DOL Opines On Improper Overtime Rates

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Administering payroll for employees with variable work schedules and hourly rates can cause major headaches for employers. In an effort to simplify and reduce administrative costs, employers are oftentimes tempted to set a standard overtime rate to be paid at a set dollar amount to all employees regardless of variations in compensation rates and actual weekly compensation earned. However, as a recent Department of Labor Opinion Letter explains, employers must adhere to the FLSA’s overtime calculation rules when setting such rates.

The December 21, 2018 letter analyzed home health aides who provide in-home services to various clients. Some of the employees’ weekly schedules were heavily influenced by travel between clients throughout the day and, as a result, their hours worked varied greatly. To capture the total time worked and corresponding pay, the employer multiplied an employee’s time with clients by his or her hourly pay rate for such work. The employer then divided the total by the employee’s total hours worked, which includes both the client time and the travel time. The typical standard rate for the employees was $10 per hour, and if any employees worked over 40 hours in a given work week, they were paid time and a half for all hours over 40 based on that standard rate ($10 x 1.50 = $15/hour).

The Opinion letter took issue with the standard rate of $10 per hour. The $10 per hour rate was lawful for all employees who made $10 per hour or less, as an employer may choose to pay overtime greater than its statutory obligation. However, the DOL determined that the employer’s practice did not comply with the FLSA’s overtime calculation rules for those employees whose regular rate of pay exceeded $10 per hour. Those employees’ standard rate, when calculating overtime, could not be lower than their actual hourly rate.  As the DOL further explained, the employer’s practice did not entirely compensate certain employees for all overtime worked.

This letter reminds employers that, when calculating overtime compensation, the regular rate of pay cannot be arbitrarily selected, especially when the selected amount is potentially less than the employee’s actual hourly wage rate. Rather, overtime must be based on the actual rate of pay the employee earns.
If you have other questions regarding overtime calculations, please contact Jonathan Scandling of the Frantz Ward Labor & Employment Practice Group.