Payment of Producers Under New Overtime Rule

My last post concerned the exemptions from the overtime payment requirements of the Fair Labor Standards Act (“FLSA”) that will most likely apply to the employees of an insurance agency.  While the job duties of a customer service representative can probably be defined in such a way as to qualify him or her under the administrative exemption, because a producer’s primary job duty is the sale of insurance products that exemption would not be available for a producer.  The only exemption for which a producer who is not a door to door salesperson may qualify is the one for highly compensated employees, but as of December 1, 2016, that will require a producer to earn at least $134,004 a year, of which $47,476 was paid as a salary.

If a producer will not qualify for an exemption from the overtime payment requirements of the FLSA, an agency must decide whether to prohibit the producer from working more than 40 hours in any one work week, so no overtime pay will be required, or pay the producer one and a half times their calculated hourly compensation for each hour worked in excess of 40 in any one work week.  The latter option can get expensive in a hurry, so the question becomes is there a way a producer can be paid for working more than 40 hours in a week that is not as expensive as the traditional way.

The answer to that question is Yes by using what is known as the fluctuating workweek method of payment.  To be able to use that method of payment for any employee, the following requirements must be satisfied:

1. The employer and employee have an understanding that the employee will receive a fixed salary for the hours the employee works in a workweek, regardless of how few or many hours are worked, and payment of that salary is made.
2.  The hours the employee works fluctuate from week to week.
3.  The salary paid is such that in any given week, the employee never receives less than minimum wage pay when the salary is divided by the total hours they work during that week.
4.  The employee receives pay at a rate not less than half the regular pay rate for that week for any hours they work in excess of 40 hours in a workweek.

The financial benefit from using the fluctuating workweek method of payment is that the amount of overtime pay is calculated by dividing the total number of hours worked in any one week by the agreed on fixed salary and then using that hourly rate to calculate the amount of overtime pay due for any hours worked in excess of 40 during that week.  For example, if the fixed salary is $800 per week and an employee works 50 hours during that week, their hourly rate of pay is $16, not $20 which it would be if the employee were being paid a salary of $800 a week for an expected 40 hours of work  The overtime pay rate under the fluctuating workweek method would be $24 ($16 + $8), instead of $30 ($20 + $10), resulting in a savings of $60 ($30 – $24 x 10 hours).  This savings will increase with every extra hour worked because the hourly rate of pay on which the overtime pay rate is calculated will decrease.

The main problem with using the fluctuating workweek method of payment for producers is the requirement that a fixed salary must be agreed on, which will be paid no matter how many hours are worked in any given week, 50 or 30.  The fixed salary requirement will prevent a commission only compensation arrangement, but it could be used for new producers if the agency’s practice is to pay its new producers a guaranteed minimum amount and account for any commissions earned above that with a year-end bonus.  For veteran producers, an agency could agree to pay a fixed salary based on the commissions earned the prior year with a similar year-end bonus for any commissions earned above the salary amount.  In both situations, the salary should be adjusted to account for the expected number of overtime hours, so that the salary and overtime pay are equal to what the salary would have been without taking overtime pay into consideration.

Use of the fluctuating workweek method of payment will not work for all agencies or all producers, but it is an option that should be considered when an agency is determining how it will pay its producers and other employees to comply with the new overtime rule’s requirements.