Calculating the overtime rate for employees paid on a day-rate basis – Are there benefits to employers in paying day rate?

All employers are familiar with the overtime calculation required by the Fair Labor Standards Act for non-exempt employees paid on an hourly basis. Many less are familiar with that calculation when made in the context of employees paid on a “day-rate” or “job-rate” basis. Even among those employers that are familiar with the “day-rate” payment scheme there has been some uncertainty in just how overtime pay should be calculated. This uncertainty was recently resolved by the Fifth Circuit Court of Appeals in the case of Eldon P. Dufrene v. Browning-Farris, Inc. In that case, the Fifth Circuit concluded that the Code of Federal Regulations’ interpretation of the day rate overtime calculation is consistent with, and therefore satisfies, the overtime requirements of the Fair Labor Standards Act. This article will explore the day-rate overtime calculation in conjunction with the Fifth Circuit’s ruling in Browning Ferris, and contrast it with the same calculation when made in the context of employees paid on an hourly basis. Though Oklahoma is not within the Fifth Circuit’s jurisdiction, the decision of one federal circuit court on an issue of federal law is often persuasive to other circuit courts. Accordingly, Oklahoma employers will do well to take heed of the Fifth Circuit’s ruling concerning day rate overtime calculations.

In this article, regular rate and overtime rate calculations have been explored in the context of non-exempt hourly employees. While there are similarities between the regular rate and overtime rate calculation for hourly employees and day rate employees, there are certain hidden and often overlooked differences that may be of benefit to employers. These differences, once understood, may change the manner in which you pay your employees.

What is a day rate?

A day rate (sometimes known as a job rate) payment scheme is a method of payment where the employee “is paid a flat sum for a day’s work or for doing a particular job, without regard to the number of hours worked in the day or at the job, and if he receives no other form of compensation for services.” Thus, if payment to an employee is based solely upon a stipulated amount for a day’s work, irrespective of the number of hours the employee works during that day, the employee is being paid on a day rate basis. This, of course, does not mean the employee is not paid for overtime hours worked. That would violate the overtime provisions of the FLSA. It does mean, however, that the employee’s overtime rate takes some interesting twists depending on the number of overtime hours worked.

Calculating overtime on a day-rate basis.

The first step in calculating the overtime rate for a day-rate employee is to determine the employee’s “regular rate.” This calculation is much the same as that used for other non-exempt employees. The total amount earned by a day-rate employee for a given week is calculated by multiplying the employee’s day rate (i.e. the amount he is paid for a day’s work) by the number of days the employee worked during the week. This total is then divided by the total number of hours the employee actually worked. The result is the employee’s regular rate.

After determining the regular rate for a day rate employee, the employer must calculate the employee’s overtime rate. Under the day rate provisions of the Code of Federal Regulations, the employee is paid one-half the “regular rate” for each hour worked in excess of 40 hours per week. While not immediately apparent, there are significant advantages in this day rate overtime calculation for employers that use the day rate payment scheme rather than an hourly rate scheme.

Under the hourly rate payment scheme, the regular rate is the same as the hourly rate if the employee’s only compensation is the hourly rate. The overtime rate is then one-half the regular rate for each hour worked over 40 hours. Because the regular rate is constant no matter how many hours are worked, the employee is paid the regular rate for every hour worked and one half the regular rate for each hour worked in excess of 40 hours per week. Under the “day rate” payment scheme, however, the regular rate declines as the employee’s work hours increase. Therefore, the overtime rate also declines as the number of overtime hours increases over a 40 hour work week.

Perhaps an example will help explain these differences and the advantages of the day rate payment scheme.

Example 1 – An overtime calculation on a day-rate basis.

First let us consider two day rate employees that work a different number of hours during the work week. These employees will be referred to as Employee A and Employee B. Both are paid on a day rate basis and receive no other compensation for their services. Employee A is paid $80 per day and works five days during the week at 8½ hours per day for a total of 42.5 hours. Employee B is also paid $80 per day and works five days during the week, but works 10 hours per day for a total of 50 hours. Employee A’s regular rate is $9.09 and his overtime rate is $4.55. These rates are calculated as follows:

Employee A:

Regular rate – $80/day x 5 days/week = $400/week ÷ 42.5 hours worked = $9.41/hour.

Overtime rate – $9.41/hour x ½ (half time) = $4.71 additional/overtime hour.

Total for week – $400 day rate/week + (2.5 overtime hours x $4.71/hour) = $411.78.

This gives an effective rate for Employee A of $9.69/hour for the week (i.e. $411.78 ÷ 42.5 hours worked).

By contrast, Employee B’s regular rate is $8.00 per hour and his overtime rate is $4.00 per hour. This is calculated as follows:

Employee B:

Regular rate – $80/day x 5 days/week = $400/week ÷ 50 hours worked = $8.00/hour.

Overtime rate – $8.00/hour x ½ (half time) = $4.00 additional/overtime hour.

Total for week – $400 day rate/week + (10 overtime hours x $4.00/hour) = $440.00.

This results in an effective rate for Employee B of $8.80/hour for the week (i.e. $440.00 ÷ 50 hours worked). Thus, the effective rate for Employee B is a full $1.16/hour less than the effective rate of Employee A, and though the employer pays Employee B $28.22 more for the week, that amount accounts for an additional 7.5 hours of work at $3.76/hour; significantly less than the overtime rate for either Employee A or Employee B.

This example illustrates how an employee’s regular rate and overtime rate declines under a day rate payment scheme as the number of hours worked by the employee increases. This is a distinct advantage when day rate employees regularly work in excess of 40 hours per week.

Comparing overtime calculations for hourly employees and day-rate employees.

An even more dramatic comparison results when the day rate payment scheme is contrasted with the hourly rate payment scheme. You will note in the following example that though the weekly straight time payment and day rate payment are the same (i.e. $320.00), the regular rate, overtime rate, and effective rate are significantly different for Employees A and B. Again, an example will best illustrate the difference.

Example 2 – An overtime calculation for both hourly and day-rate employees.

Employee A is paid on an hourly basis at $8.00/hour and works five days during the week at 8½ hours per day for a total of 42.5 hours. Employee B is paid on a day rate basis at $64.00/day and works five days during the week at 8½ hours per day ($64.00 is the equivalent of eight hours/day at $8.00/hour). Employee A’s regular rate is $8.00/hour and his overtime rate is $4.00/overtime hour. This is calculated as follows:

Employee A

Regular rate – $8.00/hour x 8.5 hours/day x 5 days/week = $340.00 ÷ 42.5 hours/week = $8.00

Overtime rate – $8.00/hour regular rate x ½ (half time) = $4.00/overtime hour

Total for week – $340/week straight time + ($4.00/OT hour x 2.5 OT hours) = $350.00/week

This yields an effective rate for Employee A for the week of $8.24/hour worked.

Contrast Employee B. His regular rate is $7.53/hour and his overtime rate is $3.77/hour. This is calculated as follows:

Employee B

Regular rate – $64.00/day x 5 days/week = $320.00 ÷ 42.5 hours worked = $7.53/hour.

Overtime rate – $7.53/hour regular rate x ½ (half time) = $3.77/overtime hour.

Total for week – $320 day rate/week + (2.5 overtime hours x $3.77/hour) = $329.43/week

This yields an effective rate for Employee B for the week of $7.75/hour worked. This is nearly fifty cents per hour less than the same calculation for Employee A, though the weekly straight time pay is the same.

As you can see, the day rate payment scheme has distinct advantages to employers where their employees regularly work more than 40 hours per week. As explained in the Browning-Farris case, however, there are certain conditions that must be satisfied in order to take advantage of this day rate/job rate calculation. Principally, the employee can receive no other form of compensation for his services other than the day rate agreed upon. Fortunately, the Code of Federal Regulations has identified a number of payments that do not constitute “other compensation” for purposes of the day rate calculation. Among them are the following:

• payments in the form of gifts or on other special occasions, the amounts of which are not measured by or dependent upon the hours worked or upon production or efficiency;

• payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar causes;

• reimbursement for reasonable travel or other expenses incurred by the employee to further the employer’s interests so long as such amounts are not made in payment for the hours worked;

• a non-contractual bonus program whereby whether or not to award a bonus is within the employer’s sole discretion and the bonus decision is made at or near the end of a pay period; and

• payments made pursuant to a bonified profit sharing plan or trust, where such payments are made independent of the hours worked.

While this list is not exhaustive, it does illustrate that many forms of compensation used by employers to enhance their employment package do not violate the day rate provisions of the FLSA and CFR.

What does this mean for employers?

What can you, as an employer, learn from the Fifth Circuit’s ruling? First, the Fifth Circuit has clarified the day rate/job rate payment scheme and its appropriate calculation. As a result, you may confidently calculate the overtime rate for employees paid on a day rate basis. Second, you are given food for thought regarding how best to pay your employees. There are clearly benefits to you under the day rate payment scheme. While the day rate payment scheme may not be appropriate for all employers, it might certainly make a lot of sense for many employers that are presently paying their employees on an hourly or other, less advantageous basis.

Steven K. Metcalf