Rate of Pay

Calculating overtime payments is not as easy as it sounds one and one half times the hourly rate of pay. Simple enough except that the hourly rate of pay must include other payments made by the employer; payments such as certain bonuses or meals. In general, if the payment is considered part of the compensation package, then it has to be included in the regular rate of pay. For instance, if an employee is hired with the understanding that she will be awarded cash bonuses for saving her employer money, those cash bonuses must be considered part of the regular rate of pay. On the other hand, if an employer decides to award Christmas bonuses, and they are completely at the discretion of the employer, then they do not have to be included in the regular rate of pay.

The Fair Labor Standards Act (FLSA) is the federal law requiring employers to pay employees a minimum wage and to pay employees (who are not exempt from the act) overtime at a rate of one and a half times the regular rate of pay. The FLSA definition of "regular rate" is: "all remuneration for employment paid to, or on behalf of, the employee." 29 U.S.C. Section 207(e). Both the FLSA and the implementing regulations developed by the Department of Labor 29 C.F.R. Section 778.201-777.224 include examples of payments excluded from the regular rate of pay:

1. Gifts
2. Payments made when no work is performed for example, vacation and sick leave or when the employer has insufficient work.
3. Expenses incurred during travel such as the cost of a meal.
4. Payments made by an employer pursuant to a bona fide retirement, life, accident, or health insurance plan, or a plan providing similar benefits to an employee (*see case below).
5. Bonuses that are completely discretionary such as Christmas bonuses.
6. Profit sharing plans or bona fide thrift or savings plan.
7. Payment for absences such as jury duty or bereavement leave, these are types of leave that are sporadic and unpredictable.
8. Payments made by an employer that clearly are not payment for hours worked such as a fee paid to an employee for rental of his car; loans made to the employee; parking spaces, on-the-job medical care.
9. Tuition reimbursement.
10. Generally any award given to an employee for a good suggestions, as part of a suggestion system.
11. Severance pay.

Many payments must be included in the regular rate of pay. Some examples include:

1. Non-discretionary bonuses such as those that are part of pay-for-performance plans or gainsharing.
2. Payments for meals when they are considered part of the compensation.
3. Retroactive pay increases.
4. Contest prizes, such as prizes for highest production or best attendance. Any award that is made based on the quality, quantity, or efficiency of work done during normal working hours and based on the routine assigned tasks must be included.
5. Payment for on-call time when the employer pays the employee for being on-call even though the payments are not tied to any specific hours that are worked.

A recent court case in the federal district court for the Eastern District of Pennsylvania, Madison v. Resources for Human Development, Inc. (E.D. PA. 1999), ruled that a cafeteria benefits plan that allowed employees to choose a cash option - with no restrictions - was not a "bona fide retirement, life, accident, or health plan" according to the exemptions. As such, the employer was required to include the cash option as compensation when calculating the regular rate of pay.