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Feb 02, 2018

Calculating the Regular Rate

By: Allison Mann

The overtime requirement of the Fair Labor Standards Act (FLSA) is one of the most commonly known employment laws in the United States. The FLSA requires employers to pay nonexempt employees overtime for any hour worked in excess of forty hours in one week. Overtime pay is time and a half of the employee’s regular rate of pay. However, oftentimes confusion arises when actually calculating the regular rate of pay. An employee’s “regular rate” includes not only the employee’s hourly rate, but some other types of compensation. One of the most common calculation errors is forgetting to include bonus payments in this calculation.

The law provides that all non-discretionary bonuses must be included in the regular-rate of pay. This type of bonus is used to encourage employees to work more diligently, rapidly, or efficiently. One common example is a bonus related to perfect attendance—the employee receives the bonus when they do not miss a shift in a specified period of time. In this instance, this bonus must be included in the employee’s regular rate calculation. Another common example is a retention bonus, which must also be included. Forgetting to include required bonus amounts may lead to erroneously compensating employees who work overtime. An example will illustrate this issue the best.

Jane works for XYZ, Corp. for a rate of $20 per hour. Jane is a non-exempt employee who works 60 hours every week. As an incentive for Jane, XYZ Corp. offers her a $25 bonus every week when she does not miss a shift. This bonus is non-discretionary. If Jane fulfills the requirement, she is entitled to receive the bonus. Jane never misses a shift.

So, let’s say XYZ Corp. did not know that her bonus must be included in her regular rate for overtime purposes. It assumes Jane’s overtime wage is time and a half of $20, or $30. Each week, Jane was compensated $1,400 for time worked, plus her $25 bonus, for a total of $1,425.

However, Jane’s bonus amounts should have been included when determining overtime wages. First, XYZ Corp. should have calculated Jane’s straight time wage. This is done by multiplying Jane’s hours worked by her hourly compensation, and then adding her weekly bonus. In this case, $20 * 60 hours + $25, which amounts to $1,225. Then, this amount is divided the hours worked to determine the regular rate. So, $1,225/60, which is $20.42. Jane’s overtime compensation would be time and a half of this amount, or $30.63. Jane works 40 hours at her hourly rate of $20, and 20 hours at her overtime rate of $30.63. Thus, Jane’s weekly wage under the correct calculation is $1,412.60, plus her $25 bonus, or $1,437.60.

XYZ Corp. undercompensated Jane by $12.60 per week. This amount may seem small on this scale. However, over time, this amount can really add up. Jane works 50 weeks per year, for a deficit of $630. Further, assume XYZ Corp. has 200 other employees just like Jane. Over the course of one year, XYZ Corp. has undercompensated its employees approximately $126,000.

Bonus calculation is only one of the common miscalculation errors. Others include failure to incorporate shift differentials, calculating the wrong overtime wage for employees that receive multiple rates of pay, and failure to pay the correct overtime when a salary is paid to a nonexempt employee. Each of these situations has the potential of creating a serious wage and hour violation, and subjecting an employer to liability for back wages and potential fines and penalties from the Department of Labor. Competent counsel is recommended whenever an employer is contemplating amending an employee’s compensation plan to ensure that no miscalculation occurs.

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I make a serious effort to be accurate in my writings. These articles are not exhaustive treatises, though, so do not consider them complete or authoritative. Providing this information to you does not create an attorney-client relationship with my firm or me. Do not act upon the contents of this or of any article on our homepage or consider it a replacement for professional advice.

Reprinted with permission from an article submitted for publication in the February, 2018 Southwest Area Human Resource Association newsletter.