Will the New DOL Minimum Salary Increases Affect Your Business, and Is the Fluctuating Workweek a Viable Alternative?

In the workplace, an employee is considered “exempt” or a “non-exempt” based on the employee’s specific job duties, and the manner and amount of compensation paid.  Only non-exempt employees are eligible for overtime pay according to the Fair Labor Standards Act (“FSLA”).  The Department of Labor’s (DOL) has announced that the minimum salary to qualify for overtime exempt status will increase to $58,656 effective January 1, 2025.

For some businesses the only option will be to comply by raising employee salaries to at least this new minimum level.  However, it is not the only option and businesses should consider carefully whether they are better off under an alternative – like the fluctuating workweek.  The minimum salary increase for overtime pay and the fluctuating workweek method are both related to how employees are paid, but they differ in a number of ways:

A. Minimum Salary Increase

The DOL’s minimum salary increase affects which salaried employees are eligible for overtime pay.  Effective January 1, 2025, the minimum salary for overtime exempt status will increase to $1,128 per week ($58,656 annually). The DOL rule will also adjust the minimum salary threshold for the highly compensated employee exemption to $151,164.  Starting July 1, 2027, salary thresholds will update every three years, by applying up-to-date wage data to determine new salary levels.

B. Exemptions

Certain businesses are exempt from the minimum salary requirements.

1. Amusement and recreational establishments.[1] Section 13(a)(3) provides an exemption from the minimum wage and overtime provisions of the FLSA for “any employee employed by an establishment which is an amusement or recreational establishment, if (A) it does not operate for more than seven months in any calendar year, or (B) during the preceding calendar year, its average receipts for any six months of such year were not more than 33-1/3 per centum of its average receipts for the other six months of such year.”  An “amusement or recreational establishment” will not be considered a “covered employee” and thus exempt under Section 13(a)(3) of the Act if it meets either Test (A) or Test (B).  For Test A, whether an amusement or recreational establishment “operates” during a particular month is a question of fact and depends on whether it operates as an amusement or recreational establishment. If an establishment engages only in such activities as maintenance operations or ordering supplies during the “off season” it is not considered to be operating for purposes of the exemption.  For Test B, because the language of the statute refers to receipts for any six months (not necessarily consecutive months), the monthly average based on total receipts for the six individual months in which the receipts were smallest should be tested against the monthly average for six individual months when the receipts were largest to determine whether this test is met.

2. Non-profit organizations.[2] The FLSA generally applies to (“covers”) employers whose business operations generate annual gross volume of sales or business done of at least $500,000. Certain non-profit charitable organizations will not be covered enterprises under the FLSA unless they engage in ordinary commercial activities that result in sales made or business done, such as operating a gift shop or providing veterinary services for a fee.[3]

In determining whether or not a non-profit organization is a covered enterprise, the Wage and Hour Division will consider only activities performed for a business purpose; it does not extend to the organization’s purely charitable, religious or similar activities.[4] As a result, contributions, in-kind donations, membership dues and proceeds from fundraising special events received by a non-profit are not counted toward the $500,000 business requirement.[5]

3. Other Exemptions. Other exemptions may apply as well, and it would be helpful to consult an attorney to determine whether there are other exemptions that may apply to your business.

C. Fluctuating Workweek Method

The fluctuating workweek method is an approved way to calculate overtime pay for employees who are paid a salary, are not exempt and do not work a fixed number of hours each week.  This approach is complicated, but it will save significant funds.  And to use it, the employer and employee must have a clear understanding that the salary compensates for all hours worked in a workweek.[6]

The fluctuating workweek (“FWW”) approach to calculating overtime pay requires that the employee’s hours must fluctuate  from week to week (there cannot be a required fixed number of hours worked), and the employee must be paid a  weekly salary — regardless of how many hours they work (even if they work less than 40 hours)– and the  salary must be high enough to result in an hourly wage of at least the minimum wage, which in Virginia is currently $12.00.  Under the FWW approach, the salaried employee is paid overtime pay calculated by determining ½ of his/her “average hourly rate” for time worked over 40 in that week.  The “average hourly rate” is calculated by dividing the employee’s salary by the number of hours worked in a given workweek. The “average hourly rate” is calculated every workweek and will change based on the hours actually worked.  The more hours the employee works in a workweek, the lower the OT rate paid.[7]

An example might help.   In a typical situation, a salaried employee might be paid $44,000 annually or $846.15/week for 40 hours, so the normal “regular rate” for the required 40 hours is $21.15/hour.  In the absence of a FWW agreement, if the salaried employee is not exempt, then employer would have to pay an overtime rate of $31.73 /hr. (1.5 x $21.15) for time worked over 40 hours.  Under the FWW method of calculating the overtime pay, the amount owed will be less.

• Week One – employee works 38 hours. Under both regular and FWW methods, this employee will be paid the full salary of $846.15 for Week One even though s/he works less than 40 hours.
• Week Two – employee works 45 hours. Under the FWW method, the employee will be paid a total of $893.15, which includes the guaranteed salary of $846.15 for all 45 hours worked in Week Two, plus $47.00 in overtime pay.  The overtime pay is calculated by determining the “average hourly rate” for Week Two, which will be $18.80 ($893.15 divided by 45), and then taking 50% of that rate ($9.40) and multiplying it by the 5 hours of overtime worked.
  • Under the “regular OT” method, the employer must pay the employee $1,004.80 because the overtime pay due will be $158.65 (5 x the “OT” rate of $31.73)
  • By comparison, the employer saves $111.65 in overtime pay in Week Two under the FWW method.
• Week Three – employee works 40 hours. Under both methods, his employee gets paid $846.15 for Week Three.
• Week Four–   employee works 50 hours. Under the FWW method, the employee will be paid a total of $930.75, which includes the guaranteed salary of $846.15 for all 50 hours worked in Week Four, plus $84.60 in overtime pay. The overtime pay is calculated by determining the “average hourly rate” for Week Four, which will be $16.92 ($893.15 divided by 50), and then taking 50% of that rate ($8.46) and multiplying it by the 10 hours of overtime worked.
  • Under the regular OT method, the employer must pay employee $1,163.45 because the overtime pay due will be $317.30 in OT pay (10 x the regular rate of $31.73).
  • By comparison, the employer using the FWW method saves $232.70 in overtime pay in Week Four.

D. Considerations

Businesses may want to consider the alternative of implementing the fluctuating work week method of calculating overtime pay instead of raising salaries to the new DOL minimum level for exemption.  There are, of course, trade-offs.  The minimum salary is simple to manage and does not require new and frequent calculations.  The fluctuating workweek method may save money in salary but may increase administrative costs in terms of time and money.  Additionally, in some workplaces, employees may resist an employer’s desire to pay less overtime using the FWW method, and this could lead to morale issues, or worse collective action by disgruntled employees.  It may be useful to consult a lawyer to help determine whether the fluctuating workweek method is an appropriate alternative to increasing the salaries of employees to comply with the new minimum salary.

E. Payroll Vendors

Many payroll vendors have created technology to help simplify the calculations under the fluctuating workweek methodology.  If your business uses such a vendor, it is worth a phone call to see if they can help reduce the administrative costs of the fluctuating workweek to make it a more viable alternative.

[1] Fact Sheet #18: Section 13(a)(3) Exemption for Seasonal Amusement or Recreational Establishments Under the Fair Labor Standards Act (FLSA) | U.S. Department of Labor (dol.gov)
[2] Fact Sheet #14A: Non-Profit Organizations and the Fair Labor Standards Act (FLSA) | U.S. Department of Labor (dol.gov)
[3] Certain non-profits are automatically covered as “named enterprises,” such as schools, preschools, hospitals, mental health centers and residential care facilities regardless of the volume of business income, or lack thereof.
[4] See McMillan v. Boy Scouts of America-Aloha Council, 2012 U.S. Dist. LEXIS 83346 (D. Haw. 2012).
[5] Also keep in mind that even if the non-profit is not a “covered employer” under the FLSA, that same nonprofit may still have to comply with the FLSA overtime rules if it employs one or more employees whose job duties are engaging in interstate commerce.  The Department of Labor takes a broad view of who can be covered under this provision and has suggested it covers employees who job duties require them to regularly make or receive interstate phone calls, or send and receive emails to persons or entities located in another state, or  require the employee to transport persons or property to another state.  These issues of who is covered by the FLSA are fact specific and require careful review by legal counsel, as do the rules involving the use of volunteers.
[6] The workweek is any designated 168 hours in seven consecutive 24-hour periods that can begin on any day and at any time. It is not necessary that all employees of a company have the same workweek.  An employer is better off once a workweek is established to remain consistent to avoid paying overtime.
[7] Fact Sheet #82: Fluctuating Workweek Method of Computing Overtime Under the Fair Labor Standards Act (FLSA) / “Bonus Rule” Final Rule | U.S. Department of Labor (dol.gov)