No matter if you are new to the wage and hour world and this blog, you still probably know that employers need to pay their non-exempt employees an overtime premium for all hours worked in a workweek beyond 40, pursuant to the Fair Labor Standards Act (FLSA) and applicable state law. Whatever overtime rate you implement—whether time-and-a-half or a half-time premium—the overtime rate is always based on the employee’s “regular rate.” In past posts, we have looked at special problems that calculating the regular rate raises for employers who pay non-exempt workers a salary, particularly if the employees also earn commissions or bonuses. Even if compensation paid does not fall into one of these “special” problem buckets, the regular rate calculations for non-exempt employees can prove tricky at times.
On its face, the “regular rate” calculation would seem straightforward: the employee’s hourly wage or salary. However, the FLSA defines the regular rate more broadly to include “all remuneration for employment paid to, or on behalf of, the employee,” except for certain payments excluded by statute. Recently, a blog reader in the telecommunications industry asked whether the “regular rate” would include in-kind remuneration like free Internet access, meals, or other non-cash payments to employees given in lieu of commissions or even as fringe benefits. The answer is that it could, depending on the situation. Under the FLSA, remuneration that employers must add to the regular rate includes non-cash wages in the form of goods, boarding, or lodging; and non-overtime premium payments—such as shift differentials and hazard premiums and non-discretionary bonuses, commissions, and other incentive payments—based on hours worked, production, or efficiency.
Not every payment to an employee falls into the FLSA’s regular rate calculation, though. The FLSA specifically excludes, among other things, paid leave (vacation, PTO, sick leave, etc.); expenses incurred on the employer’s behalf; overtime premiums; Saturday/Sunday/holiday premiums; discretionary bonuses; and, more rarely, some gifts and payments on special occasions. Many of these categories have their own nuances. The difference between a “discretionary” and “non-discretionary” bonus is worth its own series of posts, for example, and have tackled some of those issues in prior posts as noted above. State laws differ, too, on what can be excluded from the regular rate. Accordingly, remember that this post is just a starting point. Your specific situation may vary, so if you are not sure whether to include a particular form of compensation or employee benefit in your calculations of the regular rate for employees, you should reach out to employment counsel to avoid an expensive mistake.
Once you have done the hard work of determining what to include and exclude, the calculation of the regular rate is relatively straightforward, with one caveat. Employers compute the regular rate for an employee by dividing the employee’s total remuneration for employment in the workweek by the total number of hours the employee actually worked in that workweek. An employee who received $400 in wages, $75 in commissions, and $25 in non-cash compensation in a week while working 50 hours has a regular rate of $10.00/hour ($500 / 50 hours). Assuming that the $500 in cash and non-cash compensation paid the employee for all 50 hours of work, and not just 40, you would owe the employee another $5.00/hour for the 10 overtime hours, or another $50. If the compensation only covers 40 hours, you would owe the full time and a half overtime premium, of course.
Simple? Sure, this part can be easier than determining what goes into the regular rate. What makes this calculation difficult, though, is when the employee earns cash or non-cash remuneration after the workweek ends. Often, employers do not pay commissions or bonuses in the same week as hours worked, but instead at some later date—at the end of a month, a quarter, or a year. Determining the impact of these later earnings on the regular rate may require a look-back calculation to apportion these earnings to their proper, earlier weeks. Commission plans, bonus rules, and pay policies that you have established may also impact the calculation of when subsequent remuneration was actually “earned.” We’ve discussed how to do this calculation for bonuses before. We’ll cover how this look-back calculation works with commissions in our next post.