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Change is Coming: Calculating "Regular Rate of Pay" and Why It Matters

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In the coming weeks, there will be a potential paradigm shift in federal wage and hour law. In that regard, one of the most hotly anticipated changes under the Trump Administration is the Department of Labor's reported effort to restructure the "regular rate of pay" analysis. A lot could be at stake for employers across the country.

The State Law Perspective

Given that Maryland law generally follows the lead of the DOL, a quick reminder of how Maryland looks at the issue may be beneficial, because what constitutes "wages" can sometimes be a tricky issue. Under Md. Code Ann., Lab. & Empl., § 3-401, "wages" are statutorily defined as "all compensation that is due to an employee for employment." Admittedly, that broad framing can lead to some level of uncertainty. Slightly more clarity is provided under § 3-501(c), wherein "wages" are described as all compensation that is due, to include "bonuses," "commissions," and "fringe benefits." If Maryland law could be condensed to a short statement, it would be this: If a promise is made to an employee that he/she will be paid (or benefitted) a particular form of compensation, in exchange for his/her services, then that remuneration probably constitutes his/her "wages." The Maryland Court of Appeals would agree, in the past describing "wages" as any form of remuneration received by an employee for his/her services. See Montgomery County v. Deibler, 423 Md. 54, 31 A.3d 191 (2011). Where the debate (and highest stakes) often arises is in the context of overtime compensation disputes. Under Maryland law, every employer is obligated to pay an employee that person's "overtime wage if at least 1.5 times the 'usual hourly wage.'" Md. Code Ann., Lab. & Empl., § 3-415. And, "usual hourly wage" is just another way of saying "regular rate of pay."

The Federal Law Perspective

Now on to Federal law. As with Maryland law, the DOL also describes "regular wages" as all remuneration for an employee's employment services, with certain exceptions. Those exceptions would include payment for expenses incurred by the employee on behalf of the employer; premium payment for overtime hours worked; discretionary bonuses, gifts and payments connected to special occasions; and payments to employees for periodic episodes where no work is performed due to a holiday, vacation or illness. See DOL Fact Sheet #23: Overtime Pay Requirements of the FLSA.

Why It Matters

All of this matters because of how often this issue is litigated, and the costs employers possibly face when they get it wrong. The DOL describes the following typical scenario in calculating overtime hours based on an employee's regular rate of pay.

An employee was hired to work a 45-hour workweek for a weekly salary of $405. Under this scenario, his/her regular rate of pay would be calculated by dividing the $405 straight-time salary by 45 hours, resulting in a regular rate of pay of $9/hour. Since 1.5 times the regular rate of pay is owed in overtime compensation for all hours worked over 40 during a workweek, this particular employee would be owed $4.50 for each of the five additional overtime hours worked ($4.50 x 5 = $22.50).

Any doubt of the risks involved in miscalculating an employee's regular rate of pay can be quickly discarded by glancing at the statistics published by the DOL. In Fiscal Year 2017, the DOL reported more than 10,843 overtime compensation violation cases, valued at $157, 592,682 in back pay. In Fiscal Year 2018, those statistics grew to 11,018 cases, for a total amount of $194,203,854 in possibly back pay. The financial stakes to employers continue to grow with each passing year.

What's the Latest

Recently, the DOL submitted a proposed rules change to the White House Office of Information and Regulatory Affairs (OIRA). In turn, the proposal has been submitted to the Administration's Office of Budget and Management. However, the substance of the proposed rules change is still unknown, and information regarding the content of the rules change will not be made public until the Office of Budget and Management has an opportunity to weigh in. A call placed to the DOL's Wage and Hour Division's, Office of the Director of Regulations, Legislation and Interpretations, confirmed this status. With all of that said, the expectation is that a more employer-friendly perspective of what constitutes an employee's rate of pay will be promoted by the Trump Administration. This has the potential to really shake up wage and hour litigation, should that happen. Stay tuned.

If you have questions about compliance with wage and hour laws at your organization, contact the author, Neil Duke, or any member of Baker Donelson's Labor & Employment Group.

This article originally appeared in the Winter 2019 issue of the Maryland State Bar Association Section of Labor & Employment Law Newsletter.

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