Anticipated ‘Regular Rate’ Rule May Clarify How to Calculate Overtime

Allen Smith, J.D. By Allen Smith, J.D. November 21, 2018

​In an upcoming proposed rule, the U.S. Department of Labor (DOL) is expected to sharpen the definition of "regular rate" of pay. The rule is intended to reduce litigation over how to determine overtime compensation.

When calculating overtime under the Fair Labor Standards Act, employers must pay nonexempt employees an overtime rate of 1 1/2 times their regular rate of pay for all hours worked in excess of 40 in a workweek. An employee's regular rate is determined by dividing the total pay for employment in any workweek by the total number of hours an employee actually worked.

"Employers provide many types of pay and benefits to reward and incentivize employees," said Nancy Hammer, Society for Human Resource Management vice president, regulatory affairs and judicial counsel. She said the upcoming proposed rule will present "an important opportunity to give employers more clarity on what types of pay are included in the regular rate."

Definition of Regular Rate

"Unless a particular payment is specifically excluded by the statute, it must be included when calculating the regular rate," noted Brett Coburn, an attorney with Alston & Bird in Atlanta. "A quick shorthand for thinking about the regular rate is that it is derived by adding up all nonovertime payments made to an employee in a week and dividing it by the number of hours actually worked in the week."

Jeffrey Ruzal, an attorney with Epstein Becker Green in New York City, provided the following example of how the regular rate is used in the calculation of pay.

Suppose Mary earns $15 per hour, receives a $100 nondiscretionary bonus in the relevant workweek, and works 50 hours in that same workweek. To calculate the regular rate, the employer must first ascertain the total amount of earnings in that workweek by multiplying Mary's $15 hourly rate by the total number of hours worked, or 50, which equals $750. Next, add to that subtotal the $100 nondiscretionary bonus, which equals $850. Divide $850 by the 50 hours worked to arrive at a $17 regular rate. Accordingly, Mary is entitled to $680 for her first 40 hours of work ($17 x 40 hours), plus $255 for her 10 overtime hours ($17 regular rate x 1.5 = $25.50, and $25.50 x 10 overtime hours = $255) for a total of $935.

DOL regulations identify only a few types of payments that may be excluded from the regular rate when calculating overtime, Ruzal explained. They include:

  • Discretionary bonuses.
  • Payments made when no work is performed, such as vacation or holiday pay.
  • Gifts.
  • Irrevocable benefits payments.
  • Premium payments for work performed outside an employee's regular work hours.
  • Extra compensation paid according to a private agreement or collective bargaining.
  • Income derived from grants or options.

[SHRM members-only toolkit: Calculating Overtime Pay in the United States]

"The speculation is that the rulemaking will address whether the amount of a tuition reimbursement, the value of an employee discount or the cost of an employer-provided gym should be part of the regular rate or excluded from it," said Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C. The DOL has issued opinion letters on tuition reimbursement and, depending on the facts, has decided that the payments may or may not be included in an employee's regular rate.

Reduced Litigation

"While it is difficult to predict just how important this rulemaking could be, until we know more specifics, any clarification of what constitutes the regular rate should help promote compliance and minimize litigation risks," Robinson said.

Much litigation centers on whether the calculation of the regular rate involves determining whether a bonus is discretionary, according to Ruzal. Nondiscretionary bonuses, which are typically performance- or metrics-based, must be included in the regular rate because employees have an expectation that if they meet the performance criteria to merit the bonus, they will receive it. So it's guaranteed compensation, much like an hourly wage or salary, he explained.

Discretionary bonuses need not be included in the regular rate because they are paid purely at the discretion of the employer. "By updating its regulations, the DOL may provide greater clarity with respect to determining whether a bonus more closely resembles the characteristics of a discretionary or nondiscretionary bonus," Ruzal said.

[SHRM members-only HR Q&A: What is the difference between a discretionary and a nondiscretionary bonus?]

Modernized Forms of Compensation

The DOL also might explain whether newer forms of remuneration, such as ride-hailing services and supplemented child care costs, should be included in the regular rate, according to Steven Suflas and Elliot Griffin, attorneys with Ballard Spahr in Denver and Philadelphia, respectively. "These new methods, which are outside of what people may generally think in terms of compensation, might have motivated the DOL to reconsider the current rule and address some of the more modern trends," they stated.

John Yslas, an attorney with Seyfarth Shaw in Los Angeles, said that other more-modern forms of compensation the DOL might address include:

  • Modest incentive programs (e.g., cash bonuses or redemption of points for products, services or gift cards).
  • Exercise classes.
  • Travel, meal or housing allowances.

Ruzal added that private equity pay is another example of modernized compensation whose inclusion or exclusion from the regular rate might be explained.

The DOL announced in its fall regulatory agenda that it plans to issue the proposed rule in December.



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