With the Department of Labor’s recent changes to the salary threshold for white-collar exemptions set to take effect on December 1, 2016, many employers are struggling to find the best option for how to comply with the new regulations without breaking the bank. One lesser-known alternative that is receiving increased attention from many companies is the fluctuating workweek method of payment for non-exempt employees.

As the name suggests, under this method, a non-exempt employee receives a fixed weekly salary regardless of hours worked. In weeks in which work exceeds 40 hours, the employee will receive an extra .5 times (rather than 1.5 times) their regular rate for overtime hours (and note that this hourly rate therefore fluctuates depending on the hours worked in any given week). The fluctuating workweek method may be a terrific solution for employers in certain situations (and only in states where it is legal) but it is also full of risk and challenges in its application.

In general, an employer may pay a non-exempt employee according to the fluctuating workweek method if: (1) the employee’s hours fluctuate for week to week; (2) the employee receives a fixed salary that does not vary with the number of hours worked (with the exception of overtime premiums); (3) the fixed weekly amount must always be equal to, or exceed, the applicable minimum wage; and (4) a clear mutual understanding between the employer and employee must exist regarding this method of payment. See 29 C.F.R. § 778.114. Those criteria may sound straightforward, but in practice, they are far from it. If an employer chooses to pay bonuses to employees, some bonuses may negate the finding that the employee truly receives a fixed weekly salary. RadioShack recently agreed to pay up to $41 million to class members in order to settle an overtime claim with its managers dating back to 2012, wherein the claimants alleged that the fluctuating workweek method of pay should not have been used because the performance-based bonuses invalidated this method.

Administration of the fluctuating workweek can be challenging in other ways. With very few exceptions, employers must pay employees their full salary even in workweeks in which the employee does not work 40 hours. In addition, employers must have safeguards in place to ensure that the employee’s hourly rate never falls below applicable minimum wage, including in a week where considerable overtime is worked. For example, if an employer agrees to pay an employee a $360 salary per week under the fluctuating workweek, but the employee works 60 hours in a week, the employer owes them an extra $60 for the extra 20 hours of work. However, the employee’s total compensation of $420 for 60 hours is below the federal minimum wage (and well below applicable wage laws in some states and cities).

Despite these challenges, the fluctuating workweek method of overtime pay can be beneficial to both employees and employers: (1) it provides employees a greater degree of consistency by guaranteeing them a minimum salary; (2) it can reduce some of the financial woes experienced by employers that come with hefty overtime payouts.

Whether the fluctuating workweek is appropriate depends on several factors, including: the nature of the positions; the hours of work; the employee population; and the employer’s ability to administer the practice. .While it is certainly not the best solution in all cases (especially for employers with operations in many different states or cities with different wage laws), it does provide employers an alternative method for complying with overtime requirements that may help reduce the related increase in labor costs. A final word of warning: the cost of litigation if this method is misused will far exceed any potential benefits, so we encourage you to consult the with wage-law experts at Jackson Lewis to discuss whether this solution might work for your company, and how it can be implemented in a way that minimizes risk.