Although by no means peculiar to healthcare, one of the recurring issues faced by healthcare employers is how to calculate overtime pay for non-exempt employees — what to include in the computation and how the multiplier actually should be applied. So, let us consider some of the factual and legal issues in calculating overtime, which commonly recurs in a healthcare environment and how to avoid liability for non-compliance.
First though, we need to understand the mandated basis for overtime calculations. Most employers think of it as simply involving one and one-half times an employee’s hourly rate — as in the example of an employee who is paid $10 per hour, and who must receive at least $15 an hour for all hours over 40 in a single workweek.1 Unfortunately, that is not how the FLSA reads, and the difference is critical. The law mandates that non-exempt employees be paid overtime at a rate of one and one-half times their “regular rate,” not necessarily what we might think of as their stated hourly rate. And, the “regular rate” is defined as being the rate actually paid to the employee, including “all remuneration from employment paid to, or on behalf of, the employee,” except payments specifically excluded under the FLSA.
Shift differentials
Now, how does this definition impact healthcare employers? As an example, consider a common approach to compensating employees working on what many might feel are less desirable shifts — the shift differential. Let us assume an employee has a stated hourly rate of $10 per hour and receives a shift differential of $2 per hour. If that employee works over 40 hours in a single workweek, then that extra $2 per hour has to be included in her total remuneration. So, instead of receiving $15 for each hour over 40, the employee must receive $18 per hour for all such hours.
Certainly, in the case of a single employee for a single workweek, the difference might not be so great. After all, in the example above, if the employee works 45 hours, there is only a $15 difference for that workweek. But, consider that if the overtime calculations are not done correctly, similar shortages apply to all affected employees for multiple weeks, and the damage could extend for a period of up to three years. As we have all heard in other contexts, pretty soon you are talking about real money.
Moreover, the above example is really a little too simplistic, as healthcare employees often work on different shifts, some without shift differentials and some with varying amounts of shift differentials. To illustrate the problem, let us assume we have an employee with a stated rate of $10 an hour who works 20 hours on the first shift (i.e., no differential), 20 hours on the second shift (i.e., $1.50 differential) and 10 hours on the third shift (i.e., $2 differential), thereby working 10 hours of overtime. To determine that employee’s regular rate for that particular workweek, the employer must use a weighted average. This is accomplished by first dividing her total remuneration excluding the multiplier, which amounts to $550 ($10 x 20 hours; $11.50 x 20 hours; and $12 x 10 hours) by the total number of hours worked (50). The resulting number is her “regular rate” for that week — and only that week — of $11. In this case, she would have to receive an extra one-half times that $11 regular rate for the 10 hours she worked over 40, ($5.50 x 10 Hours) or $55. The calculation is based on an extra one-half times the regular rate because the employee already has received “one times” her regular rate for those overtime hours. Her total earnings for the workweek would then be $605.
Mistakes concerning shift differentials and the regular rate can be costly, especially when spread over many employees and multiple years. But similar issues arise with other forms of “extra” pay. Another example is on-call pay, which is of particular utility in healthcare. The government’s position is that all amounts received as on-call pay must also be included in regular rate calculations. Perhaps somewhat surprisingly, call-in pay — usually a guarantee of a certain number of hours of pay if called in should the employee not actually work that many hours — may not have to be included in an employee’s total remuneration for regular rate purposes, although the government has indicated that is only the case if the receipt of call-in pay is “infrequent and sporadic.” Whether the “infrequent and sporadic” standard will pass muster with the courts is still an open question.
Incentive payments
Another area in which problems with regular rate calculations frequently arise involve situations in which employees receive bonuses or other forms of incentive payments based on such factors as productivity, quality, safety standards and the like. As a general rule, such payments are considered to be part of an employee’s remuneration for employment and includable in the regular rate. If the payment covers a single workweek, then the amount of the payment is simply added to the other earnings and the total is divided by the number of hours worked to obtain the regular rate for that workweek. Where things become interesting and troublesome are when these payments cover an extended period of time. In those cases, once the amount of the incentive payment is ascertained, it must be apportioned back over the workweeks in which it was earned. Then, the employee must receive an additional amount of compensation for each workweek in which she worked overtime.
To illustrate how this works, let us assume that an employee has a stated rate of $10 per hour. For a four-week period, she earns a bonus of $100. The employer allocates that $100 bonus equally to each of the four weeks, resulting in $25 “extra” for each workweek. To make things simpler, let us say that during that period she worked 50 hours in one workweek, and 40 or under in the remaining workweeks. The addition to the regular rate for that single workweek is calculated by dividing $25 by 50 hours, resulting in a 50 cent addition to the regular rate for that workweek. The employer would then add $2.50 to the amount of the bonus for that workweek ($0.50 x ½ x 10). The other three workweeks would be unaffected as there was no overtime in those workweeks.
To be sure, there are certain statutory exclusions from regular rate calculations such as truly discretionary bonuses, gifts, contributions by the employer to certain welfare plans and payments made pursuant to certain profit-sharing and savings plans. But, these exclusions involve rather specific requirements, and employers must be careful to ensure that they are defined and managed in such a way so as to preserve the exclusion.
Otherwise, employers must carefully analyze their pay practices to make sure that their regular rate calculations are in compliance with the FLSA. Keep in mind that our examples above are greatly simplified and involve only a single employee. In real life, the stated hourly rates are higher, the variations much greater and, usually, the number of employees affected and potential litigants is frightening. These types of issues often are the basis for class actions and the potential liability can easily reach hundreds of thousands or even millions of dollars.
1 Although in healthcare certain employers may pay overtime based on eight hours a day or 80 hours over a two workweek period, for simplicities sake, examples will be based on the 40 hours per workweek standard.
