January 27 Tip of the Week

“Regular Rate of Pay for Overtime Purposes”

One of the most difficult areas of compliance for employers is wage and hour issues.  Both federal and state labor laws address the issue of employee compensation, including minimum wage requirements, what constitutes compensable work time, and what is included when calculating an employee’s rate of pay for purposes of overtime.  A recent Department of Labor opinion letter addressed the issue of overtime pay and what must be included in determining the regular rate of pay for overtime calculations. 

FLSA Opinion Letter 2026-2 (https://www.dol.gov/sites/dolgov/files/WHD/opinion-letters/FLSA/FLSA2026-2.pdf) was issued in response to an inquiry from a business in the waste management industry.  The company sought guidance on how to calculate the overtime rate for their drivers who were paid $12 per hour and were able to earn additional compensation pursuant to a “Safety, Job Duties, and Performance” bonus plan.  Under the plan, drivers were rewarded for punctuality, attendance, consistency in completing daily safety tasks, driving safety, compliance with traffic laws, proper attire, and performance efficiency.  The bonus was paid as an additional hourly pay amount, with the maximum available bonus being an additional $9.50 per hour.  Despite the fact that the bonus was added to the employee’s hourly rate of pay, when calculating employees’ overtime pay the company did not include the bonus in the employee’s regular rate of pay. 

The Opinion Letter rejected this approach to calculating the overtime rate of pay for drivers on the basis that the bonus was not discretionary and was, in fact, a promise to pay additional compensation based on an agreement that was shared with the employees at the time of hire.  The Opinion Letter reviewed the statutory requirements for excluding a bonus from an employee’s regular rate of pay and found that this compensation arrangement did not meet those requirements.  As the letter noted: 

Section 7(e)(3) of the FLSA requires that three conditions be satisfied for a payment to qualify as an excludable discretionary bonus: (1) the fact and amount of the payment must be “determined at the sole discretion of the employer”; (2) the employer’s determination must occur “at or near the end of the period” when the employee’s work was performed; and (3) the payment must not be made “pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly[.]” 29 U.S.C. § 207(e)(3).

Because the bonus payments were part of a regularly payment arrangement, were added to the employee’s hourly rate of pay, and were shared with the employees as a bonus plan at the outset of their employment, the Opinion Letter determined that the bonus payments were not discretionary and must be included in the regular rate of pay calculation.  To calculate the regular rate of pay for determining the employee’s overtime rate, the employer must include the additional bonus rate of pay earned by the employee and paid to them as part of their straight time rate of pay for hours worked. 

This Opinion Letter is a great reminder to employers that, when nonexempt, hourly employees are given opportunities to earn additional compensation, the additional amounts earned must be examined to determine whether they must be included in any regular rate of pay calculation for purposes of determining overtime pay. 

Wage and hour issues can be tricky and, when employers are subjected to a wage and hour complaint, it often opens the door to a full-scale audit of an employer’s pay practices.  Any violations of the law that are discovered in that audit can lead to fines, penalties, and large back pay awards.  myHRcounsel can assist you in navigating this difficult area and ensuring that you are paying your employees appropriately.