Under a “fluctuating hours” plan, the regular rate used to calculate overtime premiums goes down as an employee’s weekly hours increase. Moreover, employers need only add an additional half time to what workers’ regular pay, not time and one half.

Basic to this plan is that employees receive a fixed straight-time wage, in essence a salary, regardless of the number of hours they work. In addition to this fixed wage, they must receive an additional half-time premium for hours worked beyond 40 in a workweek. The reason it is half time, and not time and one half, is because the straight-time portion of the wage already is included.

As hours climb, rate declines. In addition, the regular rate used to calculate the half-time premium is based on all hours worked during a week, not just the first 40. Divide the fixed wage by the total number of hours. If the fixed weekly wage is $500 and an employee works 45 hours, the regular rate is $11.12. If the employee works 50 hours, the regular rate is only $10. The longer the employee works, the lower the hourly premium rate becomes.

The regular rate cannot dip below the minimum wage, however. An employer must bring the rate up to the minimum and base the overtime premium on that level. Be aware that, not only may the federal minimum wage go up, but many states already mandate a higher standard.

Know rules and trade-offs. As is the case for hourly employees or under other pay plans, the pay period can be longer than a week. However, the employer and the employees must have a mutual understanding in advance that regular pay will not vary with the number of hours. It is best to put this understanding in writing to avoid later disputes. Employers also should make sure employees understand the plan, including how overtime is calculated.

There are a couple of trade-offs for using this type of plan. First, employees must be paid their full salary, even if their workweek is reduced because of lack of work. Second, employers cannot exclude paid leave from the regular-rate calculations as they can under normal computation methods. Employers can deduct for willful absences or tardiness, but only after the regular rate has been determined.

Source: CCH Wage & Hour Compliance Guide