Bob E. Lype & Associates - Attorneys at Law in Chattanooga, Tennessee
Bob E. Lype - Attorney at Law in Chattnooga, Tennessee
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Issues In Overtime

As presented at the NBI Wage & Hour Law in Tennessee Seminar in Chattanooga, Tennessee, in April, 2001.

I. OVERTIME REGULATIONS UNDER STATE AND FEDERAL LAW

A. Tennessee Law. Tennessee does not have general statutes or regulations which address overtime for all Tennessee employers. Under Tennessee's statutory scheme, employment practices are generally covered in Title 50 of the Tennessee Code Annotated ("Employer and Employee"). Within Title 50, Chapter 2 addresses "wage regulations." However, Chapter 2 does not address the regulation of overtime compensation, but is instead directed toward the manner in which wages are payable, as well as a prohibition on wage discrimination based upon sex.

There are a couple of Tennessee statutes which address overtime requirements for state employees. Tenn. Code Ann. 4-4-105(b) provides that state personnel who are required to work extra hours due to business demands may be entitled to "equivalent time off at other times during the week." Tenn. Code Ann. 8-23-201(a) addresses compensation for extra services or overtime for certain state employees, and Tenn. Code Ann. 8-30-214 addresses overtime for civil service employees. Tenn. Code Ann. 8-50-801(f) notes that eligible employees who are compensated for overtime work by receiving compensatory time instead of overtime pay are entitled to use "annual time" instead of "compensatory time" under certain circumstances.

B. Federal Law. Federal regulation of overtime is accomplished through the Fair Labor Standards Act (FLSA). In particular, 29 U.S.C. 207(a)(1) provides:

Except as otherwise provided in this section, no employer shall employee any of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce, for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.

The remainder of 207 addresses particular rules for particular types of employment or industries (e.g., "piece rate" employees, retail and service establishments, hospitals and nursing homes, etc.). Further, 29 U.S.C. 213 provides numerous exemptions from coverage under the overtime provisions (and in some cases the minimum wage provisions) of the FLSA. The exemptions are discussed in more detail elsewhere in these materials.

The Federal statutes are only the beginning point for understanding the Federal regulation of overtime. The Department of Labor, Wage and Hour Division has promulgated a host of regulations which explain, clarify and expound upon the statutes. These regulations can be found in the Code of Federal Regulations (CFR), Chapter V ("Wage and Hour Division, Department of Labor"), Subchapter A ("Regulations") and Subchapter B ("Statements of General Policy or Interpretation Not Directly Related to Regulations").

It is important to understand the "scheme" of the overtime regulations found in the Code of Federal Regulations. The actual "regulations" are found in Subchapter A, which contains thirty-six (36) "Parts." Each "Part" addresses a discrete topic. For example, Part 516 address "records to be kept by employers," Part 541 addresses the executive, administrative and professional exemptions, and Part 578 addresses civil money penalties for minimum wage and overtime violations. On the other hand, Subchapter B (beginning at Part 775) contains advisory interpretations and statements of policy, as opposed to "regulations." These interpretations are provided for the guidance of the Wage and Hour Division and its agents, so as to provide uniformity of interpretation. While they do not technically carry the weight of "regulations," the interpretative provisions in Subchapter B are very useful for employers and lawyers representing employers, since they provide numerous examples and insights into the way the Wage and Hour Division will interpret a given situation.

While the actual "regulations" (Subchapter A) do not contain a specific "Part" directed solely at overtime regulation, several of the Parts address topics which affect overtime compensation, such as the definition or application of various exemptions, and Part 548 concerns "Authorization of Established Basic Rates for Computing Overtime." Within Subchapter B there is one Part which addresses strictly overtime issues, although other Parts do contain guidance and interpretations which relate to overtime issues, such as exemptions. In particular, Part 778 of Subchapter B addresses "Overtime Compensation." Within Part 778 there are various subparts and sub-subparts. To assist the employer and the lawyer representing the employer in locating interpretative guidance and policy statements related to specific issues, the subdivisions of Part 778 are as follows:

  • Subpart A – General Considerations
  • Subpart B – The Overtime Pay Requirements
    • Introductory
    • Principles for Computing Overtime Pay Based on the "Regular Rate"
  • Subpart C – Payments That May Be Excluded from the "Regular Rate"
    • The Statutory Provisions
    • Extra Compensation Paid for Overtime
    • Bonuses
    • Payments Not for Hours Worked
    • Talent Fees in the Radio and Television Industry
  • Subpart D – Special Problems
    • Introductory
    • Change in the Beginning of the Workweek
    • Additional Pay for Past Period
    • How Deductions Affect the Regular Rate
    • Lump Sum Attributed to Overtime
    • "Task" Basis of Payment
    • Effect of Failure to Count or Pay for Certain Working Hours
    • Effect of Paying For But Not Counting Certain Hours
    • Reduction in Workweek Schedule With No Change in Pay
    • Prizes as Bonuses
  • Subpart E – Exceptions from the Regular Rate Principles
    • Computing Overtime Pay on an "Established" Rate
    • Guaranteed Compensation Which Includes Overtime Pay
    • Computing Overtime Pay on the Rate Applicable to the Type of Work Performed in Overtime Hours
  • Subpart F – Pay Plans Which Circumvent the Act
    • Devices to Evade the Overtime Requirements
    • Pseudo-Bonuses
  • Subpart G – Miscellaneous

Summary of Federal Overtime Requirements. Overtime is earned on the basis of the "workweek," not daily. Overtime must be paid under the FLSA for all hours worked over 40 in a given workweek, but there is no FLSA overtime requirement for daily hours worked over a given number. The "workweek" is the basis for figuring overtime pay regardless of whether employees are actually paid daily, weekly, bi-weekly or monthly. Under some situations, hospital and nursing home employees may be paid overtime averaged over a 14-day period under a special agreement allowed by the FLSA, and there are also special rules for law enforcement officers and firefighters. The "workweek" is seven consecutive 24-hour periods. It may begin on any day of the week, and under some circumstances it may be changed if the change is permanent and the purpose is not to avoid overtime liability.

The FLSA overtime rate is one and one-half of the employee's "regular rate." The regular rate generally means an hourly rate, roughly equal to straight-time earnings divided by hours worked. Because overtime is figured on a weekly basis, the "regular rate" should be computed each week, and in some cases it can vary. The "regular rate" can be affected by how an employer pays an employee (e.g., a straight hourly rate, a salary, a "piece rate," etc.). However, not all compensation paid to employees must be included in the "regular rate." In calculating the "regular rate," the employer may exclude certain items such as premium payments created by contract or policy, paid to employees in addition to their hourly wage or salary rate. Also excludable from the "regular rate" calculation are such items as discretionary bonuses, expense reimbursements, ERISA plan contributions, paid parking, royalties, vacation pay, etc.

Calculation of the "regular rate" is discussed in more detail below.

Compensable time and "hours worked" are also discussed elsewhere in these seminar materials.

II. METHODS OF CALCULATING OVERTIME

The basic premise of calculating overtime pay is not difficult. 29 U.S.C. 207(a)(1) provides that when a covered employee works more than 40 hours in a workweek, he must receive "compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed." To understand overtime calculation, it is necessary to understand the following concepts: the overtime rate; the workweek; the regular rate of pay (and in particular, what is included and what is excluded in computing the regular rate, as discussed in detail below); and certain credits which the employer may take against overtime compensation due.

The Overtime Rate. This part is easy. The overtime rate is one and one-half times the "regular rate" for hours worked in excess of 40 in a given workweek.

The Workweek. The FLSA does not set any limit on the actual number of hours which an employee may work during a given workweek, nor does it require that an employee be paid overtime compensation for hours in excess of eight per day, or for work on Saturdays, Sundays, holidays or regular days of rest. 29 C.F.R. 778.102. Contrary to the perception of many employees, no overtime compensation is owed simply because the employee is required to work 14 hours on a given day, or on a Sunday, or on a holiday, so long as the employee is not required to work more than 40 hours during that workweek. Each workweek stands alone, and an employee is not permitted to claim overtime or an employer is not permitted to disclaim overtime by "averaging" hours worked over two or more weeks. Thus, if an employee works 30 hours one week and 50 hours the next, he must receive 10 hours' overtime compensation for the second week, even though the average number of hours worked during the two weeks is 40. 29 C.F.R. 778.104. If an employee is jointly employed by two or more employers, all hours worked by the employee for the joint employers must be totaled in determining the number of hours to be compensated. 29 C.F.R. 778.103.

The "workweek" is a fixed and regularly recurring period of 168 hours (seven consecutive 24-hour periods). It need not coincide with the calendar week, but may begin on any day and at any hour of the day. 29 C.F.R. 778.105. An employer may establish one workweek for one group of employees, and another workweek for another group of employees. Id.

The beginning of the workweek may be changed by the employer if the change is intended to be permanent and is not designed to evade the overtime requirements of the FLSA. Id. A change in the workweek necessarily results in a situation in which one or more hours or days fall in both the "old" workweek and the "new" workweek. If the workweek is changed and some of the employee's working time falls in both workweeks, the Department of Labor will assume that the FLSA has been complied with if the employee's compensation is computed as follows: (1) assume first that the overlapping hours are to be counted as hours worked only in the "old" workweek and not in the new; compute straight time and overtime compensation due for each of the two workweeks on this basis and total the two sums; (2) then assume that the overlapping hours are to counted as hours worked only during the "new" workweek and not in the old, and complete the total computation accordingly; and (3) pay the employee an amount not less than the greater of the amounts computed by these methods. 29 C.F.R. 778.302.

Just because overtime is calculated on a "workweek" basis, this does not mean that overtime compensation must be paid weekly. Instead, overtime compensation earned in a particular workweek must be paid on the next regular payday for the period in which the workweek ends. If the correct amount of overtime compensation cannot be determined until some later time, the employer must pay the overtime compensation as soon after the regular pay period as is practicable. Payment may not be delayed for a period longer than is reasonably necessary for the employer to compute and arrange for payment of the amount due. 29 C.F.R. 778.106.

Credits Against Overtime. The FLSA does not require an employer to pay overtime twice for the same hours. Some employers give "premium pay" for long hours, holiday or weekend work, or undesirable hours. If the employer's "premium pay" policy calls for payment at a rate greater than the time-and-one-half FLSA requirement, such "premium pay" may be used to offset, or as a credit against, the FLSA overtime requirements. Such premium pay can have two effects related to overtime: (1) it may be excluded when calculating the "regular rate of pay" (discussed in more detail below); and (2) it may be credited against overtime pay required by the FLSA.

To be eligible for this treatment, the premium pay must fit in to one of the following three categories:

  1. extra compensation provided by a premium rate paid for certain hours worked by the employee in any day or workweek because such hours are hours worked in excess of eight in a day or in excess of the maximum workweek applicable to such employee under subsection (a) of this section or in excess of the employee's normal working hours or regular working hours, as the case may be;
  2. extra compensation provided by a premium rate paid for work by the employee on Saturdays, Sundays, holidays, or regular days of rest, or on the sixth or seventh day of the workweek, where such premium rate is not less than one and one-half times the rate established in good faith for like work performed in nonovertime hours on other days; or
  3. extra compensation provided by a premium rate paid to the employee, on pursuance of an applicable employment contract or collective-bargaining agreement, for work outside of the hours established in good faith by the contract or agreement as the basic, normal, or regular workday (not exceeding eight hours) or workweek not exceeding the maximum workweek applicable to such employee under subsection (a) of this section, where such premium rate is not less than one and one-half times the rate established in good faith by the contract or agreement for like work performed during such workday or workweek.

29 U.S.C. 207(h). Premium pay that does not fit into one of these descriptions must be treated as straight-time pay.

As an example, suppose that an employer pays "premium pay" to employees who agree to work on Saturdays, since this is an undesirable working condition. Suppose the employer pays for Saturday work at time and one-half the regular rate. For purposes of this example, suppose that the employee's regular rate is $10 per hour; and suppose that he works 44 hours during the workweek, including eight hours on a Saturday. Under the employer's policy, the employee will be paid time and one-half for all eight hours worked on the Saturday. The employee cannot claim that he is also entitled to four hours of overtime pay, since he worked 44 hours during the week. Instead, the employer is given a credit, or is permitted to offset the "premium pay" for the Saturday work against the overtime compensation which would otherwise be owed.

An employer may not, however, claim bonuses and gifts paid to an employee as a credit toward overtime compensation owing. 29 C.F.R. 778.211(a) and 778.212(a). Likewise, an employer may not claim contributions to a profit sharing plan or retirement plan as a credit toward overtime compensation owing. 29 C.F.R. 778.213 and 778.214.

III. REGULAR RATE OF PAY DEFINED

29 U.S.C. 207(a)(1) sets the basic formula for overtime compensation: "one and one-half times the regular rate at which [the employee] is employed." Therefore, in order to properly calculate overtime compensation, the employer must determine the "regular rate." But what is included? 29 U.S.C. 207(e) defines the "regular rate" to broadly include "all remuneration for employment paid to, or on behalf of, the employee." However, the statute then carves out certain types of remuneration which are excluded from the employee's "regular rate."

29 U.S.C. 207(e) provides:

As used in this section the "regular rate" at which an employee is employed shall be deemed to include all remuneration for employment paid to, or on behalf of, the employee, but shall not be deemed to include –

  1. sums paid as gifts; payments in the nature of gifts made at Christmas time or at other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency;
  2. payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer's interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment;
  3. sums paid in recognition of services performed during a given period if either, (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly; or (b) the payments are made pursuant to a bona fide profit-sharing plan or trust or bona fide thrift or savings plan, meeting the requirements of the Administrator set forth in appropriate regulations which he shall issue, having due regard among other relevant factors, to the extent to which the amounts paid to the employee are determined without regard to hours of work, production, or efficiency; or (c) the payments are talent fees (as such talent fees are defined and delimited by regulations of the Administrator) paid to performers, including announcers, on radio and television programs;
  4. contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees;
  5. extra compensation provided by a premium rate paid for certain hours worked by the employee in any day or workweek because such hours are hours worked in excess of eight in a day or in excess of the maximum workweek applicable to such employee under subsection (a) of this section or in excess of the employee's normal working hours or regular working hours, as the case may be;
  6. extra compensation provided by a premium rate paid for work by the employee on Saturdays, Sundays, holidays, or regular days of rest, or on the sixth or seventh day of the workweek, where such premium rate is not less than one and one-half times the rate established in good faith for like work performed in nonovertime hours on other days; or
  7. extra compensation provided by a premium rate paid to the employee, on pursuance of an applicable employment contract or collective-bargaining agreement, for work outside of the hours established in good faith by the contract or agreement as the basic, normal, or regular workday (not exceeding eight hours) or workweek not exceeding the maximum workweek applicable to such employee under subsection (a) of this section, where such premium rate is not less than one and one-half times the rate established in good faith by the contract or agreement for like work performed during such workday or workweek.

The basic concept of the "regular rate" is not difficult. It generally means the hourly rate actually paid for the normal nonovertime workweek. The regular rate may in no event be less than the statutory minimum. 29 C.F.R. 778.107. Further, the regular rate cannot be left to a declaration by the parties, but must be drawn from what happens under the employment contract. 29 C.F.R. 778.108. Regardless of whether the employee is paid on an hourly basis, a piece work basis, a salary basis, or otherwise, the regular rate must be expressed as a "per hour" rate. 29 C.F.R. 778.109.

A. Expressing an Hourly Rate. There is little problem in expressing an employee's "regular rate" as an hourly rate when the employee is paid solely on a per hour basis. The problem arises when the employee's compensation includes a production bonus, or when the employee is paid a flat sum for a day's work, or when he is a "piece worker," or when he is paid a salary, or when he is paid on a commission basis. Employees who are paid under such pay schemes and who are not exempt from overtime coverage must still have their regular rates expressed as hourly rates.

If the employee receives a production bonus in addition to a set hourly rate, the production bonus for a given week must be added to the normal compensation, then the sum must be divided by the number of hours actually worked, with the result being the regular rate. 19 C.F.R. 778.110(b).

When an employee is employed on a piece-rate basis, his regular hourly rate of pay is computed by adding together his total earnings for the workweek from piece rates and all other sources, then dividing this sum by the number of hours worked in the week. For hours in excess of 40, the piece-worker is entitled to be paid his piece-rate earnings, plus a sum equivalent to one-half of this regular rate of pay multiplied by the number of hours worked in excess of 40 in the week. 29 C.F.R. 778.11(a). If the employee is paid on a piece-rate basis coupled with a minimum hourly guarantee, where the total piece-rate earnings for the workweek fall short of the amount that would be earned for the total hours of work at the guaranteed rate, the employee is paid the difference. 29 C.F.R. 778.111(b).

If the employee is paid a flat sum for a day's work or for doing a particular job, without regard to the number of hours worked in the day or at the job, and if he receives no other form of compensation for services, his regular rate is determined by totaling all of the sums received at such day rates or job rates in the workweek in question and dividing by the total hours actually worked. He is then entitled to extra half-time pay at this rate for all hours worked in excess of 40 in the workweek. 29 C.F.R. 778.112.

Salary employees present a different problem. If an employee is engaged on a weekly salary basis, his regular rate of pay is calculated by dividing the weekly salary by the number of hours which the salary is intended to compensate. If the employee is paid on a salary basis covering something besides a week (e.g., a month), that salary must be reduced to its workweek equivalent. A monthly salary must be multiplied by 12, then divided by 52. A semi-monthly salary must be multiplied by 24, then divided by 52. Once the weekly wage is arrived at, the regular hourly rate of pay will be calculated as with an employee paid on a weekly salary basis. 29 C.F.R. 778.113.

But suppose the salary is not intended to compensate a given number of hours per week, but rather a fluctuating number of hours. For example, the employer may agree to pay the employee a $500 weekly salary, whether the employee is only needed 10 hours per week or 60 hours per week. If there is a clear mutual understanding between the employer and the employee in this regard, and so long as the agreed salary does not take the employee below the minimum wage when he must work a great number of hours, this arrangement is permissible. In such cases, the employee is entitled to overtime compensation (above his salary) for hours worked in excess of 40 in the workweek. The employee's regular rate will vary from week to week, to be determined by dividing the number of hours actually worked in the week into the amount of the salary, yielding an hourly rate for the given week. 29 C.F.R. 778.114. Suppose the employee is to receive a $500 weekly salary for a fluctuating workweek, and in week 1 he works 46 hours, while in week 2 he works 60 hours. For week 1, his "regular rate" is $10.87 ($500 divided by 46), so his weekly compensation is $532.61 (the $500 salary, plus one-half of the hours in excess of 40 times the regular rate; $10.87 x 6 = $65.22 ) 2 = $32.61; $500 + 32.61 = $532.61). For week 2, the employee would be entitled to receive $583.30. His "regular rate" would be $8.33 per hour ($500 ) 60). In addition to his regular $500 weekly salary, he would receive one-half of his regular rate times the number of hours worked in excess of 40 (i.e., 20).

Commissions are payments for hours worked and must be included in the regular rate, regardless of whether the commission is the sole source of the employee's compensation or is paid in addition to a guaranteed salary or hourly rate, and regardless of the method, frequency or regularity of computing or paying the commission. The fact that a commission is paid on some other basis than weekly, and that payment is delayed for a time past the employee's normal payday, does not excuse the employer from including this payment in the employee's regular rate. 29 C.F.R. 778.117. If a commission is paid on a weekly basis, it is added to the employee's other earnings for that workweek, and the total is divided by the total number of hours worked to obtain the employee's regular hourly rate. The employee must then be paid extra compensation at one-half of that rate for each hour worked in excess of 40 per week. 29 C.F.R. 778.118. Overtime pay for employees paid wholly or partly on a commission basis may be computed on an "established basic rate," in lieu of this method, as discussed in subsection D, below.

B. Exclusions from the Regular Rate. As is noted above, 29 U.S.C. 207(e) lists a number of types of compensation or remuneration which are excluded when calculating the employee's "regular rate." The listed items are the only authorized exclusions. 29 C.F.R. 778.200(c). The exclusions can generally be characterized as payments made as "premiums" for certain types of work, payments made as certain gifts or bonuses, and payments into profit sharing or pension plans.

Certain premium payments made by employers for work in excess of or outside of specified daily or weekly standard work periods, or on certain special days, are regarded as overtime premiums. In such cases, the extra compensation provided by the premium rates need not be included in calculating the employee's regular rate of pay, and (as discussed above) such premium payments may be credited toward the overtime payments required by the FLSA. 29 C.F.R. 778.201(a). No other types of remuneration for employment may be so credited. 29 C.F.R. 778.201(c).

In addition to premium payments, certain bonuses and gifts are excluded in calculating the employee's "regular rate." Bonuses "are payments made in addition to the regular earnings of an employee." 29 C.F.R. 778.208. If a "bonus" payment is considered a part of the regular rate at which an employee is employed, it must be included in computing his regular hourly rate of pay and overtime compensation. 29 C.F.R. 778.209(a). For example, an employee may have a contract that provides for the payment of additional compensation by way of a "bonus" at the rate of 10% of the employee's straight-time earnings. Such a "bonus" is actually part of the employee's regular compensation, and it must be factored into his "regular rate."

A problem arises in allocating this type "bonus" to a given workweek when the percentage bonus is paid irregularly, or when it cannot be identified with a particular workweek. If it is impossible to allocate the "bonus" among the workweeks of a period in proportion to the amount of the bonus actually earned each week, some other reasonable and equitable method of allocation must be adopted. For example, it may be reasonable and equitable to assume that the employee earned an equal amount of bonus each week of the period to which the bonus relates. 29 C.F.R. 778.209(b).

Discretionary bonuses are excluded when calculating the "regular rate." A bonus is discretionary when both the fact that a payment is to be made, and the amount of the payment, are determined at the sole discretion of the employer. If the employee has a contract right, express or implied, to receive a "bonus," it is not discretionary. 29 C.F.R. 778.211. If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it. Thus, if an employer announces to his employees in January that he intends to pay them a bonus in June, he has abandoned his discretion regarding the fact of payment, and the bonus would not be excluded from the employees' "regular rate." Bonuses which are announced to employees to induce them to work more steadily, more rapidly, or more efficiently are regarded as part of the regular rate of pay. Attendance bonuses, group production bonuses, and the like are also included in the regular rate of pay. Id.

Gifts, Christmas and special occasion bonuses may be excluded in calculating the "regular rate." However, to qualify for exclusion the bonus must actually be a gift or in the nature of a gift. If it is measured by hours worked, production or efficiency, it is not truly in the nature of a gift, and thus not excludable. 29 C.F.R. 778.212(b).

Finally, sums paid by the employee pursuant to a bona fide profit sharing plan, or a retirement plan or other qualifying ERISA plan, are excluded in calculating the employee's "regular rate." 29 C.F.R. 778.213 and 778.214.

C. How Deductions Affect the Regular Rate. The word "deduction" is often loosely used to cover reductions in pay resulting from such things as the employer's cost in furnishing board and lodging, or tools and uniforms. Deductions may also be made as a reduction in a fixed salary when an employee fails to work a full schedule. Finally, deductions are sometimes made for disciplinary reasons. The FLSA places various restrictions on an employee's right to make such deductions. See 29 C.F.R. Part 531. In general, for purposes of computing the "regular rate," when deductions are made the employee's "regular rate" is the same as it would have been if the occasion for the deduction had not arisen. 29 C.F.R. 778.304(b).

When deductions are made for such things as board, lodging, tools and uniforms furnished by the employer, the employee's "regular rate" is determined by dividing his total compensation before deductions by the total hours worked in the workweek. 29 C.F.R. 778.305. Deductions from a fixed salary when the employee fails to work the full schedule are not really "deductions" at all. If an employee is compensated at a fixed salary for a fixed workweek and if this salary is reduced by the percentage of hours which the employee did not work in a given workweek, the employee is, for all practical purposes, employed at an hourly rate of pay. A "deduction" for an hour's shortage does not actually reduce the regular hourly rate. If an employee is paid a fixed salary for a workweek of variable hours, the salary is a guarantee due the employee in short workweeks as well as in longer ones, and "deductions" of this type are not made.

When deductions are made for disciplinary reasons, the regular rate of an employee is computed before deductions are made. Once again, the FLSA places limitations on such deductions, as discussed at 29 C.F.R. Part 531. While an employer may penalize an employee for tardiness by deducting an hour's straight time pay for each hour the employee was tardy, the employer must still count as hours worked all the time actually worked by the employee in determining the amount of overtime compensation due for the workweek. 29 C.F.R. 778.307.

D. Exceptions to the Regular Rate Principle. Under certain circumstances, an employer and employee may reach a mutual agreement before work is commenced regarding a variation of the "regular rate." The circumstances are limited, and the contracts are subject to particular rules, regulations and limitations, found at 29 C.F.R. Part 778, Subpart E. In summary, such agreements can be entered in three circumstances: (1) when an "established rate" is used in lieu of the "regular rate"; (2) when "guaranteed compensation" is used in lieu of overtime compensation; and (3) for certain "piece rate" workers.

"Established Rate". 29 U.S.C. 207(g)(3) permits the employer and employee to reach a mutual agreement for an "established rate" in lieu of the "regular rate." Section 207(g)(3) permits such a mutual agreement if the amount paid "is computed at a rate not less than one and one-half times the rate established by such agreement or understanding as the basic rate to be used in computing overtime compensation thereunder; provided, that the rate so established shall be authorized by regulation by the Administrator as being substantially equivalent to the average hourly earnings of the employee, exclusive of overtime premiums, in the particular work over a representative period of time." The applicable regulations are found at 29 C.F.R. Part 548.

The regulations found in Part 548 are detailed and extensive, and if the employer desires to use such an "established rate," a number of requirements must be met. In sum, the agreed "established rate" must be based upon a bona fide calculation which is "substantially equivalent" to the average hourly earnings of the employee over a representative period of time. An employer may make an application to the DOL Wage and Hour Division for other types of approved "established rates." 29 C.F.R. 548.4.

"Guaranteed Compensation". 29 U.S.C. 207(f) permits the employer and employee to enter an agreement for "guaranteed compensation" in lieu of overtime compensation pursuant to the "regular rate," in certain situations. This is sometimes referred to as a "Belo contract," a reference to Walling v. A. H. Belo Corp., 316 U.S. 624, 86 L.Ed.2d 1716, 62 S.Ct. 1223 (1942). The ruling of Belo was codified in 1949 as 29 U.S.C. 207(f). These contracts are designed to cover employees whose duties necessitate irregular hours of work and whose total wages, if computed solely on an hourly basis, would of necessity vary widely from week to week. Belo contracts cannot be used when employees regularly work forty hours per week, and only the overtime hours vary. In addition, the contract must guarantee a weekly overtime payment, and the employee must receive that payment regardless of the number of hours actually worked. The weekly guarantee cannot exceed sixty hours per week. The basic premise of a Belo contract is that it affords the employee the security of a regular weekly income, while benefitting the employer by enabling him to anticipate and control in advance at least some part of his labor costs. 29 C.F.R. 778.404. According to the interpretative guidance, the following types of employees typically have duties necessitating irregular hours, and thus Belo contracts may be applicable: outside buyers, on-call servicemen, insurance adjusters, newspaper reporters and photographers, firefighters, troubleshooters and the like. There is no requirement that Belo contracts be pre-approved by the Department of Labor. 29 C.F.R. 78.414(a).

"Piece Rate" Contracts. The final exception to the regular rate principle is found in 29 U.S.C. 207(g)(1) and (2), which applies to certain "piece rate" workers. The purpose of this exception is to permit, under specified conditions, a simpler method of computing overtime pay. 29 C.F.R. 778.416. This type agreement must not be "seized upon as a device for avoiding payment of the minimum wage due for each hour." 29 C.F.R. 778.417.

An employee whose pay on the basis of a piece rate for work performed during non-overtime hours may agree with his employer in advance that he shall be paid at a rate not less than one and one-half times this piece rate for each piece produced during the overtime hours. If such an agreement is made, no additional overtime pay will be due. 29 C.F.R. 778.418.

IV. COMMON VIOLATIONS OF OVERTIME RATE COMPUTATION

Probably the most common violation of overtime rate computation involves the employer who sets an artificial "regular rate." An employer may set an artificially low hourly rate or salary, with the intention that the employee will receive periodic additional compensation as a production bonus, commission, etc. If the employee then works more than forty hours per week, many employers compute overtime based upon the artificially low hourly wage or salary, not taking into account the production bonus, commission, etc. As is discussed above, this is contrary to the requirements of the FLSA.

Another common computation problem arises with salaried employees, particularly when the salary is designed to compensate a fluctuating number of hours in any given week. In these cases, the employee's regular rate will vary from week to week, and therefore must be calculated from week to week.

Some employers adopt schemes to circumvent the overtime pay requirements. For example, some employers utilize a varying hourly rate which decreases as the length of the workweek increases. This is not permissible. The hourly rate paid for identical work during overtime hours cannot be lower than the rate paid for the same work during non-overtime hours, nor can the hourly rate vary from week to week inversely with the length of the workweek. 29 C.F.R. 778.500(b); see also 29 C.F.R. 778.321 et seq.

It is also unlawful for an employer to agree with his employees that they will receive the same total sum, comprising both straight time and overtime compensation, in all weeks without regard to the number of overtime hours worked in any workweek.

These are but a few examples of computation problems which can arise, usually through the employer's own attempts to evade or circumvent the overtime requirements of the FLSA. The discussion above should give the reader further insight into the types of computation problems which can arise.

View all articles by Bob E. Lype