The regular rate of pay is an often misunderstood provision of the Fair Labor Standards Act (FLSA), and one that is easy to violate for those unaware. Since the pandemic, we have seen an uptick in collective action lawsuits alleging overtime wage violations based upon failure to properly calculate the regular rate of pay. Indeed, due to the nature of company payroll, violations of the regular rate of pay may be susceptible to collective treatment because if a particular type of compensation is not included for one employee, it usually is not included for others as well.

So what is the meaning of “regular rate of pay” and why is it such a trap for many businesses? Under the FLSA, the regular rate includes “all remuneration for employment paid to, or on behalf of, the employee.” In short, hourly non-exempt employees are entitled to 1.5 times their regular rate of pay for hours worked over 40 hours in a work week. Sounds simple, right? But an employee’s regular rate is not necessarily his or her base rate.

If an employee’s base hourly rate is $16 per hour, but the employee receives a 50 cent per hour shift differential for working certain shifts, such shift differential should be included in the employee’s regular rate of pay, and thus, the overtime calculation. So, in this example, if an employee worked 46 hours in a work week, and was paid the shift differential for six of those hours, the employee's overtime rate is not $24 per hour, it is $24.10. 

While this is a small difference in isolation, extrapolated out over three years (which is the maximum look back period under the FLSA) and an entire non-exempt employee population, the aggregate effect could amount to hundreds of thousands of dollars – even before damages are liquidated (doubled), as authorized for “willful” violations under the FLSA. 

Here’s how the math works: (total eligible compensation) / (total hours worked) = regular rate

In the above example, it looks like this:

($16 x 46 hours) + ($0.50 x 6 hours) = $739 of total compensation

$739 / 46 hours = $16.065, which is the regular rate of pay

This makes the overtime rate $24.10 (when rounding up to the nearest hundredth decimal), which is simply $16.065 x 1.5.

Categories of Exclusions

But it is not simply shift differentials that should be included in the regular rate calculations. Unless excluded by the FLSA or Department of Labor regulations, the default position should be to include compensation at the regular rate. While the determination must be made on an individualized basis, depending on the character of the payment, the following categories may generally be excluded:

• Discretionary bonuses may be excluded only if both the fact that the bonus is paid and the amount of the bonus are at the sole discretion of the employer, and such bonus is not paid according to agreement or promise. Note: Simply labeling a bonus as discretionary does not make it so. 
• Holiday, vacations, or sick pay, as well as reimbursable business expenses and other payments that are not compensation for work, such as “show-up” pay or “call-back” pay, may be excluded.
• Gifts and certain similar payments made on holidays or other special occasions may be excluded as long as such gifts or payments are not measured by or dependent on hours worked or production. 
• Profit-sharing plan payments and benefit plan contributions may also be excluded from the regular rate calculation.
• Stock options and any value or income based upon stock options, subject to certain criteria, may also be excluded.

Exclusions and Credits for Statutory Overtime

In addition, there are several categories that may not only be excluded, but also may be credited to compensation due under the FLSA. In other words, these amounts may be treated as overtime pay and offset overtime amounts owed to employees under the FLSA. This includes extra compensation at a premium rate:

• For hours worked in excess of eight in a day, in excess of 40 in a workweek, or in excess of the employee’s regular working hours. For example, if the employee is paid an extra dollar per hour for all hours worked over eight in a day, such extra compensation need not be included in the regular rate and can be credited towards statutory overtime.
• For work on a Saturday, Sunday, holiday, regular rest day, or the sixth or seventh day of a workweek may be excluded where the premium rate is not less than one and a half times the worker’s rate established for non-overtime hours on other days.
• Under an employment contract or collective bargaining agreement for work outside normal hours established by such contract or agreement as the normal workday (not exceeding eight hours) or workweek (not exceeding 40 hours) may be excluded, as long as the premium rate is not less than one and a half times the worker’s rate established for work performed during the normal workday or workweek.

While there are many exceptions, generally speaking, compensation for hours worked, for services rendered, or directly related to an employee’s performance should be included in the regular rate of pay. When adding a category of payment or perk, companies should analyze the specific circumstances to determine whether such payment or perk must be included in the regular rate of pay, or if it may be excluded (and even credited). Often, diagnosing a potential regular rate violation can be as simple as examining a pay stub and performing some arithmetic. Given the potential for a collective action, companies would be wise to continually review their pay practices to ensure compliance.