Calculating the Regular Rate of Pay for FLSA Overtime Compensation

Navigating the complexities of the Fair Labor Standards Act (FLSA) overtime regulations is a common and critical concern for any large organization that strives to remain compliant and deliver fair pay to their workforce. Central to these regulations is the concept of the “regular rate of pay” which forms the basis for calculating overtime due to each employee. This rate is not just defined by the employee’s hourly wage—it encompasses various forms of compensation received during the workweek, excluding only those payments defined by statute.  

Understanding what should and should not be included in this calculation can be daunting, yet it’s essential for avoiding legal pitfalls. Missteps in this area can lead to severe financial repercussions, including back pay damages and penalties from the Department of Labor. Given the Department’s focus on extending overtime protections, it remains vital for businesses to carefully scrutinize their payroll practices.  

This article offers an in-depth overview of the intricacies of the regular rate of pay, helping employers understand how they can meet all legal requirements, and safeguard their operations against costly errors. 

What is the Regular Rate of Pay for FLSA Overtime Compensation?

The federal Fair Labor Standards Act (FLSA) generally requires that non-exempt employees be paid at least time and one-half their “regular rate of pay” for all hours worked exceeding 40 in a workweek. This is known as overtime compensation.  

But how is an employee’s regular rate of pay determined when calculating FLSA overtime pay? 

An employee’s regular rate of pay includes “all remuneration for employment paid to, or on behalf of the employee” in a workweek, with certain statutory exclusions. It is an hourly rate determined by dividing the total compensation an employee receives in a workweek (except for statutory exclusions) by the number of hours the employee actually worked that week. 

Understanding How Statutory Exclusions Affect Overtime Compensation

The statutory exclusions relating to compensation, which need not be included in the employee’s regular rate of pay when determining overtime, include: 

• Payments made as gifts or in the nature of gifts on holidays or special occasions 
• Payments for occasional periods when no work is performed due to vacation, holidays, illness, other paid time off, and failure of the employer to provide sufficient work such as when machinery breaks 
• Reasonable payments for travel or business expenses, and other similar payments 
• Bonuses paid at the sole discretion of the employer such as many employee-of-the-month bonuses, severance bonuses, bonuses for overcoming challenging or stressful situations, and referral bonuses 
• Payments pursuant to a bona fide profit-sharing plan 
• Irrevocable contributions made by an employer to a trustee or third person under a bona fide plan for providing an employee with retirement benefits, life insurance, accident insurance, health insurance, or similar benefits 
• Extra compensation paid for non-FLSA overtime hours. This includes premium pay for work performed on weekends, holidays, regular days of rest, or the sixth or seventh day of the workweek if the premium pay is at least one and one-half times the rate paid for similar work performed in non-overtime hours on other days 
• Income derived from employer provided grants, stock option rights, stock appreciation rights, or bona fide employee stock option program 

The Consequences of Failing to Properly Calculate FLSA Overtime Compensation

Determining an employee’s regular rate of pay when calculating FLSA overtime compensation can be difficult if an employee’s wages are not solely limited to hourly pay. Employers must know what compensation to include in the regular rate and what compensation to exclude.  

This is a task employers should take seriously because failing to properly calculate overtime pay can lead to costly Department of Labor audits, Department of Labor charges, lawsuits, owing employees substantial back pay damages for underpaying wages, as well as penalties.  

Due to the potential for litigation in this area, and with the Department of Labor’s new final overtime rule soon to extend overtime protection to millions of new workers¹, it would be wise for organizations to consistently review their pay policies and practices to avoid pricey overtime compensation mistakes. 

Taking steps to properly comply with FLSA overtime rules isn’t just a legal obligation—it’s a strategic advantage. Implementing a modern workforce management system that can meticulously review and adjust payroll practices appropriately can protect your organization from unexpected liabilities and foster a transparent work environment that values and respects employee rights. This proactive approach not only mitigates the risk of costly litigation and audits but also enhances your company’s reputation as a fair and reliable employer. As the landscape of labor laws continues to evolve, staying informed and vigilant is the best strategy to maintain compliance and support your team effectively. 

^{1. News Release. Biden-Harris Administration Finalizes Rule to Increase Compensation Thresholds for Overtime Eligibility, Expanding Protections for Millions of Workers. Department of Labor. Retrieved May 1st, 2024.}