This blog post was authored by Liara Silva.
Calculating an employee’s regular rate of pay and overtime pay is no small task. The FLSA requires that an employee who works overtime be compensated at a rate of at least one and one-half times the employee’s regular rate of pay. 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 is determined by dividing the employee’s total remuneration for employment in any work period, except exclusions, by the total number of hours that remuneration is intended to compensate. Below are four mistakes that employers should avoid when calculating the regular rate of pay as well as overtime pay. (If the following appears very complex to you, you are not alone: regular rate is one of the most technical and challenging areas of wage and hour law, and the discussion below assumes some advanced knowledge of this topic.)
Mistake 1: Using a Base Rate or “Regular Rate” Set in an Agreement
Many public employers set a base rate or “regular rate” in their collective bargaining agreements. This can lead to confusion, and should not be 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, employers must determine the regular rate of pay in accordance with the FLSA by dividing the employee’s total remuneration for employment in any work period, with the exception of specified exclusions, by the total number of hours that remuneration is intended to compensate.
Mistake 2: Using the Pay Period Rather than the Work Period
Another mistake employers should be careful to avoid is using employees’ pay periods to calculate the regular rate of pay. The regular rate should be calculated using the employee’s designated workweek or work period. Calculating the regular rate of pay using the employee’s pay period can result in the underpayment (or overpayment) of overtime.
Mistake 3: Not Calculating the Regular Rate Using the Hourly Basis Formula When Required
The method for determining the regular rate of pay varies depending on whether the employee is compensated on an hourly or salary basis, and the calculation becomes even more complicated for Section 7(k) work period employees (i.e., law enforcement or fire personnel who work subject to extended FLSA workweeks allowed by the section). It is important to properly distinguish between employees paid on an hourly basis and those paid on a salary basis. In calculating regular rate, employers must look to whether the employee’s pay is based on his or her actual hours worked. Whether an employee is paid on a weekly or monthly basis, for example, is not controlling. If the employee’s pay is based on actual hours worked, employers should calculate the regular rate of pay and overtime pay as if the employee is paid on an hourly basis. On the other hand, if the employee is paid on a true salary basis, employers should determine the regular rate of pay and overtime pay using the formula for salaried employees.
Mistake 4: Omitting Payments That Must Be Included in the Regular Rate
Finally, it is easy to overlook certain payments that are required to be included in the regular rate of pay. Below is a non-exhaustive list of examples of payments that should normally be included in employers’ calculations:
- Pay for work actually performed, or for productivity or efficiency;
- Shift differentials;
- Retroactive pay adjustments;
- Educational and other incentive payments;
- Controlled standby pay;
- Payments for uncontrolled standby time;
- Hazard pay;
- Bilingual pay;
- Longevity pay;
- Special assignment pay;
- Shooting pay;
- Acting pay;
- Free meals provided to employees; and
- Merit bonuses and bonuses contained in a collective bargaining agreement.
These are only a few examples of common mistakes of which employers should be aware in order to avoid liability under the FLSA. We encourage you to contact counsel if you have any questions about calculating the regular rate of pay or overtime pay.