April 23, 2015 Articles

Regular Rate: Navigating Risk Areas and Complexities

Examining errors frequently made by employers and litigators in calculating an employee's regular rate.

By Jeremy Guinta and Angela Sabbe – April 23, 2015

Under the Fair Labor Standards Act of 1938 (FLSA), employers are required to compensate employees for their time worked based on all compensation received. Premiums for overtime are to be paid as a factor of the employee’s “regular rate.” Although the terms are often used interchangeably, the employee’s regular rate does not refer to the employee’s base hourly rate. This article examines errors frequently made by employers and litigators in calculating an employee’s regular rate.

Background
As codified in the FLSA, the regular rate must include all payments to the employee, except those specifically excluded by the act. This includes wages, non-cash wages in the form of other benefits, commissions, piece rates, and certain shift differentials and gratuities. Shift premium payments—for example, nighttime premiums or hazard payments—are included in the regular rate, whereas weekend premiums or holiday premiums are typically not required to be included. Non-discretionary bonuses, including bonuses based on productivity, attendance, or safety metrics, are also included.

Conversely, discretionary bonuses, including holiday bonuses and one-time financial bonuses paid when the company meets a certain financial target, are excluded. The regular rate also excludes premiums paid for overtime worked, service rewards (such as gifts), reimbursement of expenses, and vacation, sick, or other paid time off for non-worked time (e.g., jury duty).

The total remuneration, as described above, is then divided by the number of hours workedto yield the hourly regular rate. The calculation is performed for each workweek; therefore, an employee’s regular rate may vary from week to week, while the employee’s base hourly rate remains constant.

Example. Suppose an employee works a 50-hour workweek (40 regular hours, 10 overtime hours) and earns $10 per hour. In addition, 10 of the hours worked were paid a night-shift premium of $2 per hour. The employer incorrectly paid the following:

Hours

Rate

Paid

Straight Time

30

$10.00

$300.00

Night Shift

10

$12.00

$120.00

Weekly Overtime @ 1.5 x Straight-Time Rate

10

$15.00

$150.00

Total

$570.00

The employer failed to properly include the night-shift premium payment in the calculation of the regular rate. The corrected payment is as follows:

Hours

Rate

Paid

Straight Time

40

$10.00

$400.00

Night Shift

10

$12.00

$120.00

Subtotal

$520.00

Regular Rate: $520/50

$10.40

Weekly Overtime 
@ 0.5 x Regular Rate

10

$5.20

$52.00

Total

$572.00

Additional Complexities and Related Errors
Regular rate calculations become even more complex if, for example, the employee received a quarterly attendance bonus for never being late to work, or the employee received commission payments as part of his or her compensation. In those cases, the additional compensation would need to be allocated over the entire period during which it was earned and properly factored into any overtime payments made in each week during that period.

Example. For an individual paid on a piece-rate basis, working 50 hours in a week, and earning $500, the employee’s regular rate would be $10 ($500/50 hours). The employee would also need to be compensated for 10 overtime hours. In this example, the employee should be paid $500 plus ($10 x 0.5 x 10 overtime hours), or a total of $550.

Income

 $ 500.00

Hours

50

Regular Rate: $500/50

 $ 10.00

Overtime Premium @ 0.5 x Regular Rate

 $ 5.00

Overtime Hours

10

Weekly Overtime $5 x 10

50.00

Total Pay (Income + Weekly Overtime)

 $ 550.00

Tipped employees also present unique complexities. The regular rate for food and beverage servers, who are partially compensated by gratuities, would include their base hourly rate and an allocated portion of their gratuities. Employers paying an overtime premium based solely on the servers’ base wage rate are underpaying their employees.

Example. A server earns an hourly wage of $10, works 45 hours in a week, and earns $500 in gratuities for that week. The regular rate would be calculated as $10 times 45 hours ($450) plus $500 in gratuities divided by 45 hours for an hourly regular rate of $21.11 ($950/45 hours). The overtime portion of the hours worked for this individual would be calculated using the $21.11 an hour.

Paid

Hours

Rate

Incorrect

Correct

Weekly Wages

45

$10.00

$450.00

$450.00

Weekly Gratuities

$500.00

$500.00

Weekly Earnings

$950.00

$950.00

Regular Rate

$10.00 

$21.11

Overtime Premium 
@ 5 hours (0.5 x Regular Rate)

$25.00

$52.78

Total Pay (Weekly Earnings + Overtime Premium)

$975.00

$1,002.78

The above example excludes reduction of the regular rate for tip credit.

Collective Action Implications 
Employers that use a standard pay structure and do not have differential payments, non-discretionary bonuses, commissions, or other nonstandard payments face little liability in the collective action arena. However, employers that have shift premiums for differing types of work or times of day and employers that have non-discretionary bonus or commission structures, or pay their employees on a piece-rate basis, are ripe for potential errors and potential litigation.

Further, if the employer had a payroll system that resulted in the systematic underpayment of its employees, class certification of the employees would likely be very easy. In this regard, the issues surrounding class certification in collective actions are easily met:


1. Numerosity. The payment policy likely affected many employees even at a small company.

2. Commonality. The potential class was likely affected in a similar fashion because the payroll policy was applied across the entire business.

3. Typicality. The potential class was likely affected in the same manner as the named plaintiff.

4. Adequacy. The named plaintiff will likely adequately represent the class.

When defining the class or opposing class certification, there are mitigating factors that should be considered:

  • Can portions of the class be decertified because they either were ineligible for overtime or never worked overtime during class period?
  • Are there certain groups of employees that were not eligible for bonus or differential payments that would trigger a regular rate issue in the first place?
  • Does the named plaintiff fall into either of these categories?

Conclusion
The examples above reflect differentials for one employee in a single pay period. Imagine, however, the impact of dozens, hundreds, or even thousands of employees over the course of three years (the FLSA-mandated look-back period). Although the financial impact may appear nominal on an individual basis, employers must not underestimate the financial consequences of incorrectly calculating the rate at which overtime should be paid.


Keywords: litigation, employment law, labor relations, regular rate, overtime, Fair Labor Standards Act


Jeremy Guinta and Angela Sabbe are associate directors in the Los Angeles, California, office of Navigant Consulting, Inc.

Navigant Consulting is a corporate sponsor of the Section of Litigation. Neither the ABA nor ABA entities endorse non-ABA products or services. This article should not be construed as an endorsement.

Copyright © 2015, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).