The US Department of Labor (DOL) recently issued an opinion letter that reminds employers how to properly calculate an employee’s regular rate of pay for purposes of overtime compensation.
In this letter, the DOL was responding to an inquiry about whether a company’s compensation plan, which pays an average hourly rate that may vary from workweek to workweek, complies with the Fair Labor Standards Act (FLSA). Specifically, to calculate weekly pay, the company was multiplying an employee’s time with clients by his or her hourly pay rate for such work. The employer then divided the product by the employee’s total hours worked. The company then explained that its “standard rate of pay” was $10 per hour and that it paid overtime based on the $10 per hour rate.
According to the DOL, while the employer’s plan likely complied with the FLSA’s minimum wage requirement (that an employee is paid at least minimum wage for every hour worked), it might not comply with the FLSA’s overtime requirement.
The DOL found that the minimum wage requirement was met because the company ensured that its employees were paid at least $10 per hour (which is above the federal minimum wage).
With respect to overtime, however, the DOL found that the compensation plan might not comply because the employer always assumes a $10.00 per hour regular rate when calculating the overtime premium – regardless of the employee’s hourly rate. This would result in the company underpaying an employee whose regular rate of pay exceeds $10 per hour. Instead, when determining the proper overtime rate to pay employees, an employer must calculate the employee’s regular rate of pay on a workweek by workweek basis to insure that the correct overtime rate is paid.