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Sample HR Policy

Pay Procedures

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Model Policy
305

Policy:

It is the policy of the Company to pay1 employees7 by check or direct deposit8 on a regular basis and in a manner so that the amount, method, and timing of wage payments comply with any applicable laws9 or regulations.

Comment:

(1) Employees normally will be paid2 on the fifteenth day and the last day of the month.10 If the regular payday occurs on a Saturday, Sunday, or a holiday, employees will be paid on the last working day before the regular payday.

(2) Employees on each payday will receive, in addition to their check or deposit advice, a statement showing gross pay, deductions,3 and net pay. Local, state, federal,11 and Social Security taxes will be deducted automatically. No other deductions12 will be made unless required or allowed by law, contract, or employee obligation. Employees may elect to have additional voluntary deductions taken from their pay only if they authorize the deductions in writing.

(3) Employees who discover a mistake4 in their pay check, lose their pay check, or have it stolen should notify the Personnel Department immediately. In the case of a mistake,13 the error will be remedied promptly. In the case of loss or theft, the Personnel Department will attempt to stop payment on the check and reissue a new one to the employee. However, the employee is solely responsible for the monetary loss, and the Company will not be responsible for the loss or theft of a check if it cannot stop payment on the check.

(4) Employees who are eligible for vacation may receive an advance on their vacation pay as long as an approved request for it is submitted to the Personnel Department at least one pay period before the beginning of the vacation. Under normal circumstances, no other advances5 or loans14 for employees will be made without the prior approval of the Personnel Director. (See Personal Finances of Employees, Chapter 803.)

(5) Nonexempt employees (those not exempt from the provisions of the Fair Labor Standards Act) will be paid overtime compensation15 at the rate of one and one-half times their regular hourly rate for work in excess of forty hours during their normal workweek. (For a more detailed discussion of exempt and nonexempt status, see Hours of Work, Chapter 207.)

(6) Nonexempt employees will receive premium pay6 at one and one-half their regular rate for work on Saturday and Sunday, regardless of the number of hours worked in the workweek, unless the normal workweek includes regular Saturday and Sunday work.

(7) Nonexempt employees will receive a shift differential6 calculated as follows:

(a) If the shift begins after noon and ends at 11:00 p.m. or earlier, 10 percent of regular pay; or

(b) If the shift begins after 3:00 p.m. and ends after 11:00 p.m., 15 percent of regular pay.

(8) For policies and procedures regarding on-call and reporting pay, see Hours of Work, Chapter 207. For policies and procedures governing pay upon termination, see Termination of Employment, Chapter 211.

(9) Employees should discuss any questions or concerns regarding their rate of pay and other compensation issues with their department head or with the Personnel Department.16

Management Rationale

1Regulation of Pay Practices: Pay practices are regulated extensively at both the federal and state level. At the federal level, the wage and hour provisions of the Fair Labor Standards Act ("FLSA") regulate areas such as minimum wages, overtime, and child labor. (See notes 9 and 15, below.) Many states also have their own minimum wage and overtime requirements as well as special rules on the timing and method of wage payments, payments on termination, deductions from pay, and pay for work outside of normally scheduled hours. (See notes 10 and 12, below.) Employers, therefore, should familiarize themselves with both state and federal laws relating to pay practices. In addition, employers should explain pay practices to their employees, including frequency of pay periods, deductions, and applicable state and federal laws that affect an employee’s paycheck.

2Timing of Wage Payments: The payment of wages or a salary is fundamental to the employer-employee relationship and also is regulated by state law (see note 10, below). Employers should inform new employees about when and how wage and salary payments will be made so that employees can manage their finances in an orderly fashion. For employees who are retiring or otherwise terminating employment, employers should explain how any remaining wage payments will be made. (For information on payment of accrued leave at the time of termination, see Vacations, page 502:7, note 20.)

3Deductions: Employers should state clearly that they will make only those deductions that are required or allowed by law. Mandatory deductions include payroll taxes and certain court ordered payments involving wage deduction orders, support payments, and taxes owed. (For restrictions on garnishments, see Personal Finances of Employees, page 803:5, note 11.) Other deductions may be elective, such as amounts to repay loans from the employer to the employee or benefit contributions, but they also may be restricted by federal or state law. In any case, employees should be required to authorize in writing all elective or voluntary pay deductions. This authorization helps prevent misunderstandings, and many states require it. (See note 12, below.)

4Pay Check Mistakes, Losses, or Theft: Employers should be prepared to respond promptly to mistakes in pay checks or their loss or theft. A mistake is the employer’s responsibility. (See note 13, below.) Accordingly, the employer should correct the mistake quickly so that the employee is not inconvenienced. The loss or theft of a pay check, however, often is a result of employee negligence. In these situations, an employer should not obligate itself to remedy the situation beyond attempting to stop payment on the check and issuing a new check when appropriate.

Employers should encourage employees to take basic precautions against the loss or theft of their checks, such as direct deposit, and the employer’s policies should state that it is not responsible for missing or stolen checks. Many employers prefer direct deposit, because of the savings in the cost of printing and distributing checks, and encourage employee participation. However, for various reasons, some employees may object to electronic transfer of funds or be unwilling to sign the required electronic deposit authorization. (For information on direct deposit regulation, see note 8, below.)

5Pay Advances and Loans: Many employers are willing to help their employees by granting advance pay for vacations. However, most prefer not to make other advances and loans because they do not want to get into the financial services business. In addition, it may be difficult to collect on advances and loans through wage deductions since most states limit these deductions. (See note 12, below.) Employers that choose to make loans to employees also should be aware of the tax consequences of below market loans to employees. (See note 14, below.)

6Premium Pay and Shift Differentials: Many employers provide extra pay to employees who work unpopular shifts or on Saturdays, Sundays, or holidays, even though they do not have a legal obligation to do so. For example, employers typically provide an incentive, often a set amount per hour, for the "swing shift" (3 p.m. to 11 p.m.) and the "graveyard shift" (from 11 p.m. to 7 a.m.). The Model Policy recognizes that shifts beginning after noon, but before 3 p.m., can also be disruptive to family and social life, and thus provides for some extra compensation for shifts starting after noon.

As an additional incentive, some employers voluntarily compensate hours worked in excess of eight per day at overtime rates. Others consider time away from the job during the workweek, such as vacations, holidays, or approved absences, as hours worked for purposes of computing overtime. Neither of these practices is required by federal wage and hour laws, although some states require daily overtime. (See Hours of Work, page 207:8, note 17). (For information about regulations on overtime pay, see note 15, below.)

References for Legal Counsel

References for Legal Counsel

FEDERAL

7Employee Versus Contractor Status: Workers generally can be classified as either the organization’s "employee" or as a self-employed "independent contractor." This distinction is important because employees are entitled to many protections under federal and state law that independent contractors are not, such as coverage under minimum wage and overtime laws, workers’ compensation, unemployment compensation, and employment discrimination laws. In addition, the organization must contribute payroll taxes for employees. Whether a person who performs work for the organization is an "employee" or an "independent contractor" primarily depends on how much control the employer has over the work relationship.

There generally are three different analyses that must be considered in determining independent contractor status: (1) the Internal Revenue Service ("IRS") 20-factor analysis, for coverage under federal withholding requirements; (2) the "economic reality" test, used to determine compliance with requirements of the Fair Labor Standards Act ("FLSA"); and (3) the common law "right to control" test, used by many courts to administer certain other statutes. Each of these tests is discussed below. Generally, misclassification of employees for purposes of federal tax withholding can cause the employer the most harm because the IRS is very aggressive at questioning independent contractor status and has severe penalties for noncompliance.

IRS Analysis. Employers normally are responsible for withholding certain employment taxes from their employees’ pay. This obligation does not apply when the work is performed by an independent contractor. The IRS considers the existence of an employer-employee relationship to depend on whether the worker is subject to the will and control of the employer. For the employment relationship to exist, the employer’s control must apply to both the manner in which the work is performed as well as to the result. The employer does not actually have to exercise this control. It only has to have the right to exercise control. Conversely, the IRS considers a worker to be an independent contractor if the employer controls only the result of the work and not the way in which the result is achieved.

For example, a worker pursuing an independent trade, business, or profession typically is regarded as an independent contractor. The IRS evaluates 20 factors in determining whether the employer has control over both the manner in which the work is performed as well as the work product. These factors are often applied in Private Letter Rulings ("PLRs") issued by the IRS in response to taxpayers’ requests. Although PLRs may not be used as legal precedents, they indicate how the IRS can be expected to interpret situations involving similar facts. The presence or absence of any one of the 20 factors is not determinative; rather the IRS will consider all of the factors affecting the relationship. See, e.g., Eastern Inv. Corp. v. United States, 49 F.3d 651 (10th Cir. 1995) (the court determined that the presence or absence of one factor in the 20-factor test was not determinative; however, the court viewed the method of payment as having a strong impact on the other factors in examining the totality of the evidence relating to the existence of an employer-employee relationship). The 20 factors include:

(1) Instructions: Workers are employees if they must follow another person’s instructions as to when, where, and how to perform the job.

(2) Training: A requirement that the worker must undergo training supports employee status.

(3) Integration: Integration of the worker’s services into the business operations suggests that the worker is subject to the direction and control of the owner of the business.

(4) Services Rendered Personally: A requirement that services must be rendered personally by a specific worker implies that the hirer controls the methods used to complete the work.

(5) Hiring, Supervising, and Paying Assistants: Control by the hirer over the hiring, supervision, and pay of assistants, rather than by the worker in question, implies employee status.

(6) Continuing Relationship: A continuing relationship between a worker and the entity ordering the services suggests that an employer-employee relationship exists, even if the work is performed on an irregular basis.

(7) Set Hours of Work: The establishment of set hours by the entity ordering the work implies control over the worker.

(8) Requiring Full Time: A worker who must devote full time to the business of the hiring entity is being controlled and implicitly is restricted from doing other gainful work. In contrast, an independent contractor is unrestricted as to when and where to work.

(9) Doing Work on Hirer’s Premises: Work that is performed on the hirer’s premises indicates employer control, especially when the work could be done elsewhere. However, the importance of this factor depends upon the nature of the work involved.

(10) Order or Sequence: Work that must be performed in an order or sequence established by the hirer suggests control and indicates that the worker is not free to set the pattern of work.

(11) Oral or Written Reports: A requirement that the worker submit regular or written reports to the hirer implies control over the worker.

(12) Payment by Hour, Week, or Month: Payment at these intervals generally indicates an employer-employee relationship. Payment by the job or on a straight commission indicates the worker is an independent contractor.

(13) Payment of Business or Traveling Expenses: Payment of these expenses incurred by the worker suggests an employer-employee relationship because the employer has the right to regulate and direct the worker’s activities.

(14) Furnishing Tools and Materials: Provision of tools, materials, and other equipment by the hirer tends to show an employer-employee relationship.

(15) Significant Investment: Independent contractor status is implied if the worker invests in the facilities used for the work. On the other hand, an absence of investment indicates an employer-employee relationship. Special scrutiny is given to the legitimacy of certain work facilities, such as home offices.

(16) Realization of Profit or Loss: A worker who can realize a profit or suffer a loss as a result of providing services is usually an independent contractor.

(17) Serving More Than One Firm: A worker is generally an independent contractor if the worker provides services to several unrelated firms at the same time.

(18) Serving the General Public: A worker is an independent contractor if the worker’s services are regularly available to the general public.

(19) Right to Discharge: The right of the hirer to discharge the worker at any time is a factor indicating an employer-employee relationship. In contrast, an independent contractor may not be fired if the independent contractor produces a result that meets contract specifications.

(20) Right to Terminate: A worker with the right to terminate the relationship with the hirer at any time without incurring liability is generally an employee.

Generally, the most important factors are those affecting the right to control when, where, and how the work is performed. See, e.g., Feivor v. Comm’r of Internal Revenue, T.C. Memo. 1995-107 (U.S. Tx. Ct. 1995) (the district manager was an independent contractor since the insurance company measured the manager’s performance by results, not method of achieving goals, and did not control the details of how the manager conducted business). Another important factor is who has the right to discharge or terminate the relationship. 26 C.F.R. 31.3401(c)-1(b). However, each factor’s degree of importance varies depending on the specific occupation and facts involved. Rev. Rul. 87-41. Employers also should note that the status of the relationship is not determined by designations or descriptions. 26 C.F.R. 31.3121(d)-(a)(3). Thus, labelling someone as a contractor does not, by itself, make the worker an independent contractor. See Eastern Inv. Corp. v. United States, 49 F.3d 651 (10th Cir. 1995) (the hiring party’s classification of a salesperson as an employee or independent contractor is of no consequence to the analysis).

FLSA Analysis. The Department of Labor ("DOL") uses the "economic realities test" for purposes of determining coverage under and compliance with the minimum wage and overtime requirements of the Fair Labor Standards Act ("FLSA"). The following are among the factors considered by the DOL: (1) the degree of control exercised by the hiring party over the manner in which the work is performed; (2) the relative investments by the hiring party and the worker in materials and equipment; (3) the degree to which the worker’s opportunity for profit and loss is determined by the hiring party or the worker’s own managerial skill; (4) the skill and initiative required in performing the job; (5) the permanency of the relationship; and (6) whether the service is an integral part of the hiring party’s business. See, e.g., Reich v. Circle C Inv., Inc., 998 F.2d 324 (5th Cir. 1994) (nightclub dancers were employees since the nightclub scheduled dancers to work weekly, fined and disciplined the dancers, made a significant investment compared to that of the dancers, and controlled factors affecting the dancers’ profits; in addition, little skill and initiative were required by the dancers). (For additional information about the Fair Labor Standards Act, see Hours of Work, Chapter 207.)

Common Law Test. The common law "right to control" test is used by courts to determine employee status in various types of cases, including employment-related cases, tax cases, and tort liability cases. The common law test, as applied by the courts, includes the following ten factors: (1) the extent of control which, by agreement, the hiring party may exercise over the hired party; (2) whether the hired party is engaged in a distinct occupation or business that is usually done by a specialist without supervision; (3) how the worker’s helpers are hired, whether paid by the hiring party or the worker; (4) the skill required in the particular occupation; (5) who supplies the means, tools, and place of work; (6) the length of time for which the person is hired; (7) the method of payment, whether by time or the job; (8) whether the work is part of the regular business of the hiring party; (9) whether the parties believe they are creating an employment relationship; and (10) whether the hired party is an actual business entity. See General Inv. Corp. v. United States, 823 F.2d 337 (9th Cir. 1987) (employer control over the manner in which work is performed is the basic test for determining common law employer-employee relationship). See also Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318 (1992) (the Supreme Court applied the common law right to control test to determine whether a worker was an employee covered under the Employment Retirement Income Security Act).

8Form of Payment: The Electronic Fund Transfer Act, 15 U.S.C. 1693 et seq., and Regulation E of the Federal Reserve Board, 12 C.F.R. 205.1 et seq., make it unlawful, as a condition of employment, to require an employee to establish an account with a particular financial institution for receipt of electronic fund transfers, such as the employee’s wages. 15 U.S.C. 1693k(2); 15 U.S.C. 1693a(5). In addition, employees have the right under federal and state law to be paid their wages in cash or negotiable check. 29 C.F.R. 531.27. Although the Act does not expressly authorize or prohibit employers from requiring payment by electronic transfer, employers are advised not to require direct deposit and to obtain the written consent of their employees before instituting electronic transfers in order to comply with state laws. Most state laws specifically require employers to obtain each employee’s voluntary, written consent in order to use direct deposits or electronic transfers for pay purposes. See, e.g., Cal. Lab. Code 213(d); N.Y. Lab. Law 192(1) and (2).

9Minimum Wage: The Fair Labor Standards Act ("FLSA"), 29 U.S.C. 201 et seq., requires that employees who are covered by the Act ("nonexempt employees") be paid at least the minimum wage of $5.15 an hour and must be paid overtime for all hours worked in excess of 40 in a single workweek. Overtime compensation must be at a rate of at least one and one-half times the normal hourly rate. The FLSA’s requirements generally apply to public and private employees engaged in commerce or in the production of goods for commerce, or who are employed in an enterprise engaged in commerce or in the production of goods for commerce. 29 U.S.C. 206 and 207. The term "commerce" is defined to mean trade, commerce, transportation, transmission, or communication among the several states or between any state and any place outside the state. 29 U.S.C. 203(b). Thus, the FLSA applies to most employees. However, the minimum wage and overtime provisions of the Act do not apply to certain employees specifically exempted from its coverage, including employees in bona fide executive, administrative, or professional capacities. 29 U.S.C. 213(a) and (b). (For a more detailed discussion of which employees are covered by the FLSA, see Hours of Work, page 207:4, note 4. For additional information about the FLSA’s overtime provisions, see note 15, below; and Hours of Work, page 207:8, note 17.)

States may also have minimum wage regulations. Many states provide for the same minimum wage as the federal requirement, but a few impose a higher rate. For example, Alaska’s minimum wage is set at 50 cents an hour higher than the prevailing federal minimum wage. Alaska Stat. 23.10.065. Similarly, Connecticut law provides that whenever the federal minimum wage is increased, the state will raise its minimum wage to one-half of one percent higher than the federal rate, rounded to the nearest whole cent, effective the same date as the federal increase. Conn. Gen. Stat. 31-58(j). Therefore, employers should check state law to determine whether the minimum wage is higher than the federal rate.

10Payday Requirements: Almost every state has passed legislation specifying how frequently certain wage payments must be made to employees. In addition, many also impose restrictions on how quickly the money must be paid after it is earned. For example, California, Illinois, Michigan, and New Jersey all specify a minimum of biweekly or semimonthly wages for most categories of employees and require payment within a period ranging from 10 to 15 days after the close of each pay period. See Cal. Lab. Code 204; 820 ILCS 115/3; Mich. Comp. Laws 408.472; N.J. Rev. Stat. 34:11-4.2. New York and Texas also have biweekly or semimonthly pay requirements for most employees but do not specify when the wages must be paid after the end of the period. N.Y. Lab. Law 190(7) and 191(1)(d); Tex. Lab. Code 61.011.

In addition, some states have special requirements for weekly pay, while others allow for monthly payment. For example, New York specifies weekly payments for manual laborers. N.Y. Lab. Law 191(a). Colorado, Wisconsin, and Washington require only monthly payments to employees. Col. Rev. Stat. 8-4-105(1), (3); Wis. Stat. 109.03(1); Wash. Admin. Code R. 296-126-023. Many states also allow monthly payment to employees who are exempt from their minimum wage and overtime requirements. See, e.g., Cal. Lab. Code 204 and 204c; 820 ILCS 115/3; N.J. Rev. Stat. 34:11-4.2; N.Y. Lab. Law 190(7) and 191(d); Tex. Lab. Code 61.011.

State wage payment requirements may not apply to employers with collective bargaining agreements that specify payment periods. For example, California, Illinois, and Wisconsin allow collective bargaining agreements that set out wage payment arrangements that differ from state law. See Cal. Lab. Code 204; 820 ILCS 115/4; Wis. Stat. 109.03(1). Because of the variations in state laws, employers should consult the wage and hour laws that apply to their jurisdiction.

11Federal Withholding for Fringe Benefits: The Internal Revenue Code, as amended, provides rules for taxing certain fringe benefits. Benefits that are not specifically excluded under the Code or other tax statutes, such as group term life insurance on the life of an employee or qualified transportation fringe benefits, are included in taxable income and employers, therefore, must withhold income, Social Security, and unemployment taxes on those fringe benefits. 26 U.S.C. 3401(a), 3501(b); 26 C.F.R. 1.61-21, 1.132-0.

According to IRS Announcement 85-113, 1985-31 I.R.B. 31, withholding on taxable fringe benefits must be done at least annually. In addition, under a special accounting rule, the employer may treat the value of certain benefits provided during the last two months of the calendar year as paid during the subsequent taxable year. Income tax withholding may be accomplished by: (1) adding the value of the benefits to the regular wages for a payroll period and computing withholding taxes on the total compensation; or (2) by withholding at a flat rate of 20 percent on the value of the benefit. Employers should consult with tax counsel for more information on these tax issues.

12Restrictions on Deductions: The federal Fair Labor Standards Act ("FLSA"), 29 U.S.C. 201 et seq., which requires minimum wage payments and premium overtime pay for covered employees (see note 9, above, and note 15, below), prohibits deductions from pay if they would reduce the employee’s pay below the required minimum wage. 29 C.F.R. 531.36. In addition, deductions may not affect the employee’s overtime pay. Accordingly, in weeks that overtime is worked, deductions are limited to the same amount an employer may deduct if the employee had worked only 40 hours or less. 29 C.F.R. 531.37. However, deductions for board, lodging and "other facilities" (i.e., items similar to board or lodging) may be made even if they bring an employee’s compensation below the minimum wage, as long as the deduction does not exceed the reasonable cost of these items. 29 C.F.R. 531.32. For example, "other facilities" include meals furnished at company restaurants, dormitory rooms furnished to student employees, merchandise furnished at company stores, fuel, and electricity. 29 C.F.R. 531.32.

Thus, deductions to cover cash shortages and credit card processing errors violated the FLSA since the deductions brought the wage rate below the overtime and minimum wage requirements. Martin v. Petroleum Sales, Inc., 1 WH2d 363 (W.D. Tenn. 1992), rev’d and remanded on other grounds, Reich v. Petroleum Sales, Inc., 30 F.3d 654 (6th Cir. 1994). Similarly, in Calderon v. Witvoet, 999 F.2d 1101 (7th Cir. 1993), farm owners violated the FLSA minimum wage requirement when they reduced weekly pay below the minimum wage by withholding portions of farm workers’ weekly pay and paid it to them at the end of the summer as a bonus. (For more information about garnishment and other deductions from wages, see Personal Finances of Employees, Chapter 803.)

Virtually all states limit the deductions that can be taken from an employee’s paycheck to those which are required by federal or state law or court order, or to those which are authorized in writing by the employee. With respect to employee-authorized deductions, many state statutes are broadly worded and do not limit or describe specifically the types of deductions that can be made. See, e.g., Mich. Comp. Laws 408.477. Other states specify which deductions are allowed (generally, those which benefit the employee, such as insurance premiums, retirement plan contributions, and savings plans) and stipulate that any other form of deduction violates the law. See, e.g., N.Y. Lab. Law 193(1). Illinois specifies deductions for inventory shortages, financial loss, cash advances, equipment, improper credit card transactions, and property damage as appropriate only if there is a written authorization "freely given" at the time of the deduction. 56 Ill. Admin. Code 300.700 et seq. Wisconsin allows similar deductions only with the employee’s written authority or if the employer and the employee’s designated representative determine that the loss or damage was the result of the employee’s negligence or willful conduct. Wis. Stat. 103.455. Due to variations in state laws, employers should consult the applicable state statutes before making any wage deductions.

13Underpayments and Overpayments: An employer has an obligation to correct any underpayments of employee wages. A wage underpayment that is not promptly corrected generally will violate state statutes regarding the timely payment of wages. (See note 10, above.)

State laws vary with respect to what an employer may do to recover any wage overpayments. For example, under Illinois law, the employer may deduct the entire sum on the first payday after the overpayment occurred if the employee agrees that an overpayment was made. However, if the employer does not discover the error until after that date, the employer may make deductions only after entering into a written repayment schedule agreement. 56 Ill. Admin. Code 300.900 and 300.930. Other states are less restrictive. See Ind. Stat. Ann. 22-2-6-4(a) and (b) (an employer that overpays an employee may deduct overpayment from wages after two weeks notice); 26 Maine Rev. Stat. 635 (an employer that has overpaid an employee may withhold up to 10 percent of any subsequent pay without the employee’s written permission). Consequently, employers should consult state law before deducting any wage overpayments.

14Below Market Loans: Employers that give employee loans must be careful about the interest rate charged on the loans. The Internal Revenue Code, as amended, allows the Internal Revenue Service to classify as taxable wages the difference between the current "applicable federal rate" ("AFR") and the below market interest rate charged by an employer. 26 U.S.C. 7872. The AFR generally is based on the average interest rate paid for short, medium, and long-term Treasury securities, with those rates determined every month. There are certain exclusions and rules that may apply to below market loans, including:

(1) Employer loans to an employee are excluded if they total below $10,000;

(2) Although the below market discount will be included in the employee’s wages, the employee may be able to deduct all or a portion of the interest paid on that loan, depending on how the loan proceeds are used, if the employee itemizes deductions; and

(3) The employer will have to pay Social Security taxes ("FICA") and federal unemployment taxes ("FUTA") on the below market discount but is not required to withhold income tax on it.

Any employer offering below market loans to employees should seek the advice of tax counsel.

15Overtime Compensation: The Fair Labor Standards Act ("FLSA") requires that every employee covered by the Act who works more than 40 hours in a single workweek must be paid not less than one and one-half times that employee’s "regular rate" for each hour over 40. 29 U.S.C. 207(a)(1). (For a discussion of the FLSA’s coverage, see note 9, above.) Thus, the employee’s regular rate of pay per hour for the week must be calculated before the overtime rate can be determined. Some items of compensation do not have to be included in the regular rate calculation. The following is a brief discussion of different methods of payment and their effect on the regular rate calculation:

Piece-rate, salaried nonexempt, and commission employees. Under the FLSA, the "regular rate" is a rate per hour that is determined before any deductions from wages are made. 29 C.F.R. 778.109. For employees who are not paid a regular rate per hour (such as those whose compensation is determined on a piece-rate, salary, or commission basis), overtime compensation must be computed on the basis of the hourly rate derived from their total compensation. 29 C.F.R. 778.109. For example, a semimonthly salary is translated into its equivalent weekly wage by multiplying by 24 and dividing by 52. The regular hourly rate of pay is computed by dividing the weekly salary by the number of hours that the salary is intended to compensate. 29 C.F.R. 778.113.

Shift differentials and "dirty work." Extra pay for shift differentials and "dirty work" generally must be considered in calculating the employee’s regular rate. 29 C.F.R. 778.207(b). (Shift differentials and "dirty work" pay are extra compensation provided for employees who regularly work unpopular shifts or less desirable jobs.) However, when the differential is at least one and one-half the employee’s regular rate and is paid under a collective bargaining agreement that establishes certain hours as the regular work day, it may be excluded from the regular rate and also credited against the employer’s overtime pay obligation. 29 C.F.R. 778.204(a).

So, for example, if the established regular workday is 8 a.m. to 5 p.m., a rate of one and one-half times the usual pay for work performed from 5 p.m. to 8 a.m. is treated as overtime pay. If, however, the employer pays the premium rate only for some hours outside of the regular work day (such as only for the shift from midnight to 6 a.m.), the amount of the premium cannot be excluded from the calculation for the regular rate and may not be credited against the employer’s overtime obligation. 29 C.F.R. 778.204(b).

Different hourly rates for one employee. Another situation that can complicate the calculation of the weekly regular rate is an employee working two or more jobs for which the employee is paid different hourly rates. In that situation, the employee’s regular rate of pay is the weighted average of the different rates. 29 C.F.R. 778.115. For example, the regular rate of an employee who works 35 hours per week at $15 per hour as a machine operator ($525), and works 10 hours that same week at $7 per hour cutting the grass outside the plant ($70), is $595 divided by 45 hours or $13.22 per hour. Thus, the overtime rate for this employee is one and one-half times $13.22, or $19.83 per hour, regardless of which job the employee performs during the extra hours. The employee’s regular and overtime rates will vary from week to week with the number of hours spent performing each job.

Alternatively, an employer and employee may agree (before the work is performed) that the overtime rate will be based on the regular rate that applies to the type of work performed during the hours in excess of forty. 29 C.F.R. 778.419. Therefore, if an employee spends 35 hours in a week working as a machine operator at $15 per hour, and five hours a week cutting the grass at $7 per hour, the overtime rate for any additional hours spent cutting the grass is $10.50 per hour. Conversely, the overtime rate for any additional hours spent working as a machine operator is $22.50. This method of computation is available for hourly employees only and does not apply to nonexempt salaried employees. 29 C.F.R. 778.419.

Excluded items of compensation. Certain types of compensation are excluded from an employee’s regular rate of pay. The following are among the items that may be excluded from the calculation:

(1) Discretionary bonuses. (However, awards, prizes, or bonuses for quality, quantity, or efficiency in performing usual work during regular work hours, and bonuses based on hours worked, are included in the calculation.) 29 U.S.C. 207(e)(3)(a); 29 C.F.R. 778.211.

(2) Sums paid as gifts at Christmas time or on other special occasions. 29 U.S.C. 207(e)(1); 29 C.F.R. 778.212.

(3) Premium pay for work on Saturdays, Sundays, or holidays, if the pay is at least one and one-half times the employee’s regular rate. 29 U.S.C. 207(e)(6); 29 C.F.R. 778.203. (See also the discussion of shift differentials and "dirty work," above.)

(4) Irrevocable contributions to many employee benefit plans. 29 U.S.C. 207(e)(4); 29 C.F.R. 778.214.

(5) Payments made for occasional periods when no work is performed because of vacation, holiday, or illness. 29 U.S.C. 207(e)(2); 29 C.F.R. 778.218. (See also note 6, above.)

16Prohibiting Employee Discussions of Compensation: Although some employers may prefer that employees did not share information about compensation, forbidding this activity is impractical and may be a violation of federal and state law. For example, some states specifically prohibit employers from forbidding employees to discuss compensation among themselves and even prohibit employers from requiring employees to sign agreements not to disclose their wages and from retaliating against employees who disclose their wages. See, e.g., Cal. Lab. Code 232; Mich. Comp. Laws 408.483a.

Additionally, a total ban on wage discussions among employees (i.e., a prohibition that goes beyond limiting the time and place of discussions) is prohibited under the National Labor Relations Act ("NLRA"), 29 U.S.C. 158(a)(1). Since higher wages are a frequent objective of employee organizations, a rule prohibiting wage discussions has been interpreted to be unlawful interference with the right of employees to engage in organizational and concerted activity. See, e.g., Jeannette Corp. v. NLRB, 532 F.2d 916 (3d Cir. 1976) (the employer violated the NLRA by establishing a rule prohibiting employees from discussing wage rates among themselves and by terminating employees who violated the rule).

See also Franklin Iron & Metal Corp. and Hill, 148 LRRM 1246 (NLRB 1994), enforced at 83 F.3d 156 (6th Cir. 1996) (a rule prohibiting employees from discussing wages among themselves violates 8(a)(1) of the NLRA). Thus, rather than prohibiting employees from discussing wages, the Model Policy encourages them to direct questions or concerns about compensation to the human resources or personnel department or their department head

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