Last Monday, the U.S. Department of Labor’s Wage and Hour Division issued proposed regulations that would clarify employers’ use of incentive pay under the fluctuating workweek (FWW) pay method. FWW is an alternative pay plan used with employees who are subject to the FLSA’s overtime rules but whose hours vary from week to week. In return for a guaranteed salary, the employees receive a half-time overtime premium for hours worked over 40 in a given workweek. The overtime rate fluctuates based on the total number of hours worked that week. FWW is popular among employers with highly compensated non-exempt employees such as technicians because it can reduce overtime obligations by two-thirds or more in comparison to traditional time and one-half overtime.

In 2011, DOL reversed its previous position, explaining that employers using FWW could not pay incentive or bonus pay on top of the guaranteed salary. The First Circuit Court of Appeals agreed with this position, while a number of federal district courts took the opposite view or distinguished among types of incentive pay that could be used with the FWW method. Given that most workplaces routinely use bonus or incentive pay to motivate workers, excluding such pay from FWW limited its attractiveness for many companies.

Under the new DOL proposal, all types of incentive pay and bonuses are considered compatible with FWW. Unless otherwise excludable under the FLSA, the incentive pay must be added to the guaranteed salary when determining the half-time overtime rate. If the incentive pay is not determined as of pay day, the employer would need to adjust the overtime premium once this amount is known.

FWW is not the best choice for all employers. The employee’s hours must actually fluctuate, and the salary is guaranteed if the employee works any time during the week. Calculating the half-time overtime premium can be a chore for payroll personnel, especially if retroactive bonus premiums are included. However, if finalized, these rules will make FWW a more attractive option for many employers looking to manage overtime costs, while appropriately incentivizing workers. DOL is accepting comments on the proposed rules through December 4.