Importance of Establishing An Employee’s Regular Rate of Pay

employee wagesOvertime pay is calculated at a rate of one and one-half times a non-exempt employee’s regular rate, a well-known formula which obviously depends on establishing the employee’s regular rate of pay. This should ordinarily be simple, since the pay of  a non-exempt employee is usually stated in terms of an hourly rate of pay, and indeed Connecticut wage-hour law requires an employer to advise an employee at the time of hire of the “rate of remuneration.”

However, the Fair Labor Standards Act deems the regular rate to include all remuneration for employment paid to, or on behalf of, the employee, subject to certain exceptions.  The calculation of the regular rate becomes more complicated when employees receive compensation in forms other than their hourly rate of pay for hours worked. Including other forms of remuneration will increase the overtime rate, and conversely, omitting other forms of remuneration that should be included in calculating the regular rate will reduce the overtime rate.

For example, an employee may receive payments for traveling expenses, including living expenses away from home, while traveling on behalf of the employer.  Such payments are considered reimbursement rather than compensation if the payments are reasonable; that is, reasonably approximate to the amounts that would be expended by the employee.  In a case recently decided by the Tenth Circuit Court of Appeals (located in Denver), Sharp et al. v. CGG Land (U.S.) Inc., the employees, who traveled extensively for the company, received a $35 per diem allowance for meals. The employees claimed these payments should be included in their regular rate of pay. If the employees were paid at an hourly rate of $20, their overtime rate would be $30.  But if they were on the road for a week and their per diem allowances were included in the regular rate calculation, their overtime rate would be $36.56.

The Court determined that the per diem allowance was reasonable, and was therefore excluded from the regular rate calculation for overtime purposes.  But what if this employer had wanted to be generous to employees required to travel, and had paid a $100 per diem allowance?  Assuming a $35 per diem is the limit of reasonableness, the remaining $65 would have to be included in the calculation of the regular rate, causing this good-hearted employer to have to pay an overtime rate of $42.19  in addition to the generous per diem.

Another example would be gifts, which are not included in the regular rate provided that they are given on special occasions like Christmas, as a reward for service, and not measured by or dependent on hours  worked, production or efficiency.  A hundred dollar gift certificate given to all employees at Christmas would not be included in calculating the regular rate; a similar gift certificate given to an employee of the month based on a measurable production criterion would be included.

These rules take on special significance in Connecticut, where courts may award double damages to an employee if the employer fails to pay the correct overtime wage, unless the employer can establish that it had a good faith belief that the underpayment was in compliance with the law. Courts may also award reasonable attorney’s fees and costs. The moral here is not that no good deed goes unpunished, but rather that pay practices which include non-standard forms of compensation should be carefully reviewed for conformity with wage-hour regulations.