Many employers rely on the fluctuating workweek (FWW) method to reduce their overtime obligations. FWW allows employers to pay a fixed salary and a half-time overtime premium to employees whose working hours significantly vary from week-to-week. This method is especially popular for service technicians and similar highly compensated nonexempt employees, whose working and travel schedules would result in extraordinary overtime liability if calculated at the standard time-and-one-half rate. Last month, the Fifth Circuit Court of Appeals disallowed use of this payment method where employees received a form of incentive pay in addition to the guaranteed salary.

In Dacar v. Saybolt, the employer paid offshore oil and gas inspectors using the FWW method. The employer also provided additional pay to inspectors who agreed to work holidays or less desirable assignments. This incentive pay was then included in the employees’ weekly compensation for purposes of calculating the half-time overtime premium. Several employees sued, claiming that use of the incentive pay disqualified those employees from payment under the FWW method. The Fifth Circuit agreed, affirming a judgment for the plaintiffs that required the employer to pay overtime for the prior two years calculated at time-and-one-half their regular rate of pay.

The court noted the plain language in the FWW rule that requires that employees be paid a fixed salary. The U.S. Department of Labor has changed its position on this issue a number of times over the years, but it now takes the position that incentive pay disqualifies employers from using the FWW method. The Fifth Circuit agreed, noting similar interpretations from the First Circuit and several federal district courts. Other district courts have issued contrary opinions, but with two federal appellate circuits now agreeing with DOL, employers that use FWW run serious liability risks if they mix this payment method with bonuses, commissions, or other forms of incentive compensation.

Given the widespread use of incentive pay across industries and jobs, this decision significantly limits the usefulness of FWW as an alternative to full overtime pay. Many employers may view their inability to incentivize employee performance through additional pay as an impediment to hiring, retention, and management. Employers using FWW may still be able to provide discretionary bonuses to these employees, but as this decision makes clear, any use of incentive pay will risk loss of the FWW method’s overtime reduction benefit.