Tips for Calculating an Employee's Regular Rate Under the FLSA

Practical Law Legal Update w-001-5984 (Approx. 9 pages)

Tips for Calculating an Employee's Regular Rate Under the FLSA

by Practical Law Labor & Employment

Tips

Nonexempt employees, including tipped employees, are generally entitled to minimum wage and overtime pay. Tipped employees are those who customarily and regularly receive more than $30 per week in tips (29 U.S.C. § 203(t)). Tipped employees generally include waiters and bellhops, and non-tipped employees typically include dishwashers, cooks, chefs, and janitors.

However, the FLSA permits employers of tipped employees to take a tip credit toward their minimum wage obligation to those employees. A tip credit is the difference between the applicable minimum wage (currently $7.25 per hour under the FLSA) and the minimum required cash (or direct) wage for tipped employees (currently $2.13 per hour under the FLSA). Therefore, the maximum tip credit an employer may take under the FLSA is $5.12 per hour. Employers may take a tip credit that is less than $5.12 per hour, but not more.

For overtime pay purposes a tipped employee's regular rate includes the amount of tip credit taken by the employer per hour and cash wages paid by the employer. Any tips received by the employee in excess of the tip credit do not need to be included in the employee's regular rate because they are not considered remuneration for employment under the FLSA. (29 C.F.R. § 531.60.)

Practical Law has published the following guidance on employing tipped employees:

Premium Pay for Working on a Holiday

Employers often pay employees premium rates for working on certain days, such as Sundays or holidays. These "special day" premiums can sometimes be treated as overtime premiums, allowing employers to exclude the extra pay from the employee's regular rate and apply that amount to the employee's FLSA overtime compensation. To qualify for this treatment, the premium pay must be:

For work actually performed on "special days," which are:
- holidays;
- Saturdays and Sundays;
- regular days of rest; and
- the sixth or seventh day of the workweek.
Paid at a rate of at least 1.5 times the rate established in good faith for similar work performed during non-overtime hours on other days, as follows:
- for employees paid a single hourly rate or a salary for a fixed workweek, the rate for work on special days must be at least 1.5 times the normal hourly rate;
- for employees paid a piece rate, or with more than one job with different hourly or piece rates, the rate must be at least 1.5 times either the normal rate applicable to the job the employee performs on the special days, or the average hourly earnings in that workweek (see 29 C.F.R. §§ 778.111, 778.400, 778.415-778.421);
- the premium rate cannot qualify as "established in good faith" if it does not yield the employee at least 1.5 times the federal minimum wage; and
- if the premium rate is less than 1.5 times the federal minimum wage, the extra compensation provided by that rate must be included in the employee's regular rate.

(29 U.S.C. § 207(e)(6), (h); 29 C.F.R. § 778.203(c).)

For information on drafting a payroll policy, see Standard Document, Payroll Practices and Compensation Policy.

Premium Pay for "Dirty Work" or Shift Differentials

Employment policies and agreements, particularly collective bargaining agreements (CBAs), can provide for "premium" or extra pay for certain hours or days of work, or for certain types of work. These premiums are often meant to compensate employees for what are generally considered to be undesirable shifts or duties, including:

Work on night shifts (or "third shifts").
Work that is dangerous or dirty.

These premium payments must be included in an employee's regular rate (29 U.S.C. § 207(e); 29 C.F.R. § 778.207(b)).

For information on collective bargaining generally, see:

Pay for Jury Duty Leave

To qualify for exclusion from the regular rate, payments for occasional periods when no work is performed must be:

In amounts approximately equal to the employee's normal earnings for a similar time period.
For the types of absences that are infrequent, sporadic, or unpredictable. For example, vacations and holidays qualify, but lunch breaks and regularly scheduled days of rest do not.

(29 U.S.C. § 207(e)(2); 29 C.F.R. § 778.218(c).)

Absences for jury duty qualify as this type of payment because they are sporadic or unpredictable absences when the employee does no work. For that reason, pay for these absences may be excluded from the employee's regular rate. (29 C.F.R. § 778.218).

For information on drafting a jury duty leave policy, see Standard Document, Jury Duty Leave Policy.

Pay When Weather Conditions Prevent an Employee from Traveling to Work

Like absences because of jury duty, absences because weather conditions prevent an employee from traveling to the workplace are sporadic or unpredictable absences when an employee does no work. Pay for these absences qualify for exclusion from the employee's regular rate. (29 C.F.R. § 778.218.)

Pay for Absences Because the Employer Failed to Provide Enough Work

Sporadic and unpredictable absences can also occur because of the employer's failure to provide enough work. However, pay for these absences is excluded from an employee's regular rate only for occasional, sporadic situations where the employee would normally be working but cannot because:

A machine breaks down.
Expected supplies do not arrive on time.
Weather conditions affect the employee's ability to do the work.
Other similarly unpredictable events that are beyond the employer's control.

The exclusion does not apply if the employer's failure to provide work occurs because of:

A reduction in the work schedule.
Ordinary temporary layoffs.
Any type of routine, recurring absence of the employee, such as regular days of rest.

(29 C.F.R. § 778.218.)

Report-In or Show-Up Pay

Under some employment agreements, employees are entitled to a minimum number of hours of pay if they are scheduled for, or are called in or called back to, work but are not given the expected amount of work. If this happens infrequently and sporadically, employers may exclude those payments from the regular rate.

Show-up, report-in, or reporting pay are examples these types of payments. Employees can be guaranteed a minimum number of hours of pay, at their straight-time or overtime rate, for reporting to work as scheduled but not receiving the expected amount of work. For example, if an employee who is entitled to four hours of report-in pay arrives to work for his scheduled eight-hour shift but is sent home after only two hours, he will still receive a total of four hours of pay, two for the hours he actually worked and two because of his report-in pay guarantee.

The amount of report-in pay an employee receives that is not for hours actually worked can be excluded from his regular rate. The statutory exception contemplates, however, that report-in pay occurs infrequently and sporadically.

(29 U.S.C. § 207(e)(2); 29 C.F.R. § 778.220(a).)

Call-Back Pay

A similar pay arrangement guarantees employees a minimum number of hours of pay, at their straight-time or overtime rate, when they are unexpectedly called back to work after their scheduled hours have ended. The amount of call-back pay an employee receives that is not for hours actually worked can be excluded from the regular rate. Like report-in pay, the statutory exception contemplates that call-back pay is for unscheduled call-backs that are infrequent and sporadic. (29 U.S.C. § 207(e)(2); 29 C.F.R. § 778.221(a).)

Payments Made to a Profit-Sharing Plan or Trust or to a Thrift or Savings Plan

Section 207(e)(3) of the FLSA allows employers to exclude from the regular rate payments made to a bona fide profit-sharing plan or trust or to a bona fide thrift or savings plan, if those payments satisfy certain conditions (29 U.S.C. § 207(e)(3); 29 C.F.R. §§ 778.200(a)(3), 778.213). To qualify, the payments must be:

Paid in addition to the employee's regular wages.
Made under a plan that meets the separate statutory requirements for that particular type of plan.
Determined without regard to employee hours of work, production, or efficiency.

(29 U.S.C. § 207(e)(3); 29 C.F.R. §§ 778.200(a)(3), 778.213.)

Reimbursement of Business Expenses

Examples of work-related expenses that can be excluded from an employee's regular rate are:

The actual cost of purchasing supplies, tools, materials, or equipment on behalf of the employer.
The actual or reasonably approximate cost of buying, washing, or repairing uniforms or special clothing required by the employer.
The actual or reasonably approximate cost of transportation and other travel expenses while traveling for the employer's business.
The reasonable cost of a meal (sometimes referred to as "supper money") when the employer asks an employee to continue working beyond his usual shift (traditionally, this meant staying to work through the dinner hour, when the employee would normally be home).
The actual or reasonably approximate cost of temporarily excessive home-to-work travel incurred because the employer moved its facility to another town and the employee has not had an opportunity to relocate, or the employee is, on a particular occasion, required to report for work at a location other than the employee's usual workplace.

(29 U.S.C. § 207(e)(2); 29 C.F.R. § 778.217.)

This statutory exception is limited to expenses incurred on behalf of the employer or for the employer's convenience. If the employer reimburses employees for expenses incurred for the employees' own benefit and that employees would normally pay for, such as meals, living expenses, and normal to-and-from work travel, the payments are not excluded from the regular rate. If, instead of a reimbursement, the employer actually provides facilities such as free meals or housing, then the reasonable cost or fair value of the facilities must be included in the regular rate. (29 C.F.R. § 778.217.)

For information on drafting a business expense reimbursement policy, see Standard Document, Travel and Business Expense Reimbursement Policy.

For more information on the regular rate under the FLSA, see Practice Note, The Regular Rate of Pay Under the FLSA: Statutory Exclusions and The Regular Rate of Pay Under the FLSA: Statutory Exclusions Chart.

For more information about federal and state wage and hour laws generally, see:

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