Guaranteed Pay Plans and Computation of Overtime
by Matthew A. Kaufman
Guaranteed Pay Plans and Overtime
Guaranteed salary plans do not provide proper overtime compensation because they improperly calculate the “regular rate” of pay. Employers have argued that guaranteed salary compensates for statutory overtime. In California, it does not. The same is true under the Federal Fair Labor Standards Act (FLSA) not except in cases involving “Belo” plans. The Department of Labor cites guaranteed salary plans as devices to evade overtime pay.
Examples of overtime evasion schemes include:
• A varying rate of pay which decreases as the length of the workweek increases;
• Designating some wages as a “bonus” even though the employee is already entitled to those wages;
• “Poxon” or “split-day” plans which artificially divide the workday into straight-time and overtime portions.
Examples of Guaranteed Pay Plans
The following is based on the Department of Labor’s description of overtime evasion schemes. These examples illustrate how the plans manipulate the regular rate of pay.
For the same work, an employer cannot pay a lower hourly rate for overtime hours than non-overtime hours. Nor can the hourly rate vary inversely with time worked in a week. For example, a hospital pays a nurse $15 an hour for an 8 hour day shift. If that hospital pays the nurse $10 an hour to work a 12 hour shift, that improperly calculates the regular rate.
The general rule is that where the employee is guaranteed a fixed or determinable sum as wages each week, no part of this sum is a true bonus. For example, assume that an employer guarantees a salary of $1,000 per week. For hours 40 and under in a week, the employees’ pay stubs show “straight time” paid at the rate of $18.18 an hour. For hours over 40, the pay stubs show the “overtime” paid rate of $27.27 an hour. If the employee works 50 hours a week, the employee earns $1,000 at the "hourly" rate. If the employee works 45 hours, the employee earns $1,000 with $727.27 designated as straight-time wages, 5 hours of overtime totaling $136.36, and bonus of $136.36.
This employee has not been paid any overtime. Under the California Labor Code, the employee’s straight time rate is $25 per hour. Under the FLSA, this employee’s straight time rate is $22.22 in the 45-hour week. Moreover, no part of the guaranteed pay will be credited toward the employer’s overtime obligation.
Example: Split-day pay plan
Under these plans, the regular workday is artificially divided into two portions, a “straight time” portion and an “overtime” portion. The employee receives an artificially low (less than market wages) for the first portion, and this is used to justify a low regular rate of pay for computing overtime. One example is an employee who receives minimum wage ($8 here in California) for the first 4 hours of the workday and time and a half for the remaining 4 hours in the workday ($12). If that employee worked 6 days a week, the employer cannot argue that it has already paid the employee overtime based on an hourly rate of $8. In California, the regular rate will be $12 an hour, and under the FLSA it will be $10 an hour. Under both laws, the employee is entitled to 8 hours of overtime pay.
The Federal Fair Labor Standards Act (FLSA) permits guaranteed compensation to include payment for overtime pay only under a “Belo” plan. These plans are named after a case, Walling v. A.H. Belo Co., 316 U.S. 624 (1942). California’s wage laws have no provision for them. Belo plans require:
• The employee must be “employed pursuant to a bona fide individual contract, or pursuant to an agreement made as a result of collective bargaining by representatives of employees …” [29 USC 207(f); 29 CFR 778.407]
• The work must require irregular hours. This means the employer and employee cannot control or anticipate “with any degree of certainty” the number of hours worked from week to week. [29 CFR 778.405]
• The pay cannot be below minimum wage. [29 CFR 778.408(a)]
• The employee’s regular rate of pay can include only wages for hour worked. It cannot include additional forms of compensation, such as bonuses, commissions, housing allowances, etc. [29 CFR 778.408(c)]
• For hours over the guaranteed amount, the agreement must include payment overtime hours at a rate of not less than one and half times the regular rate of pay. [29 CFR 778.409] The maximum number of hours worked for the guaranteed compensation cannot be for more than 60 hours per week. [29 CFR 778.411]
The law on Belo plans is complex and nuanced and this page does not contain a complete discussion of them. If you want to learn more, check out the citations above in the US Department of Labor website.