What Constitutes an Employee’s Regular Rate of Pay?

The question of what constitutes an employee’s regular rate of pay is an import one, particularly when determining the appropriate rate of pay for overtime hours worked.  Under the Fair Labor Standards Act, a non-exempt employee must be paid for all hours worked over 40 in a workweek at one and half times their regular rate of pay.  Generally, the regular rate of pay may be thought to be the hourly rate that the employee is paid for when working the initial 40 hours in that week.  This simplistic definition, however, is not correct under the law. 

Under the Fair Labor Standards Act, an employee’s regular rate of pay must include “all remuneration paid to, or on behalf of the employee” for the workweek.  There are eight categories of pay that can be excluded from the remuneration paid to employees when determining the regular rate of pay.  These categories include:  pay for expenses incurred on the employer’s behalf; premium payments for overtime work; premium payments for work on weekends or holiday; discretionary bonuses; gifts and payments on special occasions; and payments for occasional periods when no work is performed. Nondiscretionary bonuses, on the other hand, must be included in the regular rate of pay – even when those bonuses are calculated and paid outside of the workweek in which the employee worked overtime.

A recent Opinion Letter issued by the Department of Labor, FLSA 2026-6 (https://www.dol.gov/sites/dolgov/files/WHD/opinion-letters/FLSA/FLSA2026-6.pdf), clarified how nondiscretionary bonuses must be included in the overtime rate of pay, particularly when the bonus is determined and paid outside of the workweek where the overtime was worked.  In its opinion letter, the Department of Labor acknowledged that the calculation of the overtime rate of pay may be completed after the nondiscretionary bonus is determined and paid to the employee.  Once the bonus has been determined, an employer must go back and look at all of the weeks that the employee worked overtime – weeks where the employee would have received overtime pay at one and a half times their hourly rate – and adjust the overtime rate to include the amount of the nondiscretionary bonus.  To do that, the employer would add the bonus to the employee’s straight time earnings that were already paid and divide that by the employee’s regularly scheduled hours.  The employer would then take this new rate of pay and apply it to the number of overtime hours worked by the employee during the period in which the bonus was earned.  The result of this calculation is the overtime pay owed to the employee given the new rate of pay.  The employer may then take a credit against the amount owed to the employee for any overtime pay previously paid to the employee during the measurement period. 

The new opinion letter, however, sets forth an exception to the requirement that an employer recalculate the overtime earnings of an employee who receives a nondiscretionary bonus.  The DOL has stated that when the employer’s nondiscretionary bonus is paid as a “percentage of total earnings” by the employee, the overtime rate of pay need not be adjusted.  The basis for this determination is that a bonus that is based on an employee’s total earnings already includes the overtime hours worked by the employee and increases the regular rate of pay and the overtime rate of pay by the same percentage.  The opinion letter then goes on to describe various methods of computing employee bonuses that would meet the exception of a percentage of employee earnings.   

This opinion letter highlights the complexity of the wage and hour laws and the importance of staying up to date on recent developments and interpretations of the law.  myHRcounsel is here to assist you in ensuring that you are in compliance with the laws and to help keep you up to date on all new developments in the law.