I’ve spent the better part of a 20-year career developing, designing, implementing and supporting HR/Payroll systems and the corresponding Global HR processes supporting these systems. In recent years the trend in HRIS and HR strategy has been focused on Employee Talent and Employee Engagement. This trend of HR strategy has changed all aspects of business and, rightfully, brought the value of HR into the Boardroom and into the forefront of business planning. However, as valuable as that paradigm shift has been, at the end of the day nothing matters more than compliance and paying your employees correctly and on time. You treat your employees as you would your customers.
During 2014, I started getting calls from many companies requesting assistance in helping them meet their compliance requirements for Regular Rate of Pay (RROP). Embarrassingly, given my experience in Time Management and Payroll solutions, I was unaware of this requirement and unaware of the consequences of companies not being compliant in this area. I needed to come up to speed quickly...
WHAT IS REGULAR RATE OF PAY (RROP)
In 2014 President Obama updated the laws regarding exempt employee with regards to Overtime eligibility. With this legislation, HR departments throughout the country were required to make a series of adjustments into how they treated and compensated their employees. This change, in my opinion, caused HR leaders throughout the US to thoroughly review the Fair Labor Standards Act (FLSA) to ensure they were compliant with the President’s new Executive Order. During this mass-review of the FLSA, that forgotten directive of Regular Rate of Pay (RROP) came to the forefront of HR and Payroll departments throughout the U.S. Until this review, most companies just assumed an overtime rate of 1.5x of an employee’s hourly rate. Not so fast my friend...
The initial calculation of Regular Rate of Pay is determined by adding up all eligible compensation and dividing that amount by the number of hours worked and factoring that total into a new calculation of base (i.e. hourly) rate. This new calculation is the RROP.
Eligible compensation includes all worked hours and includes payments made to “motivate” an employee during their job. Examples of this would be shift premiums/differentials, non-discretionary bonus, etc. RROP does not include compensation that is defined by non-working hours and or non-motivated employee compensation. Examples would include holiday pay, illness, expense reimbursements, etc.
There are two major criteria in factoring the RROP:
- It can never be less than the employee’s regular hourly wage
- The RROP calculation only occurs when an employee works Overtime hours
Sarah makes $10/hr and works Monday – Friday from 8am-5pm with a one hour lunch break (8 hour work day) and is paid weekly. Sarah receives a $100 Productivity bonus and works 40 hours during the workweek.
No action is needed as no overtime was worked
Allayne makes $10/hr and works Monday – Friday from 8am-5pm with a one hour lunch break (8 hour work day) and is paid weekly. Allayne works 44 hours during the workweek. There are no other earnings.
Step 1. Straight time Compensation ($10/hr x 44 hours = $440)
Step 2. Overtime Rate calculation ($10/hr x .5 = $5)
Step 3. Overtime Pay calculation ($5/hr x 4 hours = $20) T
Total Weekly compensation ($440 + $20 = $460)
Jodi makes $10/hr and works Monday – Friday from 8am-5pm with a one hour lunch break (8 hour work day) and is paid weekly. Jodi receives a $100 Weekly Productivity Bonus and works 44 hours.
Step 1. Straight time compensation ($10/hr x 44 hours + $100 bonus = $540)
Step 2: Regular Rate of calculation ($540 weekly earnings / 44 hours worked = $12.27
Step 3. New Overtime Rate calculation ($12.27 x .5 OT = $6.14)
Step 4. Calculate Total Weekly compensation
i. $10 x 44 hours = $440.00
ii. $6.14 x 4 hours = $24.56
iii. Productivity Bonus = $100
Total Weekly compensation ($440 + $24.56 + $100 = $564.56)
Note: Don’t assume that the OT is always paid at x1.5. The overtime worked must factor in the ½ time premium which is applied to the new regular rate.
HOW TO FIND OUT IF YOU ARE COMPLIANT WITH FLSA / RROP RULES
The complexity of the calculation of RROP is spread across three (3) areas of a typical HR/Payroll system landscape:
- HR system of record
- Time and Attendance
- U.S. Payroll
HR System of Record
Ensure that your definition of employees Exempt/Non-Exempt Status is correct. Review your company and FLSA standards to the system design of your system of record. Lastly ensure that your Time and Attendance and Payroll systems have integration points (Interfaces) to your HR System of record if they are separate systems.
Time and Attendance
The foundational aspect of the RROP calculation is the proper collection and evaluation of eligible employees working time. All working hours need to be properly accounted for and correctly calculated with regards to all regular time, overtime, shift premiums, etc. and all other pay policies of your organization. Best practice dictates that your Time and Attendance system calculates, and sends to your payroll system, EE hours on a daily basis. However, weekly calculation is fine when it comes to RROP. If you’re company calculates and consolidates time worked any period beyond that (bi-weekly for example) then you need to fix that so that each separate workweek can be properly calculated.
After all eligible criteria listed above are accounted for, the final calculations of RROP need to meet FLSA requirements. Keep in mind that although the majority of the RROP payments are dictated by hours worked, a hidden complexity comes with the pay period allocation of payments not having to do with hours worked within a period or across many pay periods.. Employee payments such as commissions and non-discretionary bonuses could be spread across multiple periods using an algorithm that allocates those payments across multiple pay periods to correctly calculate the Regular Rate across that timeframe.
WHAT TO DO NEXT
If you find out that your company is 100% compliant then consider yourself lucky and move on to other areas of your firm's HR/payroll strategy. If you are not compliant, or if you have questions, address it…quickly. Need help figuring out how? Give us a call! See contact information below.
NOTE: This article outlines an accurate, but very simplistic explanation, of how the Regular Rate of Pay should be addressed and calculated. There are numerous iterations and methods to figure out the correct RROP based on a myriad of criteria. If you would like a full and comprehensive list of all scenarios and complexities of RROP, refer to the following 48-page Department of Labor document.