Note – This post has been updated to correct a calculation error noted below.

The impending increase in the minimum salary for the executive, administrative and professional exemptions under the FLSA has many employers looking for ways to manage overtime costs for newly-reclassified employees. As part of that search, you might have heard of this idea called the “fluctuating workweek method” for calculating overtime as one alternative that can yield major savings. So what is this method, and how does it work?

Fixed vs. Fluctuating Workweek Methods for Calculating Overtime

The basic idea is pretty simple. Under the FLSA, employers are free to pay non-exempt employees a flat salary, as long as that salary is sufficient to provide employees at least the minimum wage for all hours worked every workweek, and so long as employers pay overtime at 1.5 times the employee’s “regular rate” of pay for all hours worked in excess of 40 in a single workweek.

In order to pay overtime for a salaried employee, an employer has to convert the salary to an hourly rate, and then pay the employee 1.5 times that rate for any overtime hours. Say an employee is paid $1000 per week. If that salary is intended to cover a fixed number of hours each week – say, 35, the math is simple. Divide the salary by 35, and there’s your hourly rate – $28.57 per hour. The overtime rate is $42.86. If the employee works 42 hours, you pay $1000 (for the first 35 hours), plus five hours at $28.57 per hour ($142.85), plus two hours at  $42.86 ($85.72), for a total of $1228.57.

But what if, instead of a fixed number of hours, you reach a clear mutual understanding with your employee that the salary covers straight-time pay for all hours that the employee works during each workweek, no matter how many or how few? If the employee works 20 hours, they get $1000. If they work 50 hours, they get $1000. Because the number of hours covered by the salary varies from week to week, the employee’s regular rate also varies from week to week. In a 42-hour week, the regular rate is $1000÷42, or $23.81. In a 50-hour week, the regular rate is $1000÷10, or $20.00. The more hours worked, the lower the rate. That sounds pretty good from the employer perspective, but it gets better. Because the salary is deemed to cover the employee’s straight-time wages for all hours worked, no additional pay is due for the “time” part of the “time and a half” overtime premium. The employer only pays the “half.” So, for our 42-hour workweek example, the employee would get the $1000 salary, plus a half-time overtime premium for 2 overtime hours at a rate of $23.81  $11.91 per hour, totaling $47.62 $23.81. The total due for the week would thus be $1047.62 $1023.81 – a savings of $180.95 $204.76.

Sounds pretty great, right? So why don’t all employers do this for all non-exempt employees? Naturally, there’s no such thing as a free lunch.

Catch No. 1 – Fixed Salary Means Fixed Salary

If you want to pay employees a fixed salary for working a fluctuating workweek, the salary actually has to be fixed. You know how, with exempt employees, you can dock their salary if they are absent after they’ve exhausted vacation or sick leave? Not allowed for non-exempt employees paid on a fluctuating workweek basis. If you want to use this method, it means paying employees their full salary for every workweek in which they perform any work, even if it’s just one day or even one hour.

You also can’t get around this requirement by creating attendance bonuses or creating other time-based incentives for employees to show up for work. Indeed, the Department of Labor’s commentary in final rules issued on April 5, 2011 suggests that paying any compensation to an employee in addition to the flat weekly salary can preclude use of the fluctuating workweek method. The DOL’s commentary does not carry the force of law, and there is some debate in the courts as to whether incentives based on factors other than additional work hours – such as bonuses based on financial performance or sales commissions – prevent use of this method. However, employers who don’t want to take their chances in litigation with the DOL on this issue should think carefully before mixing the fluctuating workweek method for calculating overtime with any other form of compensation.

Catch No. 2 – Fluctuating Means Fluctuating

Notice that the method is called the “fluctuating workweek” method. If you have an employee who always works a fixed 42-hour schedule, with no variation in hours from week to week, this method can’t be used. According to the U.S. Department of Labor, not only do hours have to fluctuate, but they have to fluctuate both above and below 40 hours per week. So if the employee’s schedule bounces between 41 and 45 hours per week, but they never have a week below 40 hours, you’re playing with fire if you use this method.

Note that the regulation does not say how frequently or to what degree an employee’s schedule needs to fluctuate. Taking a day off here and there probably isn’t enough. To be safe, employers should use this method only with employees whose actual work schedules vary. The variance need not be daily or every week- for example, an employee might work longer hours during a regular “busy” season, and shorter hours the rest of the year.

Catch No. 3 – The DOL Doesn’t Like It

The DOL makes it clear in its commentary in the 2011 final rules that it views the fluctuating workweek method with some suspicion, because the method “results in a regular rate that diminishes as the workweek increases, which may create an incentive to require employees to work long hours.” Consequently, employers who use this method should not expect the DOL to cut them any breaks in the way it applies the rules. While the proper construction of the FLSA is ultimately up to the courts, it is still usually wise for employers to avoid taking actions that put them at odds with the DOL’s views of the law.

Catch No. 4 – Check Your State Law

While federal law allows employers to use the fluctuating workweek method, the same may not be true in your state. California, for example, does not recognize this method for calculating overtime. Check with your employment counsel before adopting a fluctuating workweek calculation for overtime to make sure it is permitted in all states where you operate.