The Fair Labor Standards Act allows employers to pay non-exempt employees whose hours vary under a pay method that can reduce the impact of unpredictable working time. Under the fluctuating workweek (FWW) method, employees are paid a guaranteed salary for all hours worked in a given workweek. They are then paid a half-time overtime premium (as opposed to standard time and one-half overtime) for hours worked over 40, with the premium based on a regular rate determined by dividing the weekly salary by total hours worked.

A major obstacle to use of FWW has been the U.S. Department of Labor’s position that the guaranteed salary cannot include bonuses or other incentive compensation. On Wednesday, DOL reversed this position, adopting final regulations that permit use of bonuses, shift premiums, and other incentive compensation to employees paid under the FWW method. The rule requires that such incentives be added to the guaranteed weekly salary for purposes of determining the weekly regular rate.

The FWW system is not suited for all employees. In the new rules, DOL makes clear that the employee’s hours must actually vary, although they do not need to drop below 40 hours in some weeks. In addition, employees must be given a clear understanding of how the pay method works. If the employee works any time in a workweek, the full salary is guaranteed. The regular rate must be recalculated on a weekly basis, which imposes additional burdens on payroll functions.

Employers with non-exempt employees who work unpredictable hours should review the FWW pay method to see if it makes sense for their business. When properly used, it provides employees with predictable income while reducing overtime costs for employers.