I. INTRODUCTION
The federal Fair Labor Standards Act addresses maximum hours and overtime compensation in §7(a). Employees who are within the general coverage of the Act and are not specifically exempt from its overtime pay requirements may not work over 40 hours per week without receiving additional compensation at a general overtime rate of pay of not less than one and one-half times the employee’s “regular rate” for the overtime hours worked. Apart from the child labor provisions of the Act, there is no absolute limitation on the number of hours that an employee may work in any workweek, so long as the required overtime compensation is paid. The maximum non-overtime hours does not generally require that an employee be paid overtime for hours in excess of eight per day, or for work on Saturdays, Sundays, holidays or regular days of rest. Rather, the “workweek” is the basis for applying the maximum hours and overtime provisions of § 7(a).
The Act applies a single workweek as its standard and does not allow the averaging of hours over two or more weeks. E.g., if an employee works 30 hours one week and 50 hours the next week, the employee must receive overtime compensation for the overtime hours worked in the second week, even though the average number of hours worked in the two weeks is 40. The workweek is defined in § 778.105 of the regulations as “a fixed and regularly recurring period of 168 hours - seven consecutive 24-hour periods.” The workweek need not coincide with the calendar week but may begin on any day and at any hour of the day. Once the beginning time of an employee’s workweek is established, it remains fixed regardless of the schedule of hours worked. The beginning of the workweek can only be changed if it is intended to be permanent and not an evasion of the overtime requirements of the Act.
There is no requirement that overtime compensation be paid weekly, but the general rule is that overtime earned in a particular workweek must be paid on the regular pay day for the period in which such workweek ends. If the correct amount of overtime cannot be determined until sometime after the regular pay period, the Act is satisfied if the employer pays the overtime as soon after the regular pay period as practicable.
II. COMPUTING OVERTIME PAY BASED ON THE “REGULAR RATE”
The “regular rate” of pay is not a declaration by the parties as to what is to be treated as the regular rate for an employer, but must be determined from what happens under the employment arrangement. The “regular rate” is a rate per hour, even though the Act does not require employers to compensate employees on an hourly rate basis. Earnings may be determined on a piece-rate, salary, commission, or other basis. The regular hourly rate of pay is determined by dividing total remuneration for employment in any workweek by the total number of hours actually worked in that workweek for which such compensation was paid.
A. Hourly Rate Employees
If an employee is employed solely on the basis of a single hourly rate, that rate is his “regular rate.” Overtime work must be paid, in addition to straight time hourly earnings, a sum determined by multiplying one-half the hourly rate by the number of hours worked in excess of 40 in the week. If the employee receives, in addition to hourly rate earnings, a production bonus, the overtime work must be paid based on the regular hourly earnings plus the production bonus.
B. Piecework Employees
An employee that works on a piece-rate basis has a regular hourly rate of pay computed by adding together total earnings for the workweek from piece rates and all other sources (e.g., production bonuses) and any sums paid for waiting time or other hours worked (except statutory exclusions). The sum is then divided by the number of hours worked in the week for which such compensation was paid in order to arrive at the pieceworker’s “regular rate” for that week. For overtime work, the pieceworker must be paid, in addition to total weekly earnings, at this regular rate for all hours worked, a sum equivalent to one-half this regular rate of pay multiplied by the number of hours worked in excess of 40 in the week.
C. Day Rate and Job Rate Employees
When an employee is paid a flat sum for a day’s work or for doing a particular job, regardless of the number of hours worked in the day or at the job, and if the employee receives no other form of compensation for services, the regular rate is calculated by totaling all sums received at such day or job rate in the workweek and dividing by the total hours actually worked. The employee is entitled to extra half-time pay at this rate for all hours worked in excess of 40 in the workweek.
D. Salaried Employees – General
If an employee is employed solely on a weekly salary basis, the regular hourly pay rate is computed by dividing the salary by the number of hours which the salary is intended to compensate. E.g., If the salary is compensation for a regular workweek of 35 hours at a salary of $500, the employee’s regular pay rate is $14.29 an hour ($500/35 hours) and when working overtime, the employee must receive $14.29 for each of the first 40 hours and $21.44 (1.5 x $14.29) for each hour thereafter. An employee hired at $500 for a 40 hour workweek would have a regular pay rate of $12.50 an hour.
E. Salary for Periods other than Workweek
Where a salary covers a period longer than a workweek, e.g., month, it must be reduced to its workweek equivalent. A monthly salary is reduced to its equivalent weekly wage by multiplying by 12 (number of months) and dividing by 52 (number of weeks). Similarly, a semi-monthly salary is determined by multiplying by 24 and dividing by 52. Once the weekly wage is determined, then the regularly hourly pay rate is calculated as discussed in the paragraph above. E.g., the regular rate of an employee who is paid a regular monthly salary of $2,000 or a regularly semimonthly salary of $1,000 for a 40 workweek, is $11.54 per hour.
F. Fixed Salary for Fluctuating Hours
A salaried employee may have work hours which fluctuate from week to week. A salary may be paid if understood that a fixed amount will be received as straight time pay for whatever hours called upon to work in a workweek, whether few or many. This clear and mutual understanding is permitted only if the amount of the salary compensates the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours worked is the greatest, and if the employee receives extra compensation, in addition to such salary, for all overtime hours worked. This arrangement intends that the employee is compensated at straight time rates for whatever hours are worked in the workweek. The regular rate varies from week to week. The regular rate is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week. The fluctuating workweek method may not be used unless the salary is sufficiently large to assure that no workweek will be worked where the employee’s average hourly earnings from salary fall below the minimum hourly wage rate and the employee clearly understands that the salary covers whatever hours the job may demand in a particular workweek and the employer pays the salary even though the workweek is one in which a full schedule of hours is not worked.
III. PAYMENTS THAT MAY BE EXCLUDED FROM THE “REGULAR RATE”
Certain additional payments may be made by employers that might be characterized as “premium” payments for work in excess of or outside of specified daily or weekly standard work periods or on certain special days. Under the rules, the extra compensation provided by the premium rates need not be included in the employee’s regular pay rate for the purpose of computing overtime payments. Three types of extra premium compensation may be credited toward overtime compensation due for work in excess of the applicable maximum hours standard. No other types of remuneration for employment may be so credited.
The three recognized types of credited payments for overtime purposes are:
1. Premium Pay for Hours in Excess of a Daily or Weekly Standard (See, § 778.202)
a. Hours in excess of eight per day or statutory weekly standard;
b. Hours in excess of normal or regular working hours;
c. Premiums for excessive daily hours;
d. Hours in excess of other statutory standard;
e. Premium pay for sixth or seventh day worked.
2. Premium Pay for Work on Saturdays, Sundays and Other “Special Days” (See, § 778.203)
3. “Clock Pattern” Premium Pay (See, § 778.204)
a. Overtime premiums under collective bargaining agreement or other applicable employment contract;
b. Premiums for hours outside established working hours;
c. Payment in pursuance of agreement.
The plain wording of the Act and its regulations make it clear that extra compensation provided by premium rates other than those listed above cannot be treated as overtime premiums. Where such other premiums are paid, they must be included in the employee’s regular rate prior to computing statutory overtime compensation. In other words, no part of such other premiums may be credited toward statutory overtime pay. For examples, some non-overtime premiums would include extra premiums for night-shifts, incentives for rapid work performance, hazardous work, and “arduous or dirty work.” Lump-sum payments without regard to the number of hours worked are not overtime premiums and must be included in the regular rate.
IV. “BONUSES” – INCLUSION AND EXCLUSION IN COMPUTING THE “REGULAR RATE”
Payments recognized by the Act as excludable from the regular rate are discretionary bonuses, gifts and payments in the nature of gifts on special occasions, contributions by employers to certain welfare plans and payments made by the employer pursuant to certain profit-sharing, thrift and saving plans. Generally, these exclusions are found in §§ 778.211 through 778.214 of the regulations. Bonuses not qualifying for exclusion from the regular rate must be added with other earnings to determine the regular rate upon which overtime pay must be based.
In order to qualify a bonus for exclusion, it must be a discretionary bonus, i.e., the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement. The employee must not have a prior contract right, either express or implied. When an employer announces or promises in advance to pay a bonus, the employer has abandoned the discretionary requirement. In addition, bonuses which are announced to employees to induce them to work more steadily, rapidly, or efficiently or to remain with the business are regarded as part of the regular pay rate. Attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee’s continuation of employment until payment is made are also included in the regular pay rate.
Christmas bonuses or gifts, special occasion bonuses or gifts or similar payments are excludable so long as they are not measured by or dependent on hours worked, production, or efficiency. If the payment is so substantial that employees consider it a part of the wages for which they work, the bonus cannot be considered to be in the nature of a gift.