Failing to compensate employees below the required overtime rate under the Fair Labor Standards Act (“FLSA”) is an unnecessary source of liability for employers. However, the topic is often overlooked due to the complexity and confusion surrounding what actually counts toward an employee’s regular rate, the base rate an employer must use when determining overtime payments. This concern is amplified by a split in the federal appellate courts on the issue and an increase in Department of Labor (“DOL”) investigations into inadequate overtime compensation.
The FLSA requires almost all non-exempt employees to be paid overtime for hours worked over forty hours per week at a rate not less than one and one-half times the regular rate at which they are employed. Most employers assume an employee’s regular rate is always the normal hourly wage and, in some situations, this is the case. Unfortunately, the answer frequently is not so simple. Under the FLSA, regular rate includes all compensation for employment paid to, or on behalf of, the employee, with the exclusion of payment made when no work is performed, such as time off for vacation, holidays, etc.
This vague language leads to a commonly litigated question: what payments must be included in the regular rate calculation?
In Featsent v. City of Youngstown, 70 F.3d 900, 905 (6th Cir. 1995), the Sixth Circuit Court of Appeals held bonuses paid to police officers pursuant to a collective bargaining agreement for the absence of medical claims and accrued sick leave can be excluded from an employee’s regular rate of pay. The court held that the appropriate test for whether payments are included in the calculation is whether the payments are related to the employee’s compensation for services and hours of service. However, the court did require the City to include payments for shift differential, hazardous duty, education incentives and longevity in the officers’ regular rate, holding that these payments were related to the employees’ services.
Thus, under Featsent, Ohio employers must include payments made as compensation for services and hours of service in an employee’s regular rate calculation. Nevertheless, employers should note that two federal appellate courts have applied the Sixth Circuit’s reasoning to additional benefits, and another rejected the analysis altogether. The Eighth and Tenth Circuits agreed that only payments for work performed should be included, but both ruled that sick leave accrual payments should be considered under this analysis. Acton v. City of Columbia, 436 F.3d 969, 979 (8th Cir. 2006); Chavez v. City of Albuquerque, 630 F.3d 1300, 1309 (10th Cir. 2011). Further, the Ninth Circuit held that even payments made to employees who opted out of a city’s insurance plan should be included in the calculation. Flores v. City of San Gabriel, 824 F.3d 890, 900 (9th Cir. 2016), cert. denied, 137 S. Ct. 2117 (2017). The court disagreed with the Sixth, Eighth and Tenth Circuits’ analysis, and instead reasoned that the exclusion does not apply to any payments considered compensation. The Supreme Court denied the employer’s request to review the case. Therefore, the decision is only binding on states within the Ninth Circuit.
Despite the disagreements between the circuits, based on Featsent, Ohio employers need only include compensation related to services performed and actual work. Due to the recent increase in DOL investigations, as well as the complexity of the subject matter, employers should periodically review their process for calculating employees’ regular rate to ensure compliance with the FLSA and limit liability. Specifically, employers should review the additional payments made to employees, such as longevity pay and premium pay for shift and weekend work, to determine if these items are being included in employees’ regular rate of pay for overtime purposes.
Liability under the FLSA can be expensive. Employers could be required to pay double the back pay for up to three years and attorney fees to the employees’ attorney. Therefore, it is prudent to follow the FLSA.
The attorneys at Fishel Downey regularly review payroll practices for its clients and conduct FLSA compliance audits as well as create personnel policies to meet FLSA requirements. When necessary, the firm also defends employers in DOL investigations and in court. If you have any questions about complying with the FLSA, please contact us at info@fisheldowney.com or call 614.221.1216.