On Dec. 12, 2019, the U.S. Department of Labor (DOL) announced a new final rule that clarifies how to calculate an employee’s regular rate of pay under the Fair Labor Standards Act (FLSA). The final rule became effective on Jan. 15, 2020.
This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
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Calculating the regular rate is an essential first step when determining an employee’s overtime compensation. Under the FLSA, an employee’s regular rate of pay includes all forms of compensation paid to that employee in a workweek.
FLSA Regular Rate of Pay
An employee’s overtime compensation is based on his or her regular rate of pay (also called the regular wage rate). An employee’s regular rate of pay represents the average compensation the employee receives per hour during a workweek. The regular rate of pay can vary from week to week and may be different from the employee’s contractual rate of pay.
To calculate an employee’s regular rate for a specific work period, employers must divide the employee’s total wages for a workweek by the number of hours the employee worked during that workweek. Unless an exemption applies, averaging hours over two or more weeks is not permitted.
FLSA Regular Rate of Pay Highlights
- An employee’s regular rate of pay includes all forms of compensation paid to that employee in a workweek.
- Compensable time is time used in satisfying a principal activity and time spent in any activity that is essential and indispensable to the fulfillment of a principal activity.
- An employee’s total wages includes all forms of compensation given for employment, whether paid directly to, or on behalf of, the employee.
FLSA Regular Rate of Pay Important Dates
December 12, 2019
DOL announces final rule for regular rate calculation.
January 15, 2020
Final rule becomes effective.
FLSA Regular Rate of Pay Hours Worked
The FLSA requires employers to pay their employees for all hours of compensable work. As a general rule, compensable time is time used in satisfying a principal activity and time spent in any activity that is essential and indispensable to the fulfillment of a principal activity.
Under this direction, employers should carefully consider whether their employees must receive wages for waiting time; on-call time; rest and meal periods; attending lectures, meetings and training periods; or travelling.
An employee’s total wages includes all forms of compensation given for employment, whether paid directly to, or on behalf of, the employee.
When calculating an employee’s total wages, employers should exclude payments made at the employer’s sole discretion, and that are independent of any agreement or promise that may lead employees to expect a payment. Excludable payments may include:
- Sign-on and longevity bonuses;
- Contributions to benefit plans for accident, unemployment, legal services or other events that could cause future financial hardship or expense;
- Discretionary bonuses (please note that the label given a bonus does not determine whether it is discretionary);
- Gifts and monetary awards that are not measured by hours worked, productivity or efficiency;
- Irrevocable employee benefit contributions (such as life insurance, health benefits and retirement accounts);
- Paid time off (vacation, illness, holidays and production downtimes);
- Payments for overtime hours, holiday hours or work that falls outside a schedule set by an employment contract or collective bargaining agreement;
- Payments for unused paid leave, including paid sick leave or paid time off;
- Payments of certain penalties required under state and local scheduling laws;
- Reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit (please note that reimbursements that do not exceed the maximum travel reimbursement under the federal travel regulation system or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”);
- The cost of certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), or adoption assistance;
- The cost of office coffee and snacks to employees as gifts;
- Value or income derived from an employer-provided grant; and
- Value or income from stock option rights or stock appreciation and bona fide stock purchase programs.
Employers must add an employee’s bonus to the employee’s wages and divide the total compensation given to the employee for that workweek by the total number of hours the employee actually worked during that workweek. The same procedure applies to employees who receive additional wages for working unusual shifts.
Lump Sum Nondiscretionary Bonuses
To help employers comply with regular wage rate requirements, the DOL published Opinion Letter FLSA2020-1. In this opinion letter, the DOL states that nondiscretionary bonuses count as remuneration and must be included in an employee’s regular rate.
Nondiscretionary bonuses create an expectation of payment. In other words, employers must pay these bonuses to employees who satisfy the eligibility requirements for them. In contrast, discretionary bonuses are paid at the sole discretion of the employer.
The issue of bonus allocation is important because overtime pay must be determined on a weekly basis. When the bonus covers only one workweek, the bonus must be added to that week’s compensation. However, when the bonus covers multiple weeks, the employer has three mutually exclusive options:
- Allocating the bonus “among the workweeks of the period in proportion to the amount of the bonus actually earned each week”;
- If proportional allocation is not possible, the employer may “assume that the employee earned an equal amount of bonus each week of the period to which the bonus relates”; or
- If neither of the options above is appropriate, the employer may “assume that the employee earned an equal amount of bonus each hour of the pay period.”
To calculate a salaried employee’s regular rate, an employer must divide the employee’s weekly salary by the number of hours the salary is intended to compensate for that workweek. Employers should not use the actual number of hours an employee worked during the workweek for this calculation. If an employee’s compensation is a monthly or yearly salary, the employer must reduce the monthly or yearly salary to its weekly equivalent. The employer can then follow the same procedure described above to calculate the employee’s regular and overtime rates. If a salaried employee receives a bonus or commission, the employer must add this payment to the salary for the period in question before calculating the regular rate.
Employers must include all commissions paid to an employee when calculating that employee’s regular rate. Commission wages must be included in the pay period when they were earned, not when they are paid. If an employer cannot tie a commission to a specific period, the employer should treat the commission as a bonus when calculating the employee’s regular rate.
Piece, Day, Job, Book and Flag Rate Wages
To calculate overtime wages for employees paid on a piece, day, job, book or flag rate, employers can divide the employee’s total earnings for a workweek by the total number of hours the employee worked during that same period
Employees Paid at Two or More Rates
If an employee receives wages for work completed at two or more different rates during the workweek, an employer must calculate the employee’s regular rate by using either the weighted average method or by using the rate for the job that caused the employee to work overtime. Under the weighted average method, an employer must first calculate the total wages the employee earned during a workweek using all applicable rates. Then, the employer must divide the employee’s wages by the total number of hours he or she worked at all jobs.
Call-back pay is typically provided to employees when they respond to their employee’s call to work hours beyond their regular shift. Prior to the final rule, call-back pay could be excluded from the regular rate only if it was required to be “infrequent and sporadic.” The new rule eliminates the infrequent and sporadic requirement, and allows employers to exclude call-back and other similar payments only when call-back hours are not prearranged or planned. The DOL explains that the key to whether additional hours are prearranged is whether the extra work was anticipated and could have been reasonably scheduled.
For more guidance on the FLSA Regular Rate of Pay or questions regarding your employees payroll, please contact TPG Payroll & HR Services at 909.466.7876. You can also visit our Payroll & Tax Management – Painless From Punch To Pay page today to learn more!