Calculating Regular Rate of Pay: FLSA Overtime

Calculating overtime pay is not always easy. Although the Fair Labor Standards Act (“FLSA”) generally requires that non-exempt employees receive overtime compensation at time and one-half their “regular rate” of pay for all hours worked over 40 in a workweek, the question remains; what is an employee’s regular rate of pay? Is it merely their hourly rate as some employers think, or is it something different? An employee’s regular rate of pay includes all remuneration for employment in a workweek, subject to certain exceptions, divided by their total hours worked during the week. Payments excluded from the regular rate computation include:

Gifts.

Sums paid as gifts for holidays or on other special occasions as a reward for service. To qualify, the payment may not be measured by, or depend on, hours worked, production, or efficiency.

Compensation for occasional periods when no work is performed.

This includes payments due to vacation, holiday, illness, an employer’s failure to provide enough work, or other similar cause. Therefore, if a non-exempt employee takes a paid sick day or a paid holiday, the compensation for that day need not be included in their regular rate of pay for the week.

Expenses.

Reasonable payments for out-of-pocket expenses an employee incurs while furthering the employer’s interest such as travel expenses, uniform expenses, and payments for supplies.

Discretionary bonuses.

Although most bonuses must be included in an employee’s regular rate of pay, an exception is for bonuses paid within the employer’s sole discretion at or near the end of the period covered by the bonus. A bonus is not discretionary if it is paid pursuant to an agreement, or if the employee has other reasons to expect it.

Profit sharing.

Contributions by the employer in keeping with a bona fide profit-sharing plan, thrift, and savings plan.

Benefits.

Payments irrevocably made by an employer to a third person or trustee under a bona fide plan for providing old-age, retirement, life, accident, health insurance, or similar benefits to employees.

Premium pay.

Extra compensation paid for exceeding eight hours in a workday, 40 hours in a workweek, or exceeding the employee’s normal or regular working hours.

Weekend or holiday pay.

Extra pay for working on Saturdays, Sundays, holidays, or regular rest days, or on the sixth or seventh day of the workweek, where the premium rate is not less than one and one-half times the rate established in good faith for work performed in nonovertime hours on other days.

Employment contract/collective bargaining agreement premiums.

Additional pay provided under an employment contract or collective bargaining agreement for work outside the established hours of the regular workday (not exceeding eight hours) or workweek (not exceeding 40 hours), where the premium rate is not less than one and one-half times the good faith rate established by the contract or agreement for like work performed during the workday or workweek.

Income derived from qualifying stock transactions.

Any value or income derived from employer-provided grants or rights through a stock option, stock appreciation right, or bona fide employee stock purchase program that meet certain criteria.

Stay compliant with overtime laws.

Properly determining an employee’s regular rate of pay for overtime purposes can be confusing and mistakes costly. FLSA litigation has been rising in recent years, including class action lawsuits, resulting in extensive liability for employers. Under the FLSA, employers can be liable for up to two years and, in some instances, three years of unpaid overtime compensation for each employee wrongfully paid. Because of this, employers should regularly audit and review compensation policies and practices to ensure they comply with federal, state, and municipal overtime requirements. And if you are unsure about how to stay compliant with overtime laws, seek expert help.