As litigation and administrative investigations of misclassification of employees for overtime purposes have grown, employers have increasingly turned to alternative methods of pay intended to reduce their overtime obligations. The most popular of these alternatives is the fluctuating workweek method. In return for a guaranteed weekly salary, the employee receives a half-time overtime premium which is calculated based on the number of hours worked in each workweek. When compared to the standard time and one-half overtime premium, fluctuating workweek can reduce overtime obligations by two-thirds or more.

However, employers using the fluctuating workweek method have faced significant risks if they attempted to pair the fixed weekly salary with an incentive bonus or commission payment. The Department of Labor’s fluctuating workweek regulations do not discuss payment of these additional amounts.  In 2008, DOL proposed changes to these rules that would have made clear that such additional payments do not interfere with the use of the fluctuating workweek pay method.

In 2011 after the change in administrations, DOL issued a memorandum withdrawing these amendments, signaling to employers its position that such additional payments are inconsistent with fluctuating workweek. Since this withdrawal, several federal district courts have reviewed whether payment of incentive bonuses eliminates the use of fluctuating workweek. The most prominent two cases challenged RadioShack’s pay plan, but the courts reached opposite conclusions. An Ohio district court said that the bonuses violated the fluctuating workweek rules, while a New York district court found that the bonus payments did not preclude use of the alternative pay method.

Both cases were appealed to the respective federal appellate courts, but RadioShack’s intervening financial problems precluded any decisions. DOL did not submit briefs in either case, and the agency has not been particularly aggressive about pursuing claims for overtime based on incentive bonus payments to employees compensated through fluctuating workweek.

Last month, the First Circuit Court of Appeals became the first federal appellate court to weigh in on this question. In Lalli v. General Nutrition Ctrs., Inc., GNC managers on fluctuating workweek received incentive sales commissions in addition to their fixed weekly salary. The plaintiff claimed that this method violated fluctuating workweek rules because the weekly salary varied based on the amount of the commission earnings.

The First Circuit rejected this argument, drawing a distinction between incentives based on performance and those based on additional hours worked. The court found that the latter bonus method would violate fluctuating workweek because it would cause the salary for weekly time worked to vary. However, an incentive payment not tied to working time does not change the fixed salary, it simply provides additional compensation to the employee. The First Circuit read the 2011 DOL action to only impact bonuses or commissions tied to working hours.

The court noted that GNC calculated the half-time overtime premium paid each week based on payment of the salary plus commissions, as would be the case for non-exempt employees paid under standard pay practices. The First Circuit’s blessing of this calculation differs from the New York district court, which stated that such attempt would violate the DOL rules.

Until other appellate courts weigh in on this issue, the question of combining incentive payments with fluctuating workweek remains uncertain. However, the First Circuit’s blessing of this method gives employers a credible basis for combining fluctuating workweek with a commission or incentive bonus structure tied to production and not time worked.