The regular rate exclusions: premium pay

Many employers operate on holidays, or weekends, and pay employees more on holidays to encourage them to work. Some do this the wrong way – for example, it always seems wrong to me that it’s New Year’s Day, not New Year’s Eve, that gets the “holiday” status. Once, I worked at a video store that was open 365 days a year, and I worked New Year’s Eve. That year there was a huge snowstorm and everybody wanted movies. They paid me time and a half, all right – but only for the hour and a half that my 5 p.m. to 1:30 a.m. shift bled over to New Year’s Day from New Year’s Eve. But, I digress. I don’t work in video rental now for a reason (plus my employer declared bankruptcy about six months after I left along with most other traditional video rental companies).

But I digress, so back to how to treat this premium pay when calculating the regular rate? A burning question, I know. The FLSA considers these premiums a form of overtime pay only if the premium is at least time and one-half of the employee’s rate for similar work in non-overtime hours. 29 CFR § 778.203(a). For pieceworkers or workers with more than one rate, this rate is “either (1) the bona fide rate applicable to the type of job the employee performs on the “special days,” or (2) the average hourly earnings in the week in question.” 29 CFR § 778.203(a). If the premium meets that requirement, it need not be included in the regular rate and can be credited towards overtime compensation.

The other type of premium considered an overtime premium is extra pay for hours outside of an employee’s normal working hours; for example, if the employer pays a premium for working more than eight hours a day. That can be credited toward your overtime obligation.  Here is what I mean.  If you promise to pay time and one half for all work in excess of 8 hours in a day and the employee works say 10 hours on Monday so by the end of the week they have worked 42 hours you don’t have to pay the overtime premium twice.  In other words, you get credit at the end of the week for the 41st and 42nd hours because you already paid the employee time and one half for the 9th and 10th hour they worked that workweek.

The catch is that you can’t give an employee arbitrary “normal working hours” to avoid paying overtime. For example, say my employee’s “regular” working hours are 8 a.m. to 12 p.m., and during that time I pay an artificially low hourly rate. From 12 p.m. to 5 p.m., I pay the employee time and one-half for working outside of her “regular working hours.” That way I can get out of rolling the higher rate into the regular rate for overtime, right? No – the regs call this scheme out as “a device to contravene the statutory purposes and the premiums will be considered part of the regular rate.” 29 CFR § 778.202(c).

The regulations do make a distinction between paying employees a premium for work outside of regular working hours and paying a premium for undesirable working conditions, like a standard shift differential. If you pay a premium for work outside an employee’s regular working hours (which must not exceed eight hours per day) or outside of the regular workweek (which must not exceed 40 hours per week) and the pay with premium is at least time and one-half, then that is considered overtime compensation and you need not include the premium in the regular rate. However, if you pay a premium for undesirable working conditions, such as paying more for hours worked between midnight and 6 a.m. only, that premium can neither be excluded from the regular rate nor credited towards overtime compensation. 29 CFR § 778.204(b). The rationale is that you are not really paying an overtime premium, you are paying more because no one likes working overnights.   And by the way, if you don’t like working overnight, don’t go to law school.  Lawyers work all the time.