New Department of Labor Rule: Overtime Calculations
On January 15, the Department of Labor announced its second Final Rule of 2020, available here: Department of Labor Final Rule. This Final Rule clarifies what constitutes an employee’s “regular rate of pay.”
See New Overtime Rules for the first Final Rule of 2020, which updated overtime rules, most notably salary levels.
What is the regular rate of pay, and why does it matter?
In general, the Fair Labor and Standards Act (FLSA) mandates that employers pay non-exempt employees one and one-half times their regular rate of pay when they work more than 40 hours in any workweek. The regular rate of pay (“Regular Rate”) is defined as “the hourly rate an employee is paid for all non-overtime hours worked in a workweek.”
What comprises the Regular Rate of pay?
The Regular Rate is not always as simple as “x-dollars per hour.” Other factors such as certain bonuses, certain benefits, and pay structure need to be taken into consideration.
The landscape of employment has drastically changed since the creation of the rules relating to the regular rate of pay. For example, in 1950, fringe benefits such as wellness packages, health insurance and the like comprised only 5 percent of employees’ total compensation. Today, they comprise about a third of total compensation. Since 1950 and the present day, some updates have been made. The courts have provided guidance as to what is excludable and what must be included in calculating the Regular Rate.
Diamond is paid $10 an hour to work for Fuzz Company. During the week of January 19 to January 25, 2020, Diamond works 42 hours. Fuzz Company provides its employees with a bonus based on the performance of the company pursuant to a formula made available to all employees. Diamond’s 2019 bonus was calculated to be $200.
What is Diamond’s Regular Rate and Overtime Rate for the week of January 19 to January 25?
Before this post, most people would assume the regular rate of pay would be $10 an hour, and the overtime rate would be $15, which is 1.5 times Diamond’s documented hourly rate of pay. But, that bonus Diamond received is considered a non-discretionary bonus and must be included in the overtime calculation. A non-discretionary bonus is one that the company promises, the employees expect and depend on some marker of employee or company performance. On the flip side, a discretionary bonus is a bonus that is not predictable, not tied to company performance or any other parameter, and is not systematic.
So, how do we incorporate Diamond’s $200 bonus into her overtime rate for the week of January 19 to January 25, 2020?
- Determine the straight time (non-overtime) compensation. This is done by multiplying $10 by 42, which equals $420. Then, add in the $200 non-discretionary bonus to get a total of $620 for total straight time.
- Next, take the total straight time value of $620 and divide by the number of hours worked that week. $620 divided by 42 is $14.76. This is the Regular Rate of pay for the week of January 19 to January 25.
- So, for the two overtime hours worked, Diamond is owed the equivalent of the Regular Rate times 1.5 ($14.76 x 1.5) or $22.14 for each hour.
- The total owed to Diamond for the week of January 19 to January 25 is as follows:40 x $10 = $400.00 (this represents the non-overtime hours worked)
+2 x $22.14 = $44.28 (this represents the overtime hours worked)
$200 = $200.00 (this is the non-discretionary bonus)
TOTAL = $644.28OR Straight Time ($10 x 42) + 200 = $620
+ Overtime ($620 / 42) x 1.5 x 2 = $44.28
For how long will Diamond’s Regular Rate be $14,76 and overtime rate of pay be $22.14?
Only for the week of January 19 to January 25, 2020. Believe it or not, Regular Rates and overtime rates of pay need to be calculated each week. Most payroll systems can complete the calculation for employers so employers will not be expected to manually complete these calculations.
If, for example, Diamond works 42 hours the week of January 26 to February 1 and does not receive any bonuses or other benefits that need to be taken into consideration for the overtime calculation, her overtime rate would be $15/hour ($10 x 1.5).
What is excluded from the Regular Rate or clarified, under the new rule?
The following is a non-exhaustive list of what employers can exclude when calculating the Regular Rate:
- Gifts, such as a gift card for a holiday, a longevity bonus, and sign-on bonuses without clawback provisions (money cannot be taken back), that are not tied to hours worked or production.
- Unused Paid-Time Off (PTO): As many employers move away from delineating between sick time and holiday time towards one pool of paid time off, the new rule affirms all PTO is generally excludable.
- For example: Emerald’s hourly rate is $10, and he is entitled to a paid day off on Groundhog’s Day, but he opts to work his typical 8 hour day and works an additional 36 hours the rest of the workweek. What should Emerald be paid during Groundhog’s Day week?
- This calculation is easier than Diamond’s calculation because the Groundhog’s Day PTO does not need to be taken into consideration, and the Regular rate of pay is $10. So, the overtime rate is calculated by taking the Regular Rate and multiplying by 1.5. $10 x 1.5 = $15.The amount owed is as follows:Straight Time: 40 x $10 = $400
Overtime: 4 x $15 = $60
Groundhog’s Day PTO: 8 x $10 = $80
Total = $540
- The new rule extends to PTO generally, not just holidays.
- Pay for meal periods may be excluded in the Regular Rate calculation unless an agreement or practice indicates that the employee and employer have traditionally viewed the meal period time as “hours worked.” “Hours worked” generally means all time an employee is required to be on the employer’s premises, on duty or at a specified workplace. Employers and employees may agree to exclude the time spent eating as “hours worked.”
- For example, Ruby works for Corduroy Company (“Corduroy”) 8:30 am to 5 pm, Monday through Friday each week, and takes a thirty-minute lunch break from 12:00 pm to 12:30 pm every day of the week, putting her at 40 hours each week. Ruby and Corduroy have agreed that Ruby’s thirty-minute lunch break is not considered “hours worked” for Corduroy. Whether or not Corduroy compensates Ruby for that time is Corduroy’s decision, but that lunch pay is not used in calculating overtime since Corduroy and Ruby agreed it will not be considered hours worked. If Corduroy asks Ruby to stay until 7 pm one day of the week, Ruby would have 42 hours worked for the week, and would be owed two hours of overtime. Even if she’s compensated for her five thirty-minute lunch breaks, that time is not considered in calculating the overtime owed (nor would it be considered in calculating her Regular Rate).
- Payments made during “infrequent/unpredictable absences” such as jury duty, funerals, paid family leave, paid leave for military service; voting; attending child custody or adoption hearings; attending school activities; donating organs, bone marrow, or blood; voluntarily serving as a first responder; and any other paid leave “required under state or local laws” are specifically listed as excludable in calculating the Regular Rate.
- “Reasonable” reimbursement to employees for expenses accrued as a result of their employment. Reimbursement rates consistent with the Federal Travel Regulations are presumed “reasonable.”
- Payments for tuition, gym memberships, fitness classes and wellness programs, are all excludable if they are available to employees regardless of hours-worked or services-rendered.
- Employer contributions to many types of retirement plans in the IRS codes (such as 401k) are presumed excludable.
Labels won’t save you
Guidelines clarifying whether a bonus is discretionary, which is relevant towards whether it is excludable, is not conclusively proven by the label assigned to it or the reason it was given. Facts specific to the bonus at issue determine whether it is discretionary or non-discretionary.
If an employer is not careful, they may end up owing a higher rate in overtime than they ever would have thought. Failure to pay overtime, or the proper amount, can lead to heavy fines, and even criminal prosecution!
These rules and regulations can be very confusing, and the consequences of getting them wrong can be detrimental to a small business. Kramer, Elkins, & Watt, LLC can help you make sense of it. Our experienced attorneys have been helping business owners make informed decisions for years and would love to help you with any wage questions your business may be facing.