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Understand the Regular Rate to Avoid Overtime Claims
The definition of “regular rate” — a building block in calculating overtime for nonexempt employees — is technical, but understanding it can help prevent class actions and keep labor costs in check.
Before implementing any new compensation programs, HR professionals should consider the potential impact on the regular rate and resulting overtime rates, which can significantly increase labor costs, said Chris Coyne, an attorney with Epstein Becker Green in New York City.
Technical Definition
“The regular rate of pay is the weighted average of most forms of compensation paid to a nonexempt employee for work performed in a workweek, except for statutory exclusions,” said Timothy Rusche, an attorney with McGuireWoods in Los Angeles. “A number of different types of remuneration must be factored into the regular rate, including certain bonuses, commissions, and shift differentials.”
Determining how to calculate the regular rate and the forms of remuneration to include in the regular rate can be tricky, he added.
“The regular rate is the basis upon which an employee’s overtime rate is calculated,” Coyne said. The regular rate can vary week to week and may be impacted by generous compensation programs.
“As such, it must be a consideration when developing compensation systems, bonus programs, or employee incentive plans to ensure employers are accurately anticipating the impact and cost of these programs and are ready to implement any necessary changes in their payroll systems,” he said.
The regular rate under the Fair Labor Standards Act (FLSA) is a fluctuating hourly rate that accounts for the diverse compensation practices used by employers, Coyne said. It is a mathematical calculation that involves combining all remuneration an employee receives in each workweek, subject to certain statutory exclusions, and dividing that figure by the total number of hours worked.
Employers should recalculate the regular rate for each workweek where they pay additional remuneration, said Chris Duke, an attorney with Akerman in West Palm Beach, Fla., and Boca Raton, Fla. “The regular rate is not a fixed number.”
The FLSA provides an exhaustive list of payments that employers may exclude from the regular rate calculation, Coyne noted. Employers must account for payments that do not fall within these exclusions.
“Importantly, there are eight statutory exclusions to the type of compensation that must be counted as remuneration for purposes of developing the regular rate,” he said. These exclusions encompass, among other things, gifts, discretionary bonuses, and vacation pay.
California Differences
Employers calculate the regular rate of pay associated with flat sum (nondiscretionary) bonuses differently under California state law than they do under the FLSA, said Keith Kopplin, an attorney with Ogletree Deakins in Milwaukee.
Under the FLSA, a flat sum bonus earned in a workweek is divided by the total number of hours worked during that workweek, including overtime hours, and the employee is entitled to an extra 0.5 times that amount for any overtime hours worked.
Under California state law, by contrast, a flat sum bonus earned in a workweek is divided by the total number of nonovertime hours worked during that workweek, and the employee is entitled to an extra 1.5 times that amount for any overtime hours worked, Kopplin noted.
This difference “results in a higher regular rate and increased overtime compensation,” Rusche said.
In addition, California requires overtime in a variety of circumstances that are not required under federal law, such as work performed over eight hours in a day, Coyne said.
Common Misunderstandings
A common misunderstanding about the regular rate is that it is synonymous with the base rate, Kopplin said. “By law, the regular rate must include shift differentials, nondiscretionary bonuses, and other incentives paid to nonexempt employees.”
Nondiscretionary payments that employers must include in the regular rate encompass bonuses based on predetermined metrics, commissions, and other forms of compensation made for job performance, Kopplin noted.
Employers also should include piece-rate earnings in the regular rate, Duke said.
“All remuneration an employee receives must be included in the regular rate calculation, subject to an exhaustive list of statutory exceptions,” Coyne emphasized. “In other words, if a payment does not fall within one of the enumerated categories specified in the act, it must be included in calculating the regular rate.”
Employers should analyze remuneration carefully before excluding any form of payment from the regular rate, as the act requires meeting specific criteria before deeming any payment excludable, Coyne said.
“In some limited circumstances, premium rate payments provided by employers can not only be excluded from the regular rate but can also be used as an offset for the employer against overtime due,” he added. “Identifying these types of payments and properly accounting for these credits can provide significant savings for employers, yet this does not apply to all excluded payments — only those specifically identified in the statute.”
Litigation May Result from Miscalculation
Noncompliance with state wage and hour laws and the FLSA can be costly, as underpaying overtime can lead to class or collective actions. Plaintiffs’ lawyers frequently bring claims seeking unpaid overtime resulting from miscalculation, Kopplin said.
“Although the amount of overtime due to each individual employee in such a lawsuit may be relatively small, the calculation is usually an objective math problem that is amenable to class and collective litigation where the named plaintiff seeks to represent all current and former employees who were similarly denied overtime due to the miscalculation,” he said. “Under the FLSA, prevailing employees can also recover their attorney fees and costs and an amount equal to the unpaid overtime as a penalty.”
This article is courtesy of Society for Human Resource Management (SHRM)
