Top 10 tips for calculating the regular rate under the FLSA

Suzanne Brown, Senior Legal Editor, Practical Law Labor & Employment

The Fair Labor Standards Act (FLSA) generally requires overtime compensation of at least 1.5 times an employee's regular rate of pay for all hours worked over 40 in a workweek. The regular rate is calculated as an hourly rate, but it does not necessarily equal the employee's customary hourly wage or salary. The regular rate includes all compensation paid to (or on behalf of) employees, except for certain exclusions expressly permitted by the FLSA.

The exclusions are construed narrowly in favor of employees. If employers fail to show that the statutory requirements for exclusion have been satisfied, they may be liable for additional overtime compensation.

Employers should consider all forms of compensation when calculating an employee's regular rate. The following are examples of the types of compensation often overlooked.

1. Tips.
   

   Nonexempt employees, including tipped employees, are generally entitled to minimum wage and overtime pay. However, the FLSA permits employers to take a tip credit toward the minimum wages owed. A tip credit is the difference between the minimum wage (currently $7.25 under the FLSA) and the minimum cash (or direct) wage (currently $2.13 under the FLSA). So under federal law, employers may take a tip credit of $5.12 per hour or less.

   A tipped employee's regular rate includes the cash wages and the amount of the employer's tip credit. Any tips received by the employee in excess of the tip credit do not need to be included in the regular rate because they are not considered remuneration for employment under the FLSA.

2. Premium pay for working on a holiday.
   

   An employment agreement or contract may provide for premium pay for working on a holiday. The employee forgoes any paid holiday benefit, and is instead compensated at a premium rate for working on the holiday.

   The premium rate, paid for working on special days, such as Sundays or holidays, can be treated as overtime premiums and excluded from an employee's regular rate, if they are:

   • For work actually performed on "special days," which are:
     • Saturdays and Sundays;
     • holidays;
     • regular days of rest; and
     • the sixth or seventh day of the workweek.
   • Paid at a rate of at least 1.5 times the rate established in good faith for similar work performed during non-overtime hours on other days.

   "Holiday" is given its ordinary meaning of a day normally observed to celebrate a historic or religious event. A day off arbitrarily given to employees because of lack of work is not a holiday or a regular day of rest under this test.

3. Premium pay for "dirty work" or shift differentials.
   

   Employment policies and agreements, such as collective bargaining agreements, may also provide for premium pay for certain hours or days of work, or for certain types of work. These premiums are often meant to compensate employees for what are generally considered to be undesirable shifts or duties, including:

   • Work on night shifts (or "third shifts".
   • Work that is dangerous or dirty.

   These premiums must be included in an employee's regular rate.

4. Pay for jury duty leave.
   

   Payments for occasional periods when no work is performed may be excluded from an employee's regular rate if the amounts:

   • Approximately equal the employee's normal earnings for a similar time period.
   • Are for the types of absences that are infrequent, sporadic, or unpredictable. For example, vacations and holidays qualify, but lunch breaks and regularly scheduled days of rest do not.

   Paid jury duty leave is an example of this type of payment and may be excluded from the regular rate.

5. Pay when weather conditions prevent an employee from traveling to work.
   

   Another example of pay for infrequent, sporadic, or unpredictable absences is pay for an employee's absence when weather conditions prevent the employee from traveling to the workplace. Pay for those absences may be excluded from the regular rate.

6. Pay when an employee is absent because the employer failed to provide enough work.
   

   Still another example is pay for absences because of the employer's failure to provide enough work. These payments may be excluded from the employee's regular rate only if they are for occasional, sporadic situations where the employee would normally be working but cannot work because:

   • A machine breaks down.
   • Expected supplies do not arrive on time.
   • Weather conditions affect the employee's ability to do the work.
   • Other similarly unpredictable events that are beyond the employer's control.

   An employer's failure to provide work does not include:

   • A reduction in the work schedule.
   • Ordinary temporary layoffs.
   • Any type of routine, recurring absence of the employee, such as regular days of rest.
7. Report-in or show-up pay.
   

   Under some employment agreements, employees are entitled to a minimum number of hours of pay if they are scheduled for, or are called in or called back to, work but are not given the expected amount of work.

   Report-in pay (also referred to as show-up or reporting pay) is a minimum hours example. Employees are guaranteed a minimum number of hours of pay for reporting to work as scheduled but not receiving the expected amount of work. For example, an employee entitled to four hours of report-in pay, who arrives to work for his scheduled eight-hour shift but is sent home after only two hours, will still receive a total of four hours of pay, two for the hours he actually worked and two because of his report-in pay guarantee.

   Generally, employers may exclude from the regular rate any amount of report-in pay that is not for hours actually worked. Employers should keep in mind that the statutory exception contemplates that report-in pay occurs infrequently and sporadically.

8. Call-back pay.
   

   Call-back (or call-out) pay is another example of a minimum hours arrangement. Call-back pay guarantees employees a minimum number of hours of pay when they are unexpectedly called back to work after their scheduled hours have ended.

   Like report-in pay, the amount of call-back pay an employee receives that is not for hours actually worked can be excluded from the regular rate. Again however, the FLSA's exception contemplates that call-back pay is for unscheduled call-backs that are infrequent and sporadic.

9. Payments made to a profit-sharing plan or trust or to a thrift or savings plan.
   Employers may exclude from the regular rate payments made to a bona fide profit-sharing plan or trust or to a bona fide thrift or savings plan, if those payments are:
   • Paid in addition to the employee's regular wages.
   • Made under a plan that meets the separate statutory requirements for that particular type of plan.
   • Determined without regard to employee hours of work, production, or efficiency.
10. Reimbursement of business expenses.
    

    The FLSA also excludes from an employee's regular rate payments received as reimbursement for certain work-related expenses, such as travel expenses. The statutory exception extends to the reimbursement of expenses employees incur on the employer's behalf or are required to incur for the convenience of the employer. The amount excluded from the regular rate is either the actual cost incurred by the employee or a reasonable approximation, depending on the type of expense.

    Employers cannot artificially designate a portion of an employee's wages as a reimbursement or per diem and exclude that amount from the regular rate. If reimbursements are disproportionately large compared to the actual cost (or a reasonable approximation), the excess must be included in the regular rate.

    Examples of work-related expenses that can be excluded from an employee's regular rate are:

    • The actual cost of purchasing supplies, tools, materials, or equipment on behalf of the employer.
    • The actual or reasonably approximate cost of buying, washing, or repairing uniforms or special clothing required by the employer.
    • The actual or reasonably approximate cost of transportation and other travel expenses while traveling for the employer's business.
    • The reasonable cost of a meal when the employer asks an employee to continue working beyond his usual shift.
    • The actual or reasonably approximate cost of temporarily excessive home-to-work travel incurred because:
      • the employer moved its facility to another town and the employee has not had an opportunity to relocate; or
      • the employee is, on a particular occasion, required to report for work at a location other than the employee's usual workplace.

    This statutory exception is limited to expenses incurred on behalf of the employer or for the employer's convenience. If the employer reimburses employees for expenses incurred for the employees' own benefit and that employees would normally pay for, such as meals, living expenses, and normal to-and-from work travel, the payments are not excluded from the regular rate.

Correctly calculating the regular rate is necessary to determine an employee's overtime compensation. Failure to account for each type of compensation can mean significant liability for the underpayment of overtime wages. Companies should review all components of employee compensation to ensure the required amounts are included in the regular rate calculation.

Reprinted with permission from the Association of Corporate Counsel 2016 All Rights Reserved

www.acc.com
http://www.acc.com/legalresources/publications/topten/calculating-the-regular-rate-under-the-flsa.cfm

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