By: Alex Passantino

Seyfarth Synopsis: On January 15, 2020, the Department of Labor’s Final Rule on regular and basic rates of pay will take effect. This series will explore the various issues implicated by the Department’s changes. Part I addresses the Department’s changes to Part 548 of the regulations, Authorization of Established Basic Rates for Computing Overtime Pay.

In December, the U.S. Department of Labor’s Wage & Hour Division announced its revisions to certain provisions of the FLSA regulations addressing regular and basic rates of pay. One of those changes increased the viability of the use of basic rates, by increasing the tolerance level related to additional overtime pay from $0.50 per week to 40% of the applicable minimum wage. Below we discuss basic rates and the impact of this revision.

What Are Authorized Basic Rates?

Ordinarily, under the FLSA, overtime pay must be paid at one-and-one-half times the employee’s “regular rate” of pay for the workweek in question. Regular rate requires that an employer total all remuneration (less authorized exclusions) and divide that total by the number of hours worked by the employee. The resulting number is the “regular rate,” and overtime pay is due at a rate that is one-half that rate (since the regular rate has already been paid for all hours).

Sometimes, the “extra” payments that must be included in the regular rate are small and have an even smaller impact on the overtime due. The FLSA nevertheless generally requires those payments to be included.

Enter basic rates …

In certain circumstances (detailed below), the FLSA permits overtime compensation to be computed pursuant to an agreement or understanding between employer and employee using rates that are “substantially equivalent” to the average hourly earnings of the employee. In other words, under certain circumstances — and pursuant to agreement — the small amounts that impact the regular rate in minimal ways can be effectively excluded from the week-to-week calculation of overtime pay.

What is Required to Use Basic Rates?

The FLSA regulations require satisfaction of all of the following elements in order to use basic rates:

  • Overtime compensation is paid pursuant to an agreement or understanding arrived at between the employer and the employee or as a result of collective bargaining before performance of the work;
  • The agreement establishes a rate as the “basic rate” to be used in computing overtime compensation;
  • The basic rate is a specified rate or derived from a specified method of calculation;
  • The basic rate is a bona fide rate and is not less than the applicable minimum wage;
  • The basic rate is authorized (as described below) 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;
  • Overtime hours are paid at least one-and-one-half times the basic rate;
  • The employee is paid 1.5 times the basic rate only for those hours that qualify as “overtime hours” under the FLSA (e., over 8 in a day, over 40 in a week, Saturdays/Sundays/holidays/days of rest/sixth or seventh days; outside of normal workday);
  • The number of hours for which the employee is paid 1.5 times the basic rate is at least the number of hours worked in excess of 40;
  • The employee’s average hourly earnings for the workweek exceed the applicable minimum wage;
  • Extra overtime compensation is properly computed and paid on other forms of additional pay which have not been considered in arriving at the basic rate but which are required to be included in computing the regular rate.

How Are Basic Rates “Authorized”?

The FLSA regulations set forth a number of scenarios in which basic rates are authorized, assuming the rates meet the requirements set forth above:

  • A rate per hour which is obtained by dividing a monthly or semi-monthly salary by the number of regular working days in each monthly or semi-monthly period and then by the number or hours in the normal or regular workday.
  • A rate per hour which is obtained by averaging the earnings (less permitted exclusions) of the employee for all work performed during the workday or any other longer period not exceeding sixteen calendar days for which such average is regularly computed under the agreement or understanding.
  • A rate excluding the cost of meals where the employer customarily furnishes not more than a single meal per day.
  • A rate excluding additional payments in cash or in kind which, if included in the computation of overtime under the Act, would not increase the total compensation of the employee by more than 50 cents a week on the average for all overtime weeks in the period for which such additional payments are made. [As noted below, the 50 cents per week figure is increasing on January 15, 2020.]
  • A rate equal to the average hourly remuneration of the employee for employment during the annual period or the quarterly period immediately preceding the calendar or fiscal quarter year in which such workweek ends, subject to some significant limitations.

The above methods of determining a basic rate are inherently authorized under the FLSA; no additional approval from WHD is necessary.

In addition, employers may submit to WHD an application for authorization of basic rates determined by other methods, which the Administrator of WHD may or may not approve, in her discretion.

So What’s Changing on January 15, 2020?

The fourth bullet in the previous section addresses the exclusion from the computation of overtime “certain incidental payments which have a trivial effect on the overtime compensation due.” Since 1966, the triviality of those incidental payments has been governed by a standard that required no more than a 50 cents per week impact on the overtime rate. The 50 cents figure was based on 1966’s $1.25 minimum wage–it is 40% of that minimum wage.

In an effort to bring the provision in line with current minimum wages, the final rule references the minimum wage under either the FLSA or state or local law applicable in the jurisdiction in which the employee is employed, whichever is higher.

What Does this Change Mean?

In changing the $0.50 limit to 40 percent of the higher of the applicable local, state, or federal minimum wage, WHD has increased the availability of the use of basic rates. For example, at the $0.50 limit, for an employee working 45 hours per week, the maximum additional payment would be around $9.00 per week. Under the revised provision, at the level of the current federal minimum wage, the tolerance would be $2.90 per week on average, which would be high enough to exclude (for example) a $500 bonus paid quarterly to an employee averaging 45 hours per week:

  • $500/13 weeks in quarter = $38.46/week
  • $38.46/45 hours = $0.85/hour
  • $0.85 * 0.5 (half-time) * 5 overtime hours = $2.13 per week impact

If you have any questions about the regulatory revisions, basic rate, or another wage and hour issue, please contact a member of Seyfarth’s Wage and Hour team.