The “regular rate of pay,” an often-misunderstood legal term of art, can be a thorn in the side of employers when calculating how to pay non-exempt hourly employees. These employees must be paid an overtime rate of at least one and a half times their regular rate of pay. Issues can arise when, in addition to their hourly wages, non-exempt hourly employees receive compensation that can change their regular rate of pay, and thus their overtime rate of pay, on a weekly basis. In some states, such as California, the regular rate of pay is also used when paying meal and rest break premiums, paid sick leave and reporting time pay.
When compensating employees beyond their hourly wage, employers should be sure to analyze whether to include or exclude the additional compensation in the regular rate of pay. For example, if an employee is paid a $2/hour premium (or shift differential) to work a night shift, that premium should be factored into the regular rate of pay. This analysis should be done under federal law (i.e., the Fair Labor Standards Act) as well as state law.
In addition, the calculation of the regular rate of pay should be done on a weekly basis when additional compensation covers that workweek as it is a function of how many hours the employee has worked that week. When additional compensation, such as a nondiscretionary bonus, covers more than one workweek and is paid out later once calculable, the regular hourly rate can exclude the bonus for purposes of payment of current wages. Then, once the compensation (e.g., a bonus) amount is ascertainable, it must be apportioned back over the period(s) in which it was earned. If an employee worked overtime in any of the workweeks in which the compensation was earned, the employee must receive a retroactive payment of an overtime premium on the additional compensation.[1]
What Should Be Included
Generally, compensation for hours worked should be included in the regular rate of pay. This includes:
- Fair value of lodging if furnished to the employee and regarded as part of wages
- Commissions
- Nondiscretionary bonuses (unless calculated as a percentage of all wages)
- Production bonuses
- Safety bonuses
- Shift differentials
- Certain types of per diem payments when they operate more as compensation rather than reimbursement
- Cash-in-lieu of benefit payments
- Supplemental wages when a disabled worker is working a lower wage job than prior to the disability
What Can Be Excluded
Not all additional forms of pay or compensation must be included in the regular rate of pay. There are generally these statutory exclusions under the FLSA,[2] which were clarified in December 2019 when the U.S. Department of Labor issued its final rule[3]:
- Gifts or payments made as gifts at Christmas time or on special occasions when the amounts are not tied to the employee’s hours worked, production or efficiency
- Payments for not working, such as paid time off, vacation pay, sick pay, holiday pay; this includes payouts of unused PTO at the end of employment
- Reimbursement for reasonable business expenses (such as supplies, cell phone plans, membership dues in professional organizations) that is not tied to hours worked or treated as part of compensation
- Discretionary bonuses: both the existence of and the amount of the bonus are determined at the sole discretion of the employer and not promised or agreed to in advance
- Contributions made to bona fide benefit plans (such as retirement accounts that meet the requirements) or for similar employee benefit plans that meet the requirements
- Some perks such as on-site massage therapists or gym memberships, wellness programs
- Tuition payments
- Discounts on employer-provided goods and services
- Reporting or show up pay if sporadic
- Call back pay if unexpected and not prearranged
- Predictive scheduling pay if not prearranged: pay due from a change in schedule without sufficient notice (as stated by laws requiring predictive scheduling pay)
- “Clopening” pay if not prearranged: pay due to an employee who is called back to work without a specified number of hours between shifts
- Payments made pursuant to a bona fide profit-sharing plan or trust, or bona fide thrift or savings plan
It is important to analyze each additional form of compensation under both federal and state law and employers should consult legal counsel to ensure that their compensation policies and calculations comply with applicable law.
[1] 29 C.F.R. § 778.209(a).
[2] 29 C.F.R. § 778.200.
[3] 84 FR 6873, available at https://www.federalregister.gov/documents/2019/12/16/2019-26447/regular-rate-under-the-fair-labor-standards-act.
