The CPA Journal

OVERTIME: DETERMINING AN EMPLOYEE’S REGULAR RATE

By Jeffrey D. Pollack

Although it is common knowledge that the Fair Labor Standards Act (FLSA) requires employers to pay one and one-half times an employee’s regular rate for all work performed in excess of 40 hours per week, employers often overlook the proper method for determining this regular rate. Accurately calculating an employee’s regular rate may be time-consuming, but it is essential. Failure to pay proper overtime can result in liability for sums owed for the previous three years, liquidated damages equal to the amount of unpaid wages, attorney’s fees, and costs. In cases of repeated willful violations, the FLSA also allows the imposition of civil penalties and imprisonment.

The regular rate includes “all remuneration for employment paid to, or on behalf of, the employee” [29 USC section 207(e)]. It is the “hourly rate actually paid for the normal, non-overtime workweek” [Walling v. Helmerich & Payne, 323 U.S. 37, 40 (1944)]. Regardless of the basis on which the employee is actually paid (e.g., hourly, salaried, by commission), the regular rate is always hourly and, moreover, must be determined for each particular workweek, even if the employee is paid less frequently than weekly.

The starting point for determining an employee’s regular rate for a particular week is to divide total earnings by the total hours for which payment is made. For single-rate hourly employees, the regular rate is the hourly rate; for an employee that works at multiple tasks and multiple rates, the regular rate is the weighted average of all the rates in proportion to the number of hours worked at each. Nevertheless, employers must also consider nonexempt salaried employees, commission payments, and the statutory exclusions from the regular rate.

Nonexempt Salaried Employees

An employee that receives a fixed salary is not automatically exempt from the overtime requirements. A nonexempt employee paid on a salary basis must still receive one and one-half times the regular rate for all hours over 40.

If an employee receives a weekly salary, dividing the salary by the number of hours the salary is intended to cover will determine the regular rate. For example, an employee paid $500 for a stated 35-hour workweek has a regular rate of $14.29. If she works a 44-hour week, she must receive $657.17 as follows: $500 for the first 35 hours, plus $71.45 ($14.29 per hour for hours 36–40), plus $85.72 ($21.43 per hour for hours 40–44).

Even if the employer and employee have a clear understanding that the salary is fixed compensation, regardless of whether more than 40 hours are worked (i.e., the fluctuating workweek), the employee must still receive an additional one-half the regular rate for all hours over 40. With a fluctuating workweek, the regular rate varies from week to week, so the employer must divide the salary by the amount of hours actually worked to determine the regular rate.

The regulations give the example of an employee whose hours vary from week to week, whose overtime work is never in excess of 50 hours in a workweek, and whose salary of $250 a week is paid with the understanding that it constitutes compensation, except for overtime premiums, for whatever hours are worked in the workweek. If during the course of four weeks this employee works 40, 44, 50, and 48 hours, his regular hourly rate of pay in each of these weeks is $6.25, $5.68, $5, and $5.21, respectively. Because the employee has already received straight-time compensation on a salary basis for all hours worked, only additional half-time pay is due. For the first week, he is entitled to be paid $250; for the second week, approximately $261.36 ($250 plus four hours at $2.84, or 40 hours at $5.68 plus four hours at $8.52); for the third week, $275 ($250 plus 10 hours at $2.50, or 40 hours at $5 plus 10 hours at $7.50); for the fourth week, approximately $270.88 ($250 plus eight hours at $2.61, or 40 hours at $5.21 plus eight hours at $7.82). See 29 CFR section 778.114(b).

Two prerequisites apply before using the fluctuating workweek:

The salary must be large enough so that the employee’s average hourly earnings never fall below minimum wage; and

The employee clearly understands that the salary covers whatever hours the job may demand in a particular workweek, and the employer must pay the salary even if the workweek is, in fact, less than 40 hours (29 CFR section 778.114).

When a nonexempt salaried employee is paid other than weekly, the employer must translate the salary to its weekly equivalent. For example, a semimonthly salary would be multiplied by 24, then divided by 52. The weekly salary would then be divided by the number of hours intended to be worked to determine the regular rate.

In one situation, an employer may pay a fixed salary to a nonexempt employee without additional overtime compensation. Such an arrangement is permitted only if the employee’s duties necessitate irregular hours of work and the employee is employed pursuant to an individual or collective agreement that provides the following:

A weekly guarantee of pay for not more than 60 hours based on the specified rate, and

A regular rate equal to or greater than the minimum wage that provides for compensation at one and one-half times the rate for hours worked in excess of the stated weekly maximum [29 USC section 207(f)].

Commission Payments

In the eyes of the FLSA, commissions are “payments for hours worked and must be included in the regular rate” (29 CFR section 778.117). This rule applies whether the commission is the sole form of compensation or not. Commission earned or paid weekly is included in (or constitutes) the total weekly compensation. If a commission is earned or paid other than weekly, “the employer may disregard the commission in computing the regular hourly rate until the amount of commission can be ascertained. Until that is done he may pay compensation for overtime at a rate not less than one and one-half times the hourly rate … exclusive of the commission” (29 CFR section 778.119).

Once the commission can be computed, the total commission is apportioned over the number of weeks in the commission period, then divided by the number of hours worked in each week to determine the increase in the regular rate. The employee must receive at least one-half that amount for each hour worked over 40 in any of those weeks. The regulations provide alternative methods when apportioning the commission equally among the workweeks is impossible or impractical.

Exclusions from the Regular Rate

The FLSA specifically excludes eight categories of compensation from an employee’s regular rate. Understanding the exclusions is critical because the employer must include any remuneration that does not fall within one of these exceptions in the total compensation when determining the regular rate. The following forms of compensation are specifically excluded under 29 USC section 207(e):

Gifts “the amounts of which are not measured by or dependent upon hours worked, production, or efficiency”

“Payments made for occasional periods when no work is performed” (e.g., vacation, holiday, sick pay) and reimbursement of expenses incurred in furtherance of the employer’s business

“Sums paid in recognition of services” if 1) both the fact and amount of such payments are at the employer’s sole discretion and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly or 2) the payments are made pursuant to a bona fide profit-sharing or other similar plan

Irrevocable contributions for health, retirement, death, or similar benefits

Premium compensation because the employee works more than eight hours in a day or 40 in a week (or in excess of normal hours)

Premium compensation for work on weekends, holidays, regular days of rest, or the sixth or seventh consecutive workday—only if such premium is at least one and one-half times the normal rate for such work

Premium compensation provided by an applicable employment or collective bargaining contract for work outside the hours of the normal workday or workweek—only if such premium is at least one and one-half times the normal rate for such work

Income derived from employer-provided grants or rights provided pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase program which is not otherwise excludable under any of the previous provisions.

Jeffrey D. Pollack is a partner in the law firm of Mintz & Gold LLP in New York City.

Editor:
Robert H. Colson, PhD, CPA
The CPA Journal

This Month | About Us | Archives | Advertise| NYSSCPA

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

THE CPA IN INDUSTRY