Stillwagon

Anthony P. McNamara

or any member of our Labor & Employment group.

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