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Employees Paid Incentive Pay, Shift Differentials, Regular Bonuses and Commissions Often Have Overtime Pay Violations

Many employers utilize incentive pay wherein an employee is paid an extra amount of money on top of his or her normal hourly rate.  Sometimes this comes in the form of incentive pay (i.e., if an employee performs at a certain level, they might get a higher rate of pay), shift differentials (for example, an extra $1 per hour for working the night shift), commissions or bonuses, and safety pay, among many others.  Many employers violate the overtime laws by not including this extra pay factored into the “regular” rate of  pay.

Here’s an example:

If Employee gets $10 per hour.   And, she also get an extra $2 per hour for incentive pay.   This means that the “regular rate” is really $12 per hour and not $10.  As such, for overtime (at 1.5 times the regular rate of pay), the rate should be $18 per hour (and not $15).   Many employers fail to include the incentive amount in computing the regular rate.

The FLSA requires employers to compensate employees one-and-one-half times their regular hourly rate for all hours over forty (40) in a week. 29 U.S.C. § 207(a)(1).  The FLSA defines the regular rate to “include all remuneration for employment paid to, or on behalf of, the employee” with certain statutory exceptions that are not applicable here.  29 U.S.C. § 207(e).  The regular rate is based upon what actually happens rather than a prospective declaration of what the rate will be. 29 C.F.R. § 778.108; see Bay Ridge Operating Co. v. Aaron, 334 U.S. 446, 468-69 (1948).

 The statutory exceptions are to be interpreted narrowly against the employer and the employer bears the burden of showing that an exception applies.  Caraballo v. City of Chicago, 969 F. Supp. 2d 1008, 1015 (N.D. Ill. 2013) (collecting cases from several circuits).   These statutory exclusions are discussed in 29 C.F.R. § 778.200, which emphasizes that Section 207(e)’s list of exclusions is exhaustive: “all remuneration for employment paid to employees which does not fall within one of these seven exclusionary clauses must be added into the total compensation received by the employee before his regular hourly rate of pay is determined.”  29 C.F.R. § 778.200(c); see also Caraballo v. City of Chicago, 969 F. Supp. 2d 1008 (N.D. Ill. 2013) (where the district court partially granted Plaintiff’s motion for summary judgment because additional payments made to the employees should have been included in their regular rate of pay for purposes of overtime); O’Brien v. Town of Agawam, 350 F.3d 279, 294 (1st Cir. 2003) (summary judgment appropriate in part because “the exceptions are to be interpreted narrowly against the employer…and the employer bears the burden of showing that an exception applies”); Acton v. City of Columbia, Mo., 436 F.3d 969, 972 (8th Cir. 2006);  Featsent v. City of Youngstown, 70 F.3d 900, 904 (6th Cir. 1995); Reich v. Interstate Brands Corp., 57 F.3d 574, 578–79 (7th Cir.1995),  denied, 516 U.S. 1042, 116 S.Ct. 699, 133 L.Ed.2d 656 (1996) (analogizing earned work credits to premium rates for undesirable shifts and finding that Section 7(e)(2) does not exclude that compensation from the regular rate); 29 C.F.R. § 778.207(b) (requiring that the regular rate include premiums for nightshift differentials and hazardous work).

Here are some common regular rate claims:

Attendance Bonuses.    29 CFR 778.211(c) specifically addresses attendance bonuses:  “Attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employees  continuing in employment until the time the payment is to be made and the like are in this category. They must be included in the regular rate of pay.”    The Department of Labor has said that: “Under 29 C.F.R. § 778.211(c), “[b]onuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm are regarded as part of the regular rate of pay. Attendance bonuses . . . are in this category.” See 29 U.S.C. § 207(e)(3)(a); Wage and Hour Opinion Letter November 5, 1999; Wage and Hour Opinion Letter February 24, 1986 (copy enclosed); Wage and Hour Opinion Letter July 15, 1980 (copy enclosed); see also Landaas v. Canister Co., 188 F.2d 768, 771-72 (3d Cir. 1951) (“We conclude that the provision for attendance bonus was clearly a part of the regular rate.”); Bibb Mfg. Co. v. Walling, 164 F.2d 179 (5th Cir. 1947) (attendance incentive must be included in regular rate), cert. denied, 333 U.S. 836 (1948); Chao v. Port City Group, No. 1:04-CV-609, 2005 WL 3019779, at *4 (W.D. Mich. Nov. 10, 2005) (attendance bonus paid to employees who had perfect attendance during an entire quarter should have been included in the regular rate).”

Commissions: 29 CFR § 778.117 states thatCommissions (whether based on a percentage of total sales or of sales in excess of a specified amount, or on some other formula) are payments for hours worked and must be included in the regular rate. This is true regardless of whether the commission is the sole source of the employee’s compensation or is paid in addition to a guaranteed salary or hourly rate, or on some other basis, and regardless of the method, frequency, or regularity of computing, allocating and paying the commission.”.  Tomeo v. W&E Communications, Inc., 14 C 2431, 2016 WL 8711483, at *11 (N.D. Ill. Sept. 30, 2016)(granting summary judgment for plaintiff because production pay bonus miscalculated)

Like many things in the law, there are several variables that factor into whether an employee must be paid a higher regular rate for overtime purposes and this page is for informational purposes only.

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