Regular Rate

Subscribe to Regular Rate

An interesting decision just issued involving an employer who attempted to use a blended compensation system to pay employees overtime.  A federal appellate court ruled, however, that this system did not comply with the Fair Labor Standards Act and allowed a million dollar judgment obtained by the USDOL to stand.  The case is entitled U.S. Department of Labor v. Fire & Safety Investigation Consulting Services LLC, and issued from the Court of Appeals for the Fourth Circuit.  The compensation system “mixed and matched” the employees’ regular hourly pay rate with their overtime rate.  Thus, the workers were basically paid a single uniform hourly rate for all hours worked and therefore their OT rate was not calculated properly.

As the Court aptly stated, “the FLSA shields employees from precisely the type of payment scheme utilized by Fire & Safety — one that appears to compensate employees for both non-overtime and overtime but in reality, uses a single rate for all hours worked, regardless of whether they are non-overtime or overtime hours.  Upholding such a scheme and accepting Fire & Safety’s retroactive justifications would undercut one of the fundamental purposes of the FLSA: ensuring that employees are adequately paid for all overtime hours.”

These workers, who investigated fires and provided security for oil-and-gas companies worked shifts of twelve hours for fourteen consecutive days, followed by fourteen days off.  The pay system involved the workers receiving a fixed amount for the entire 168 hours.  That supposedly included both the regular pay rate for the first eighty (80) hours worked and (allegedly) time-and-a-half for the additional eighty-eight (88) hours.  If the workers, however, did not work the full schedule, the Company then used the blended rate.  The Company did this by dividing the total number using a pre-set formula that was based on the compensation they would have earned if they worked the full 168 hours.

The Court provided a hypothetical example of this illegal system in operation: Any person who earned $10 an hour would receive $2,120 in regular pay/overtime for the fourteen days.  If the person was short of the 168 hours, the Company divided the full pay of $2,120 by 168 and multiplied that figure by the actual number of hours worked.  There was a complaint and the agency found it was illegal; the Company corrected the practice but would not pay back pay.

The Fourth Circuit affirmed the lower court and used an actual example from the Company’s records.  The Court stated that “this series of calculations demonstrates that … Fire & Safety’s blended rate in fact served as the regular rate.  Otherwise, when consultants like those above worked less than a full hitch, their wages would have properly accounted for their non-overtime and overtime hours using their purported regular hourly rates, instead of their blended rates.”

The Takeaway

Interesting approach but ultimately doomed to failure.  There are very few ways to pay overtime when non-exempt people work more than forty hours.  If the overtime can (somehow) be built into the agreed-upon compensation, that would work but threading that needle can be tricky.

Tricky, but doable…

It is vital for employers to remember that when non-exempt employees earn commissions, those commissions must be included in the computation of their regular rate when they work overtime. The inclusion of the commissions bumps up the regular rate a little but if this is not done, then these small amounts of money can quickly add up if an employee or, worse yet, a class of employees files a lawsuit. That is exactly what has happened in a recent case involving sales representatives in a class action. The case is entitled Johnson v. Cincinnati Bell Inc. et al., and was filed in federal court in the Southern District of Ohio.

Salesperson holding the receiver of a corded desk phone while dialing in the office.The named plaintiff, Michael Johnson, was a sales representative for less than one year. His theory was that the failure to include the commissions in the regular rate violated the Fair Labor Standards Act. He moved for conditional certification in May and then the parties filed a joint stipulation in which they agreed to the definition of the class as certified and they also agreed on a method for advising potential members.

The court found that the class was appropriate, as there was a low standard of proof that needed for the establishment of a class. The judge stated that she was “satisfied that both the agreement of the parties and evidentiary submissions by plaintiff demonstrate the modest showing necessary to support conditional certification of the proposed class.”

There were affidavits, as well as payroll records which undergirded the theory that these employees, the outbound sales representatives, who worked in the telesales department “had certain standard duties, [were] paid in the same manner and regularly worked more than forty hours per week, and defendants did not include commission payments in the regular rate of compensation for purposes of overtime.”

The Takeaway

This case highlights the complexity of the Fair Labor Standards Act and all of its nuanced regulations. It is very easy for a well-intentioned, good faith employer to make a mistake. If it affects but one employee, that is all it is, a simple mistake, maybe costing a few dollars. If it affects a class, it is a much bigger issue.

Much bigger. And costlier…

I have blogged about some USDOL initiatives of late and see they are picking up some momentum with further developments coming down the line. The agency is going to revise the manner in which overtime is calculated (maybe to the employer’s benefit) and speak more on the issue (thorny as it is) of inclusion of bonuses in the regular rate.

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
There are other forms of “compensation” for employees, such as employee discounts and referral fees. The issue of whether these items are includible in the regular rate may also be opined about.  As I blogged about, the regulatory Agenda specifically stated that it would “clarify, update, and define regular rate requirements.” No other details have been forthcoming.

There is consensus that the new regulations would establish new groups of payment that may be excludible from the regular rate for overtime which businesses would welcome. There are any number of non-economic incentives and “payments” that are not directly amenable to computation and should (or should not) be includible.

Mr. Alexander Passantino, a former Wage-Hour Division Chief has observed that “it would be nice to have more guidance on what you’re talking about there so that we could give clients more advice on that with more certainty. Clients come up with good ideas on how they want to reward employees. It’s just helpful to say, ‘Yeah, that’s going to impact overtime rate,’ or, ‘no, it’s not.’”

The Takeaway

I agree with that sentiment. Employers want to comply with the law and often times have difficulty in properly interpreting what the FLSA does/does not command.  We will see what happens to the definition of the “regular rate” and what items it will/will not include.

I can’t wait…  .

The Trump Administration has issued its regulatory agenda, which is a semi-annual statement of the short- and long-term policy plans of government agencies. The DOL is at the forefront of these changes to come. The agency stated that it will revise the definition of “regular rate,” the number that forms the basis for overtime computations this coming September.

A former lobbyist for the Chamber of Commerce applauded the DOL proposed initiative on the regular rate and called it “huge.” The Fair Labor Standards Act mandates that employers calculate the regular rate for overtime purposes and there are many scenarios in which bonuses and other incentives are required to be included when determining what the regular rate is for a particular week. If these bonuses and other incentives did not need to be included, that would be a watershed development in how overtime is calculated and would reduce employer overtime liability significantly.

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
I have handled FLSA class actions where a client, through inadvertence, did not include small bonus amounts for employees and the end result was a major class action that we eventually settled but it was a real problem. The point is that many employers, good faith, well-intentioned employers, are simply unaware of these rules though they are certainly not trying to “stiff” their employees.

Another proposal in the agenda, rather controversial, is to expand apprenticeship and job opportunities minors under eighteen by softening the rules that forbid minors from working in so-called “hazardous” occupations or working around machinery that is prohibited. One advocate for workers agreed with the goal of increasing work chances for young people but urged the agency “to proceed with caution.” The advocate stated that “the DOL has a responsibility to safeguard the health and well-being of all workers, especially children.”

The Takeaway

The regular rate revision or change excites me from an “intellectual” side and, more germanely, from a practitioner’s perspective. That entire issue is very misunderstood by the employer community and can often lead to major liability. On a weekly basis, the tiny amounts generated from an employer’s failure to include bonus monies is negligible. However, when those tiny amounts of money are combined for a class of employees over two (or three) years, then the liability may become astronomical.

Maybe this new proposal is the right fix…

U.S. Secretary of Labor Alex Acosta
U.S. Secretary of Labor Alexander Acosta (By US Department of Labor (L-17-05-01-C-AlexanderAcosta-023-E) [Public domain], via Wikimedia Commons)
I have often blogged about the usefulness of USDOL (or any DOL) Opinion Letters and I have lamented that this procedure was stopped under President Obama.  I hailed that the new Secretary of Labor was going back to it.  Well, we have hit the bonanza and the year has just started!  Opinion Letters provide a mechanism for businesses (or individuals) to ask that the DOL provide formal guidance on specific factual and/or compliance issues under the FLSA.

The agency has now re-issued more than a dozen advisory opinion letters that had been published towards the end of the Bush administration but were later rescinded.  The reinstated letters address inclusion of bonus issues, employee exemption issues, especially the administrative exemption and whether “on-call” hours constitute hours worked in certain situations.

For example, in one letter the DOL ruled that project supervisors working in a residential home building industry qualified for an administrative exemption.  The Opinion Letter noted that the majority of the project supervisors’ job duties were administrative in nature and required the use of independent judgment.  Those duties included acting as the homebuilding company’s representative at the worksite in dealings with subcontractors, suppliers, customers and government inspectors and modifying the construction process as needed.

The DOL also emphasized the independent judgment factor when it found (in another letter) that client service managers at an insurance company qualified for the administrative exemption.  These employees’ primary duty was to serve as insurance advisers and consultants to the insurer’s clients.  As such, they utilized independent judgment when giving advice and did not need to receive prior approval for their advice.

There were also letters that addressed under what conditions bonuses should be included in the regular hourly rate of employees, which increases the amount of overtime the employees would be due.  These letters are vital because these issues come up with regularity.

The Takeaway

These letters might address technical issues but they also touch on substantive ones as well. I respect and value these letters because they still provide answers to important questions and serve as definitive guidance in assisting employers in complying with the FLSA.

A thorny enough task by itself…

When employers calculate overtime, and what the regular rate will be for the overtime, they must ensure that they include all “extra” payments, like commissions, or earned or promised bonuses, when they pay the overtime.  Failure to do so is a violation of the Fair Labor Standards Act.  To prove the point (hopefully not!), Quest Diagnostics has been hit with a class action overtime suit filed on that very theory.

Diagnostics and health care
Copyright: nito500 / 123RF Stock Photo

The named lead plaintiff alleges that the Company failed to properly pay hundreds of hourly workers by not including automatic incentive payments in their overtime rate calculations.  The case is entitled Avila v. Quest Diagnostics Clinical Laboratories Inc. et al., and was filed in federal court in the Central District of California.

The named plaintiff, a referral assistant and testing assistant at the Company’s West Hills, California, location claimed that she typically worked more than forty hours per week.  She alleges that when she was paid overtime, her non-discretionary payments bonuses, such as “Recognition Quest” and “Goal Sharing Bonus” were not included when figuring out her regular rate of pay, thereby violating state law and the Fair Labor Standards Act.  She claims in the Complaint that the “defendants regularly and systematically, as a policy and practice, miscalculated the overtime rate of pay by failing to properly include the various forms of incentive pay paid to plaintiff.”

The named plaintiff claims that there are more than five-hundred people in the class and that there were common policies or practices that applied to all class members.  The lawsuit alleges violations of the FLSA and California law, as well as state Counts alleging a failure to timely pay wages upon separation and violations of the California Unfair Competition Law.

The Takeaway

These kinds of lawsuits can sneak up on an employer.  It is a nuance of FLSA law that these payments, often small, must be included for regular rate purposes.  On a weekly basis, the extra money for employees is not that much and is financially manageable.  But, if these inclusions are not effected then, over a two (or three year) look back period and for up to five hundred employees, the amounts that could be due are staggering (plus liquidated damages and attorney fees).  I recently settled such a case, early on in the litigation, and the sums due were significant.

The lesson to be learned is a simple one—other than for discretionary (and that is a term of art) bonuses, all sums employees derive from their employment, that are promised to them or are found in employer policies (e.g. commission, attendance bonus) must be included when computing their regular rate in overtime weeks.  It may be a tedious chore, but a chore that will prove far less aggravating than dealing with a FLSA collective action.

Pay a little now, or pay a lot more later…

A little known aspect of the FLSA is the need for an employer to include non-discretionary bonuses when calculating the regular rate for purposes of overtime calculation.  In a collective action, the employees of Publix Super Markets have charged that the Company has not done that, particularly in the face of an alleged admission by the employer that the bonuses were nondiscretionary.  The case is entitled White et al. v. Publix Super Markets Inc. and was filed in federal court in Tennessee.

The Company had filed a motion for summary judgment asserting that the quarterly profit sharing bonus paid to hourly employees, the Christmas bonus, paid time for six holidays and tuition reimbursement did not warrant inclusion in the OT rate.  The Company charged that the plaintiffs mislabeled the manner in which the employee bonuses were actually calculated and that, in fact, the payments were within the law.

The workers fired back, contending that the Company had gone on record conceding that the payments were nondiscretionary and that the payments conflicted with DOL regulations.  The Company rebutted by contending that the bonus already provided “simultaneous payment of overtime compensation due on the bonus.” The Company asserted that the bonus was calculated based on number of hours employees worked at their store during the relevant period and thus fell within the safe harbor of percentage bonuses.  If a bonus is computed as a percentage of total employee earnings, then under USDOL regulations, it is legal.   The Company asserted that the USDOL had already concluded that the bonus did not need to be included into the OT calculation based on this percentage calculation.

The workers countered by asserting that the DOL’s “longstanding interpretation” of the total earnings requirement for rendering a bonus excludable from the regular rate was that the retail bonus had to be included because they were remuneration for employment and not just expense reimbursements, the Company could not exclude those payments from the regular rate.

 The Takeaway

Bonuses (or whatever they are called) must be included in the regular rate, if they part of a policy, practice or custom and employees expect such bonuses.  Truly discretionary bonuses are rare animals, i.e. the Christmas bonus, but a way to defend such an allegation is to build into the bonus “program” that the giving of such bonuses is contingent on, for example, “budgetary concerns.”

With that said, if the plaintiffs in this case can show that the payments at issue were given as payments for some employment related activity, as opposed to, for example, a paid sick day where no employment activity is engaged in, they might have a case.

Last week, the U.S. Department of Labor (“DOL”) announced that United States Beef Corp., doing business as Arby’s, has agreed to pay back wages in the amount of $55,838 based on their failure to properly calculate overtime.  This agreement came following an investigation by the DOL, which found that 255 Arby’s restaurants had failed to include bonuses paid to managers when computing the “regular rate” of pay for overtime compensation. The settlement affects 759 current and former hourly paid managers in Arkansas, Illinois, Kansas, Missouri, and Oklahoma.

Pursuant to the Fair Labor Standards Act (“FLSA”), overtime for hourly workers “must be compensated at a rate not less than one and one half times the regular rate at which the employee is actually employed.”  The “regular rate” is computed by dividing the total compensation paid to an employee (including all commissions, bonuses and incentive pay) by the hours worked in a given week.  Contrary to an hourly rate, the “regular rate” of pay will vary from week to week depending on the number of hours worked and the monetary amount of any bonus or commission paid to the employee.

The DOL found that Arby’s had computed overtime for the hourly managers using their hourly rate of pay rather than their “regular rate.”  The DOL stated in a press release that “Fast food restaurants are frequently found by the Wage and Hour Division to be in violation of the FLSA’s minimum wage and overtime wage provisions.  Because historical data indicate that the majority of violations are committed by franchisees rather than by corporate-owned establishments, the division is focusing its enforcement efforts accordingly.”

All employers, not just fast food franchisees, need to make sure that they are calculating overtime correctly.  This is especially true for businesses that pay employees lump sum amounts, such as bonuses, pursuant to company policy or practice.  As seen above, even a relatively small deviation from the required computation can lead to significant liability.