The U.S. Court of Appeals for the First Circuit recently sided with an ever-increasing line of cases clarifying the type of payments that may be added to a fixed salary without violating the fluctuating workweek method described in 29 C.F.R § 778.114.  The Court distinguished additional hourly-based pay from performance-based bonuses in this context, and re-affirmed that employers retain significant discretion in crafting and implementing creative compensation plans — including pay plans that combine various types of compensation — to meet business needs and incentivize their workers.

The Plaintiff’s Attack on GNC’s “Combo” Pay Plan

In Lalli v. General Nutrition Centers, In., et al., GNC Store Manager Joseph Lalli received a fixed weekly salary regardless of his hours worked, plus weekly commissions for his sales. Because he received a fixed salary for fluctuating hours plus weekly performance-based bonuses, GNC calculated his overtime rate using the “half-time” method outlined in the FLSA interpretive bulletins at 29 C.F.R § 778.114 and § 778.118.  Lalli challenged the company’s overtime calculations on the basis that his commissions altered the fixed nature of his weekly pay and thus removed his compensation from the half-time purview of Section 778.114.

Employee Compensation: Have It Your Way (Almost)

In denying the Plaintiff’s claims (more on that below), the First Circuit confirmed that employers should be able to structure compensation plans to suit their business needs and incentivize their workers, and that employers should not be restrained by the compensation plan examples outlined in 29 C.F.R. § 778.109-.122.  While noting that the two pay plans at issue (fixed salary for fluctuating hours and commissions) were “‘examples’ of compliant pay structures,” the First Circuit explicitly rejected the implication that a “pay scheme must fall within a regulatory example in order to comply with the [FLSA].”  As in this case, the Court explained, “different types of remuneration…may be combined in a compliant compensation plan.”  Indeed, the Court concluded, “[i]t was not the purpose of Congress in enacting the [FLSA] to impose upon the almost infinite variety of employment situations a single, rigid form of wage agreements.”

Additional Performance-Based Pay Does Not Jeopardize the Fluctuating Workeek Method

Lalli argued his salary was not “fixed” for purposes of Section 778.114 because his compensation fluctuated from week to week on account of the commissions he earned, citing in support the First Circuit’s 2003 O’Brien v. Town of Agawam decision and an April 2011 DOL bulletin.

The O’Brien court held that contractually-stipulated overtime pay for each hour in excess of eight per shift and an additional bonus of $10 per week for nightshifts, in addition to the employees’ salaries, disrupted the “fixed salary” element of the fluctuating workweek.  Further, in July 2008, the DOL proposed a change to 29 C.F.R. § 778.114 to clarify the validity of the fluctuating workweek when paired with “overtime premiums and other bonus and non-overtime premiums.”  In its April 2011 bulletin, however, the DOL changed course and opted to leave Section 778.114 unaltered.  Lalli argued that this change of heart was meant to signal that Section 778.114 is not applicable whenever bonuses or additional payments are included on top of a fixed salary.

According to the First Circuit, both authorities were inapposite to this case.  “[N]either the O’Brien decision nor the DOL’s April 2011 bulletin,” the Court noted, “reach or answer the particular question posed here: whether a compensation structure employing a fixed salary still complies with section 778.114 when it includes additional, variable performance-based commissions.”  O’Brien was distinguishable, the Court said, because Lalli’s performance-based compensation was unrelated to hours worked.  Similarly, the DOL’s 2011 bulletin was unavailing because it cited only to cases rejecting hours-based bonuses. As the First Circuit observed, “[i]f anything, the DOL bulletin indirectly approved of the developing distinction between time-based and performance-based bonuses.”

Ultimately, the Court rejected Lalli’s plea that “two rights make a wrong,” holding that “GNC’s pay scheme epitomizes the compensation arrangements illustrated in sections 778.114 and 778.118, and the mere combination of these two permissible methods does not render the former inapplicable.”  While this decision reinforces employers’ wide latitude in implementing creative and multi-faceted compensation plans, creativity and discretion should not be interpreted as a substitute for overtime compliance.  In this case, the half-time overtime method under Section 778.114 was lawfully paired with the half-time overtime method under Section 778.118.  Employers seeking to implement other or more creative combinations should consult with experienced wage-hour counsel to ensure their pay plans are compliant.