The fixed-salary, fluctuating workweek method of payment has become an attractive option to many employers. The model permits employers to pay non-exempt employees at one-half of their regular rate of pay for any hours worked over 40 in a week, instead of at time and one-half that they would otherwise would have to pay. The “regular rate” is determined by dividing the employee’s weekly salary by the total number of hours worked in the week. Because an employee’s hours vary from week to week, so does the “regular rate.” Although an employee’s overtime rate decreases with each hour worked, the fluctuating workweek provides predictability for both the employer and employee.

However, recent action by the Wage and Hour Division of the U.S. Department of Labor (Division) calls into question whether this model can work for employers who also pay their employees bonuses. In comments to the final rule issued by the Division clearing up issues in the regulations relating to various wage-hour issues, the Division rejected language regarding the fluctuating workweek method of payment that would have stated that, in addition to the fixed salary, an employee also could be paid bonuses without invalidating the fluctuating workweek pay method.

The Division stated that “bonus and premium payments ... are incompatible with the fluctuating workweek method of computing overtime” and, while it acknowledged that bonus payments benefit employees, the Division 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 position may render the fluctuating workweek model invalid for employers who also pay bonuses or other premiums. Under the Division’s interpretation, payment of such bonus or premium amounts would eliminate an employer’s ability to use the fluctuating workweek method, meaning the employer will have to calculate the overtime rate based on 40 hours and a time-and-one-half overtime rate. The revised regulations took effect on May 5, 2011. Until this issue is clarified by the courts or by the Division, employers should refrain from paying bonuses to employees paid according to the fluctuating workweek model.