After the proposal lay dormant for more than two years, the Department of Labor’s Wage and Hour Division recently issued a final rule addressing several provisions Fair Labor Standards Act regulations. The regulations appear in the Federal Register and will be effective on May 5, 2011.

Although the majority of the revisions are technical amendments designed to fully implement a few decades’ worth of statutory changes, there is one issue of particular significance to many in the retail community: DOL’s newly-announced position with respect to salaried non-exempt employees who are compensated under the fluctuating workweek method of payment. Many times, these employees may occupy the “borderline exempt” positions in an organization; that is, the positions that might be classified as exempt but which the employer has decided to classify as non-exempt (e.g., assistant managers, certain administrative personnel in corporate headquarters).

In the regulatory package, the Wage and Hour Division rejected proposed clarifying language regarding the fluctuating workweek method of payment. See 29 C.F.R. § 778.114. Under the fluctuating workweek method, an employee is paid a fixed salary for fluctuating hours. If the employee works in excess of 40 hours in a workweek, the salary is divided by the number of hours worked, and the resulting rate is divided in half. The half-time rate is then paid (in addition to the salary) for all hours worked in excess of 40. The proposed clarifying language would have made clear that, in addition to a fixed salary, an employee also could be paid bonuses and other non-overtime premiums without invalidating the fluctuating workweek pay method.

Yet the Division rejected this proposal, stating in the Preamble to its revised regulations that “bonus and premium payments . . . are incompatible with the fluctuating workweek method of computing overtime . . . .” The Division acknowledged that bonus payments and other forms of premium pay benefit employees, but the Division ultimately concluded that the proposed clarifying language “could have had the unintended effect of permitting employers to pay a greatly reduced fixed salary and shift a large portion of the employees’ compensation into bonus and premium payments . . . .” This unintended effect, according to the Division, could have resulted in a “wide disparity in weekly pay that the fluctuating workweek method was intended to avoid . . . .”

The Division’s stated position may make the fluctuating workweek pay method invalid for employees who receive bonuses and other non-overtime premium payments. Under the Division’s interpretation, payment of such bonus or premium amounts would eliminate an employer’s ability to use the fluctuating workweek method. (i.e., the employer will have to calculate the overtime rate based on 40 hours and a time-and-one-half overtime rate).

What The New Regulations Mean For Retailers

A number of groups are considering whether (and how) to challenge the Division’s interpretation on a variety of grounds. In the meantime, however, management should be aware of the risks of continuing to pay their fluctuating workweek employees any bonuses or non-overtime premium payments (e.g., attendance or safety bonuses and shift-differential pay).