The Fair Labor Standards Act, also known as the wage and hour law, has been in the news a great deal lately. In at least five cases in the past week errors costing tens-of-thousands of dollars have been in the news. Employers are making mistakes on overtime payments, especially in calculating the “regular rate of pay” needed for determining how much overtime must be paid. In addition to these mistakes, there have been two events that have been profiled in the news that are raising awareness of changes that are coming that may radically change the wage and hour landscape.
What is the regular rate of pay?
The regular rate of pay is the wage amount that must be used to calculate overtime for nonexempt employees in order for them to be paid when the work more than forty hours in a week. (This is assuming you are not in a state like California that has a different overtime standard.) The DOL definition of regular pay may cause some confusion for employers. Many employers assume that the regular rate of pay is the amount you hire someone for, i.e., the base pay you offer. For example, if I hire someone at $10 per hour, then the amount they would earn as overtime would be 1.5 x $10= $15 per hour for each hour over 40 in a week. Unfortunately, this is not the definition used by the DOL. For them, “regular” rate of pay is calculated by adding together all the non-discretionary pay the employee is receiving and dividing that by the number of hours the employee worked that week. Depending on how much extra compensation was earned you can see that the regular rate of pay is going to be higher than the stated rate of pay you hired someone for. This mistake spread across all your nonexempt employees over a year’s time can result in a major mistake on the overtime paid your employees. That mistake can be very expensive.
The first event that has been in the news is the change in the definition of exempt employee that has been put forth by the DOL. Proposed as a new overtime rule this is a change in the minimum salary that must be paid as the first step in determining is an employee can be considered an exempt employee or not. Currently, that salary level is $23,660 per year or $455 per week. If you have an employee that is making less than that they CANNOT be considered exempt from being paid overtime, regardless of their job duties. As of January 2020, that salary level will be $35,308 per year or $679 per week. This means that many employees, currently define as exempt and not receiving any overtime, will now be eligible for overtime pay. That is where knowing how to calculate the “regular rate of pay” will become very important! I am leaving out a lot of details on what goes into this. You can read more in The USDOL releases new salary requirements to maintain exempt status.
I hope most of you are aware that the House of Representatives has passed a measure to raise the minimum wage to $15 per hour, in a phased-in program by 2025. It is unlikely that this will be passed by the Senate, and even less likely it would be signed by the President, but its time is coming! As Congress gets younger members elected and public sentiment changes the time for a new minimum wage will come. Perhaps as soon as the next mid-term election. With a higher minimum wage, it will become very important to understand the fundamentals of paying overtime, such as knowing what constitutes “regular rate of pay.”
Training this will be important, particularly for small companies. Many business owners and office managers don’t know the fundamentals of the FLSA. Even many novice HR managers make mistakes on this. So do your homework and be prepared. A review of my blogs will give you a start on a proper education.