Contractors Beware: Bonuses and Incentive Payments May Create Overtime Headaches

  Grant Collins

While SMACNA contractors are familiar with the concept of “overtime” — that is, paying employees time and one-half for certain hours worked — few contractors understand how overtime paid pursuant to their collective bargaining agreement (or “CBA”) intersects with statutory overtime required by the federal Fair Labor Standards Act (or “FLSA”).

What is more, worker shortages at large construction projects throughout the country have complicated matters further because some contractors are using bonuses and incentive payments to attract workers to these jobsites. These payments likely need to be included in the “regular rate” for purposes of calculating statutory overtime under the FLSA. Failing to include these payments in the overtime calculation can cause contractors big headaches — and a lot of money. As outlined below, however, SMACNA contractors should be aware of these issues and also understand how contractual overtime paid under their CBA may offer some protection against claims for statutory overtime.

STATUTORY OVERTIME VS. CONTRACTUAL OVERTIME
Statutory overtime is required by federal law. The federal FLSA requires employers to pay overtime to non-exempt employees only if the employee works more than 40 hours in a workweek. Many states, such as Illinois, Massachusetts, and Maryland, have state laws matching the federal 40-hour standard. Other states, such as Arizona and Florida, have no state overtime laws. Still other states, such as California and Colorado, mandate overtime after 40 hours in a week and 12 hours in a day.

Under the federal FLSA, employees must be paid overtime for all hours worked over 40 hours in a workweek “at a rate not less than one and one-half times the regular rate at which [the employee] is employed.”   The “regular rate” is further defined as “all remuneration for employment paid to, or on behalf of, the employee[.]”  

In contrast to statutory overtime, contractual overtime is premium pay that is required by the terms of an employment contract — such as a CBA. For example, Article 6, Section 1 of the Standard Form provides that contractors will pay employees time and one-half for hours worked in excess of eight hours each day and any hours worked on Saturday and Sunday. Local area agreements differ and some CBAs may require a higher premium — such as double-time — on certain days. Thus, to understand their obligation to pay contractual overtime, contractors should review their CBAs carefully.

CALCULATING THE “REGULAR RATE” UNDER THE FLSA
As noted above, the federal FLSA requires employers to pay their employees time and one-half their “regular rate” for all hours worked in excess of 40 each week.   

For an employee who receives only an hourly wage, calculating the overtime rate is straight forward: simply multiply the hourly wage by 1.5 and multiply that number by the number of hours over 40. For example, an employee earning $20 per hour in base wage would receive $30 per hour ($20 x 1.5 = $30) for all hours worked in excess of 40 hours.

The problem, of course, is that most employees do not receive only an hourly wage. Instead, employees often receive additional compensation each week, including: shift differentials; per diem or reimbursed expenses; vacation pay, PTO or sick pay; overtime premiums; bonuses, such as attendance bonuses or safety bonuses; on-call pay; and fringe benefit contributions, such as pension and health and welfare contributions. In these instances, calculating overtime is more difficult. According to guidance from the Department of Labor (“DOL”), the “regular rate” may be calculated using the following formula:

Total compensation in the workweek (except for statutory exclusions) ÷ Total hours worked
in the workweek = Regular Rate for the workweek

After the “regular rate” is calculated, then the rate is multiplied by .5 (to get the premium rate) and then multiplied by the number of hours worked in excess of 40 in that workweek. Remember, statutory overtime is triggered only when an employee works more than 40 hours in a workweek.

In calculating the “regular rate,” the FLSA requires employers to include “all remuneration for employment paid to, or on behalf of, the employee,” unless it falls into one of the specific statutory exclusions set forth in Section 7(e) of the FLSA.   The statutory exclusions include the following:

• Payments for occasional periods when no work is performed due to vacation, holidays, or illness; 
• Reimbursable business expenses;
• Discretionary bonuses;
• Employer contributions to benefit plans; and
• Premium payments for non-FLSA overtime (i.e., contractual overtime).

Thus, unless the payment falls into one of these categories, the amounts must be included in the calculation of the “regular rate” under the formula set forth above. 

EDITOR'S NOTE: This is part one of a two-part column on this topic. Learn about how bonuses and incentive payments likely must be included in the "regular rate" under the FLSA and how contractual overtime may be offset against statutory overtime. 

To assist contractors with FLSA questions and questions regarding statutory overtime and contractual overtime, SMACNA held an Incentive Pay webinar on April 23. View the webinar on the SMACNA website. 

Grant Collins is an MSBA-certified specialist in both traditional labor law and employment law at Felhaber Larson. Reach him at gcollins@felhaber.com or through www.felhaber.com.