In October 2018, the Trump administration unveiled its Fall 2018 Unified Agenda of Regulatory and Deregulatory Actions. The agenda emphasizes regulatory restraint and underscores the administration’s commitment to a more business-friendly regulatory framework, noting that “in general, the [U.S. Department of Labor (DOL)] will work to assist employees and employers to meet their needs in a helpful manner, with a minimum of rulemaking.” In line with that commitment is a Notice of Proposed Rulemaking (NPRM) indicating a forthcoming change to how employers should determine employees’ “regular rate of pay” in order to calculate overtime.
Specifically, the NPRM states that “the [DOL] will propose to amend 29 CFR part 778, [of the Fair Labor Standards Act (FLSA)] to clarify, update, and define regular rate requirements under section 7(e)(2) of the Act.” However, the specific details of the proposed change haven’t been provided. Because promulgation of the proposed rule isn’t expected until at least March 2019 and actual implementation of the rule will likely take a year, it’s important for employers to remain in compliance with the laws as they’re currently written. Let’s take a closer look at how you should be calculating employees’ regular rate for overtime purposes.
What Is the Regular Rate?
The FLSA requires that covered nonexempt employees in the United States be paid at least the federal minimum wage for each hour they work and receive overtime pay at 1½ times their “regular rate of pay” for all hours worked over 40 in a workweek. However, too often, employers interpret the FLSA to mean that overtime should be paid at 1½ times the employee’s hourly rate. Although that’s often the case, it isn’t always the case because an employee’s hourly pay may not be her regular rate of pay. Determining an employee’s regular rate of pay and overtime pay isn’t always simple.
The law states that the regular rate of pay includes “all remuneration for employment paid to, or on behalf of, the employee,” except certain payments that are specified under the FLSA. The regular rate of pay is determined by dividing the employee’s total remuneration for employment in any workweek, except pay that is statutorily excluded, by the total number of hours he worked in that week. It’s the requirement to use total remuneration minus exclusions that causes the most mistakes. Let’s take a look at several common pitfalls that should be avoided when calculating an employee’s regular rate of pay and overtime pay.
Regular Rate Must Include Nondiscretionary Bonuses or Commissions
For purposes of calculating overtime pay, Section 7(e) of the FLSA, the section identified for amendment in the recent NPRM, provides that nondiscretionary bonuses must be included in employees’ regular rate of pay. Nondiscretionary bonuses include bonuses that are meant to encourage employees to work more steadily, rapidly, or efficiently, as well as bonuses designed to encourage employees to remain with the company. If pay is based on performance, it must be considered when calculating the regular rate of pay. That includes pay used to incentivize job performance, quality, or accuracy. Such outcome-based incentives include bonuses, commissions, and even noncash gifts like movie tickets to reward good work.
Consider the following hypothetical provided by the DOL in which an intermediate care facility for the disabled pays its employees on a biweekly basis. If employees work all the hours they are scheduled to work in a pay period, they are given a $100 bonus. When an employee works overtime, the bonus must be included in her regular rate of pay for overtime purposes.
To compute the employee’s regular rate under the 40-hour overtime standard, the employer must add half the biweekly bonus ($50) to her earnings for that week (i.e., her hourly rate multiplied by the total hours she worked). The resulting amount is then divided by the total number of hours she worked during that week to determine her regular rate. An employee paid biweekly at a rate of $12 per hour plus a $100 attendance bonus who works 56 hours per week would be owed overtime pay as follows:
| Week 1 | Sunday | Monday | Tuesday | Wednesday | Thursday | Friday | Saturday |
| Hours Worked | 8 | 8 | 8 | 8 | 8 | 8 | 8 |
| Week 2 | Sunday | Monday | Tuesday | Wednesday | Thursday | Friday | Saturday |
| Hours Worked | 8 | 8 | 8 | 8 | 8 | 8 | 8 |
- $100 (biweekly attendance bonus) ÷ 2 = $50 (weekly bonus equivalent)
- 56 hours worked × $12/hour + $50 (weekly bonus equivalent) = $722 (total straight-time compensation)
- $722 (total straight-time compensation) ÷ 56 hours worked = $12.89 (regular rate)
- $12.89 (regular rate) × ½ = $6.45 (half-time premium)
- $12.89 (regular rate) + $6.45 (half-time premium) = $19.34 (overtime rate)
- 40 (straight-time hours) × $12.89 (regular rate) = $515.60 (straight-time earnings)
- 16 (overtime hours) × $19.34 (overtime rate) = $309.44 (overtime earnings)
Total earnings for week 1: $825.04
Total earnings for week 2: $825.04
Total earnings for biweekly period: $1,650.08
Conversely, the FLSA provides that a bonus should not be included when calculating the regular rate of pay if “the bonus remains completely within the employer’s discretion, which the employer exercises close to the end of the period for which the bonus is paid, and is in no way required by any contract, agreement, or promise such that employees may expect the bonus.” Thus, an end-of-the-year discretionary bonus likely shouldn’t be included when calculating an employee’s regular rate of pay unless you have told employees that you give bonuses. (Think about the promise of an end-of-the-year Christmas bonus announced to newly hired employees as a recruiting tool, which would be a nondiscretionary bonus that has to be included when calculating the regular rate.)
Other excluded bonuses include sums paid as gifts, payments made for occasional periods when no work is performed, reimbursements for traveling expenses, profit-sharing payments, payments made for employee benefits, additional compensation for hours worked beyond a specified number in a day/week or outside the normal workday/workweek, premium compensation for work on weekends or holidays, and income derived from qualifying stock transactions.
In sum, discretionary bonuses and gifts are generally payments that an employee doesn’t have reason to expect and that are made at the sole discretion of the employer in recognition of services provided by the employee. They must be both discretionary in fact of payment (i.e., there is no expectation/no promise) and discretionary in amount (i.e., there is no set formula for how the amount will be determined). If payments meet those criteria, they shouldn’t be included in overtime calculations.
Base Rate Set in Contract Isn’t Necessarily Employee’s Regular Rate
The regular rate of pay also cannot be left to a contract between the parties in which the employee’s regular rate is predetermined. It must be drawn from what actually happened (as we explained above). The U.S. Supreme Court has described the regular rate of pay as the hourly rate actually paid to an employee for the normal (non-overtime) workweek for which he is employed. However, employers often set a base rate or “regular rate” in their collective bargaining agreements, which can be problematic if it is used as the regular rate of pay for purposes of calculating overtime.
Employers and employees are not free to define or agree upon the employee’s regular rate of pay. Instead, you must determine the regular rate of pay in accordance with the FLSA by dividing the employee’s total remuneration for employment in any workweek, with the exception of specified exclusions, by the total number of hours he worked that week.
Accurately Determining the Workweek
Finally, the FLSA’s overtime requirements are based on a single workweek, not an employee’s pay period. To calculate overtime owed to an employee for a particular workweek, you must accurately determine the workweek. The FLSA doesn’t permit averaging of hours over two or more weeks (except for certain exclusions).
For example, if an employee worked 30 hours one week and 50 hours the next, he must receive overtime pay for the overtime he worked beyond the applicable maximum in the second week even though he worked an average of 40 hours for the two weeks. That’s true regardless of whether the employee works a standard or swing-shift schedule or whether he is paid on a daily, weekly, biweekly, monthly, or some other basis.
An employee’s workweek is a fixed and regularly recurring period of seven consecutive 24-hour periods for a total of 168 hours. There’s no requirement that the workweek coincide with a calendar week—it may begin on any day and at any hour of the day. You can establish different workweeks for different employees or groups of employees. However, any change in an employee’s workweek must be intended to be permanent and not designed to evade the FLSA’s overtime requirements.
Takeaway
While we don’t know exactly how the Trump administration might change the calculation of the regular rate of pay for overtime purposes, we hope, for employers’ sake, that the changes provide more clarification and simplify the determination of discretionary versus nondiscretionary payments or do away with that determination altogether by specifically identifying which payments must be included and which may be excluded. Until then, follow the current regulations and seek legal counsel if you’re uncertain. Failure to comply with the FLSA can result in DOL audits, lawsuits, and a good bit of money owed in back pay and penalties.
Martin J. Regimbal is a Shareholder with The Kullman Firm and an Editor of Mississippi Employment Law Letter. He can be reached at mjr@kullmanlaw.com.
Stephen Clement contributed to this article.