With labor negotiations beginning, many public agencies need to take a fresh look at how they are defining their overtime obligations in their labor agreements. Simple changes in language can clarify the intent of the parties, avoid costly interpretive disputes and lawsuits, and assist the agency in paying employees their correct wages.
When reviewing overtime definitions, the first thing to keep in mind is the difference between overtime required under the Fair Labor Standards Act (“FLSA”) and overtime required under a labor agreement or agency policies, but not required under the FLSA. The FLSA sets the irreducible floor for when overtime must be paid. The FLSA also requires that agencies pay overtime required under the FLSA at one and one-half times the employee’s “regular rate of pay.” The “regular rate of pay” must include “all remuneration for employment paid to, or on behalf of, the employee,” except payments that are specifically excluded. Most of the premium pays public employers pay employees must be included in the regular rate of pay calculation, such as standby pay, education pay, and special assignment pay.
For FLSA overtime worked, employers must pay employees based on the FLSA regular rate of pay for that specific workweek. And the regular rate of pay for an employee may vary from one workweek to another if, for example, the employee receives shift differential pay or standby pay in one workweek, but not the other. It’s important, however, to note that employers are not permitted to average the work hours or the regular rate of pay in a 14-day pay period. An “overpayment” in one work period cannot offset the liability resulting from an underpayment in a different work period. Under the FLSA, each workweek stands alone.
Overtime that is not required under the FLSA, but that is agreed to through labor agreements or provided by agency policy, sometimes referred to as “contract overtime,” does not have to be paid at the FLSA “regular rate of pay.” In other words, the agreement or policy creates an overtime entitlement that is more generous than what the FLSA requires. A common example of “contract overtime” is overtime paid on hours worked beyond 40 hours paid (which may not be 40 hours actually worked). Overtime that is not required under the FLSA can be paid at any premium rate the parties agree upon.
Unfortunately, many labor agreements and policies use a catch-all definition of overtime that is not compliant with the FLSA, or use a several inconsistent definitions of overtime throughout the labor agreement or policy that lead to confusion. Labor agreements or policies often define overtime as one and one-half times the “base rate,” “hourly rate,” “base hourly rate,” “regular rate of pay,” “regular rate,” or “normal rate.” These definitions often have no clear meaning, violate the FLSA, or result in unintended overpayments. We highly recommend that employers review their policies and labor agreements to ensure consistent and clear use of pay-related terms.