On January 12, 2024, the U.S. 10th Circuit Court of Appeals (whose rulings apply to employers in Colorado, New Mexico, Utah, and Wyoming, as well as two other states not included in Mountain West Employment Law Letter) asked the Colorado Supreme Court to clarify whether holiday incentive pay must be included when calculating an employee’s regular pay rate under Colorado law. On September 9, the Colorado Supreme Court responded: Yes, it must be included.
Regular Pay Rate
Employees who work more than 40 hours per week must receive overtime pay at a rate that is 1.5 times their regular pay rate. Some states also have daily overtime requirements. For example, in Colorado, employees who work more than 12 hours per workday or 12 consecutive hours must also receive overtime pay at 1.5 times their regular pay rate.
Importantly, the regular pay rate isn’t the same as the base hourly rate. The regular pay rate is a calculation that incorporates nonovertime compensation received for work performed during a workweek.
For many reasons, calculating the regular pay rate is complicated. One complication arises because federal requirements can differ from state requirements. The federal Fair Labor Standards Act (FLSA) sets minimum requirements upon which states can set their own more stringent requirements. So, employers must ensure their regular pay rate calculations comply with both federal and state requirements.
Facts
Dan Hamilton worked for a Colorado employer. His employer offered him holiday pay at his base hourly rate, even when he didn’t work on a company holiday. If he worked on a company holiday, he received holiday pay and holiday incentive pay. The holiday incentive pay was 1.5 times his base hourly rate.
In three instances, Hamilton earned holiday incentive pay in the same workweek that he worked overtime. In those three instances, his employer did not include the holiday incentive pay in its calculation of his regular pay rate.
Hamilton filed a class action lawsuit, alleging his employer violated the Colorado Wage Act because it didn’t include his holiday incentive pay in its regular pay rate calculation.
Relevant Colorado and FLSA Requirements
The current Colorado Overtime Minimum Pay Standards Order (COMPS Order) states that the regular pay rate calculation should include “all compensation paid to an employee,” such as hourly rates, shift differentials, nondiscretionary bonuses, and commissions. It also states that payments for non-work hours, such as business expenses, gifts, vacation pay, and holiday pay, can be excluded from the regular pay rate calculation.
The FLSA also states what must be included in the regular pay rate calculation. It also has exceptions. Relevant to Hamilton’s lawsuit is an exception that can apply when employees work on “special days.” We don’t have space to detail the exception here, but, in general, the exception allows an employer to pay a premium of at least 1.5 times an employee’s base hourly rate when they work on a qualifying “special day.” When the employer does so, it doesn’t need to include the premium pay in the regular pay rate calculation.
Colorado’s Requirements Apply, Not the FLSA Exception
In Hamilton’s lawsuit, the employer argued that the FLSA exception should apply: It paid him at the “premium” of 1.5 times his base hourly rate, and he performed work on a “special” company holiday.
But the Colorado Supreme Court determined that the COMPS Order applied, not the FLSA exception. The COMPS Order requires all compensation to be included in the regular pay rate calculation. Because the holiday incentive pay was for time worked, it qualified as compensation that must be included in the calculation.
Additionally, the holiday incentive pay is a shift differential—or a higher wage paid to an employee for working undesirable hours, like company holidays—and the COMPS Order specifically states that shift differentials must be included in the regular pay rate calculation.
Finally, although the FLSA provides an exception for “special day” premium payments, Colorado has no similar exception. Thus, the FLSA exception doesn’t apply under Colorado law.
Takeaway
The obvious takeaway is that the FLSA’s “special day” exception doesn’t apply under Colorado law, and Colorado employers that rely on the exception should immediately review their pay practices.
But there are two other important takeaways. First, a wage and hour practice can be proper under federal law but be improper under state or local law. When implementing pay practices, be sure your company complies with all relevant requirements.
Second, calculating the regular pay rate is complicated, and it’s a good practice to regularly review your pay practices with counsel. Just one small misclassification can create an expensive class action lawsuit. After all, Hamilton filed his lawsuit based on overtime underpayments during just three workweeks.
Steven Eheart is an attorney with Holland & Hart LLP in Denver and can be reached at sdeheart@hollandhart.com.