The fluctuating workweek method is a way of computing overtime pay for a nonexempt employee — one not exempted from the Act's minimum wage and overtime requirements. It is not a path to exempt status, and not the salary-basis analysis covered in Chapter 5, which governs a different question entirely. Here the employee is already owed overtime; the method simply changes how the regular rate and the overtime premium are calculated for someone paid a fixed weekly salary even though their hours move up and down from week to week. An employer may use it only when every one of five conditions is met, and the regulation treats them as a set — missing any one takes the method off the table. Meeting the five federal conditions is not the end of the inquiry: § 778.5 provides that other applicable state and local wage laws are not overridden or nullified by the Act, and that compliance with such other law does not excuse noncompliance with the Act. An employer should therefore also consider whether state or local law restricts or prohibits use of the fluctuating workweek method before adopting it.

The five conditions are cumulative. First, the employee's hours must fluctuate from week to week. Second, the salary must be fixed: the same dollar amount whether the workweek runs long or short, with no adjustment tied to hours worked. Third, that fixed amount has to be large enough that, even in the employee's highest-hour week, it still works out to at least the minimum wage for every hour worked. Fourth, the employer and employee need a clear and mutual understanding that the fixed salary compensates all hours worked that week, with overtime premiums, bonuses, commissions, hazard pay, and other additional pay added on top of — not covered by — that salary; this understanding does not have to extend to the specific method used to calculate overtime pay. Fifth, the employee still has to receive genuine overtime pay on top of the salary: not less than half of the week's regular rate for every overtime hour.

That last condition drives the arithmetic. Under § 778.114(a)(5), the workweek's regular rate is one combined division: the fixed salary plus any bonuses, commissions, hazard pay, or other additional pay not excludable under section 7(e)(1) through (8) is added together first, and that combined total is divided, in a single step, by the hours actually worked that week — not a base hourly rate computed from the salary alone and adjusted afterward. A longer week produces a lower regular rate, and so a smaller half-time add-on, since the straight-time portion of every hour worked has already been paid by that combined total. Inclusion of bonuses, commissions, and hazard pay in this division is the default under § 778.200(c) unless the Act specifically excludes them — the exclusions cover items such as a true discretionary bonus (one where both the fact that it will be paid and its amount are decided by the employer, at its sole discretion, at or near the end of the period the bonus covers, and not under any prior contract, agreement, or promise that leads the employee to expect it regularly), a gift, or a genuine overtime premium. These are the eight statutory exclusions at section 7(e)(1) through (8), set out in § 778.200(a) and summarized in § 778.1(b). An employer may also take an occasional disciplinary deduction from the salary for willful absence, tardiness, or a major work-rule violation, but only if the deduction never cuts the pay below the minimum wage or overtime the Act requires.