What Types of Additional Pay are Included in an Employee’s “Regular Rate of Pay” for Overtime?

Federal and Michigan laws calculate an eligible employee’s hourly overtime rate based on their “regular rate of pay.” While this sounds straightforward, an employee’s “regular rate” for overtime may differ significantly from their base hourly wage. Understanding how to calculate your regular rate of pay correctly is essential to determining whether you’ve been paid properly for your overtime hours.

Miscalculating an employee’s “regular rate of pay” is a common mistake. Many employers simply misunderstand the legal requirements and pay employees “time and a half” the base rate for their overtime hours. Others deliberately undervalue the applicable rate to underpay their workers. Regardless of an employer’s intent, underpaying employees is illegal. Employees can file a lawsuit to recover unpaid wages, interest, penalties, attorneys’ fees, and costs.

The Federal Framework: The FLSA and “Regular Rate of Pay”

The federal Fair Labor Standards Act (FLSA) establishes many rules governing the pay of American workers. It sets the minimum wage per hour and requires employers to pay non-exempt employees “overtime pay” for all hours they work beyond 40 per workweek. Under the FLSA, employers must pay each employee at least 1.5 times their “regular rate of pay” for each overtime hour.

Many misunderstandings result from assuming an employee’s “regular rate of pay” is their typical base hourly wage. In fact, it includes a wide range of compensation and benefits, such as shift premiums, certain types of bonuses, and commissions. However, state and federal laws list specific types of compensation that don’t factor into this calculation, as well as several occupations that are exempt from overtime requirements.

What Does the Regular Rate Include?

An employee’s regular rate of pay includes all the compensation they receive for their work, averaged over the hours they work. This includes:

1. Base wages or salary. Hourly wages, salaries, piece-rate pay, day rates, and other straight compensation are part of the regular rate.
2. Nondiscretionary bonuses. Nondiscretionary bonuses, such as those tied to performance, productivity, attendance, or retention, must be included.
3. Commissions and incentive pay. Commissions and other incentive-based compensation are part of the regular rate because they are compensation for services the employee performs.
4. Shift differentials and premiums. In most cases, additional pay for working nights, weekends, holidays, or undesirable shifts is part of the regular rate unless it qualifies for a specific exemption.

Determining the hourly value of some types of compensation can be challenging. Some are paid monthly, quarterly, or annually, while the monetary value of others (such as certain benefits) can be uncertain. When an employer pays bonuses or commissions at a later time, the employer must retroactively adjust an employee’s regular rate over the time period involved and pay additional overtime.

An experienced wage-and-hour attorney can help you determine how the laws apply to your compensation package and calculate your regular rate of pay.

What Does the Regular Rate Exclude?

In general, most types of compensation are included in a non-exempt employee’s regular rate of pay. However, the FLSA sets out certain exceptions. These include:

1. Discretionary bonuses. If the employer retains discretion over whether and how much to pay, and makes the decision near the end of the pay period, a truly discretionary bonus can be excluded.
2. Gifts and holiday bonuses. As long as they are truly discretionary rather than tied to performance, or other benchmarks, these may be excluded.
3. Paid time off (vacation, sick leave, holidays, etc.). Payments for time not worked are excluded.
4. Certain overtime premiums. Extra overtime compensation may be excluded from calculating the regular rate of pay if it complies with the statutory exception requirements.
5. Expense reimbursements. Reasonable business expense reimbursements don’t count as compensation.

Importantly, it is the employer’s burden to prove that any category of pay should be excluded from the regular rate calculation. If you believe your employer has incorrectly excluded income from your regular rate of pay, speak with an experienced wage-and-hour attorney.

Key Federal Regulatory Updates and Guidance

Many modern employers offer a wide range of “perks” and benefits that don’t fit neatly into traditional compensation categories. For example, how would an employer calculate the per-hour benefit to each employee of access to free kombucha and a ping-pong table? Fortunately, the Department of Labor has clarified what perks and benefits may be excluded from the regular rate.

According to the most recent guidance (from 2019), allowable exclusions include:

• Certain wellness benefits, such as an on-site health club or gym membership.
• Employee discounts on retail goods and services.
• On-site amenities like coffee, beverages, and snacks.
• Payout of unused PTO or other earned leave.
• Tuition assistance.
• Reimbursement of some expenses that benefit both the employer and employee, such as professional memberships, licensing fees, insurance, and equipment costs.

The Department of Labor provides guidance on valuing many contemporary workplace benefits. However, its interpretations and guidelines change frequently, leading to confusion. Ongoing litigation can also alter how the courts interpret and enforce the law. An experienced wage-and-hour attorney can help you understand the laws that apply to your situation and whether you may have a case.

Michigan Wage-and-Hour Laws

Michigan’s wage-and-hour laws largely mirror federal laws. The Workforce Opportunity Wage Act (WOWA) incorporates many FLSA principles, including those related to overtime. Michigan’s courts and administrative agencies generally interpret the “regular rate” in accordance with federal interpretation, including relying on DOL guidance and federal case law.

Michigan follows the same core rules as the federal government. It considers all types of compensation when determining an employee’s “regular rate of pay” and requires overtime pay to be at least 1.5 times the regular rate. Overtime is payable for all hours an employee works over 40 in an employer’s standard workweek.

Michigan courts have reinforced several key principles:

• Employers cannot artificially manipulate pay structures to reduce overtime obligations (such as averaging employee hours over multiple workweek periods).
• All compensation tied to work is included in an employee’s regular rate unless a law or agency ruling expressly excludes it.
• Whether a bonus is discretionary or nondiscretionary depends on the facts, rather than an employer’s or an employee’s characterization.

Employees who believe they have been underpaid or have other wage-and-hour concerns may file a claim with the Michigan Department of Labor and Economic Opportunity (LEO).

Contact an Experienced Michigan Wage Theft Attorney

The “regular rate of pay” calculation is broader than many employers or employees realize. Under both federal and state law, it should encompass nearly all forms of compensation tied to an employee’s work. Recent federal guidance continues to emphasize strict compliance, especially for bonuses and incentive pay. If you have questions about overtime calculations, bonus structures, or other wage-and-hour issues, contact the experienced attorneys at Sommers Schwartz, P.C., to schedule a free, confidential, no-obligation consultation.