Posted on 02/05/2019 at 11:23 AM by Mike Staebell
Under the FLSA, the “regular rate” is a mathematical computation used to determine the straight-time rate of pay for non-exempt employees to properly compute overtime premium pay. It is an often misunderstood and misapplied concept. In the hundreds of FSLA presentations I have made over the years, the question of how to compute overtime premium pay for non-exempt employees who receive multiple forms of pay almost always comes up. When it does, I get sheepish looks from audience members whose firms are not complying with FLSA rules about the regular rate and overtime premium pay calculations. Violations of these regulations were also common in the FLSA investigations I conducted and supervised during my career with the DOL Wage and Hour Division (WHD).
Simply put, the regular rate is calculated by dividing an employee’s gross straight time pay by the number of hours worked by that employee in the applicable workweek. For an employee paid only an hourly wage, the regular rate will equal the hourly wage. For an employee who receives additional pay, such as commissions, incentives, or bonuses, the regular rate, and therefore the overtime premium rate, will be higher than the hourly wage. The FLSA and its regulations identify eight types of pay that may be excluded for the regular rate computation – more on that in another post.
On December 21, 2018, WHD published an Opinion Letter providing guidance on how to determine the regular rate in certain situations. In addition, January 23, 2019 WHD submitted to the Office of Management and Budget (OMB) a proposed rule to change the regulations pertaining to the FLSA regular rate. Let’s look at both of these developments, and the importance for employers to understand the regular rate concept.
Opinion Letter FLSA2018-28 responds to a question from an employer on the legality of its pay system for non-exempt home health aides. To calculate weekly pay, the employer multiplies the amount of an employee’s time spent with clients by his or her hourly pay rate. Daily travel time between clients’ homes is not included in computing weekly pay, even though such travel time is considered hours worked under the FLSA. The employer then divides the total weekly straight-time pay by the employee’s total hours worked, including the client time and the travel time. The employer guarantees that the weekly pay meets federal and state minimum wage rate requirements.
The employer states that a typical straight-time pay rate works out to $10/hour, including both client time and travel time. Overtime pay is always based on a $10/hour regular rate, regardless of the total hours worked, meaning the employees receive an additional $5/hour in overtime premium, making their overtime rate $15/hour.
WHD responded by stating that the employer's compensation plan complies with the FLSA’s minimum wage provisions, which state that an employee must receive the minimum wage based on the entire workweek. In other words, even though an employee may not be paid for all hours worked in that week, as long as the regular rate for the week is equal to or greater than minimum wage, the plan is FLSA compliant. However, WHD goes on to say that the plan would not comply with the FLSA if the employee’s regular rate was greater than $10/hour. For example, where the employee’s regular rate was actually $12/hour, their overtime rate should be $18/hour under the FLSA’s overtime regulations, not $15/hour.
This letter illustrates two FLSA regulatory concepts. First, minimum wage compliance is assessed over the entire workweek. Second, the regular rate of pay is not established by employer policy, but by the mathematic calculation of total straight-time pay divided by total hours worked.
Proposed Rule Changes to the Regular Rate
The DOL announced in its Fall 2018 Regulatory Agenda that it would be proposing changes to the FLSA regulations defining regular rate (29 CFR Part 778). Here is what DOL said in that announcement:
“The Department believes that changes in the 21st century workplace are not reflected in its current regulatory framework. While the Department has periodically updated various sections of 29 CFR Part 778 over the past several decades, they have not addressed the changes in compensation practices and relevant laws. The Department is interested in ensuring that its regulations provide appropriate guidance to employers offering these more modern forms of compensation and benefits regarding their inclusion in, or exclusion from, the regular rate. Clarifying this issue will ensure that employers have the flexibility to provide such compensation and benefits to their employees, thereby providing employers more flexibility in the compensation and benefits packages they offer to employees. Similarly, the Department believes that the proposed changes will facilitate compliance with the FLSA and lessen litigation regarding the regular rate.”
A key takeaway, and DOL’s primary rationale for the proposed rule in the above, is “the proposed changes…will lessen litigation regarding the regular rate.”
The details of the proposed rule have not been released to the public at this time. OMB has 60 days to review the proposed rule, upon approval, WHD will publish the rule for public comment in the Federal Register, and we will all get to see it. After a public comment period, DOL will review the comments and issue the final rule.
The opinion letter and proposed rule are welcome guidance on the FLSA's regular rate provisions. Given that many employers fail to follow the current rules, firms are advised to review their pay policies for compliance, pay attention to the guidance and changes coming from DOL, and seek the professional advice of experts in the FLSA if they are not sure about how to comply.
The FLSA regular rate is a complex concept, and in order to get the full value of the opinion letter and the proposed regs, employers should familiarize themselves with the current FLSA overtime rules. Stay tuned to Wage and Hour Watch. In an upcoming post, we will discuss in detail how to calculate regular rate and correctly pay overtime premium to non-exempt employees, regardless of the type or types of compensation they receive.
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