Calculating the amount of overtime that must be paid to your hourly employees may be harder than you think. A recent decision from the Fifth Circuit Court of Appeals is a reminder that getting it wrong can have serious consequences.
In Gagnon v. United Technisource, Inc., an employee claimed that his employer paid him a “per diem” as a scheme to lower his regular rate of pay for overtime purposes. The employee was highly skilled at painting the interior and exterior of aircraft. He was paid an hourly rate of $5.50 (slightly above minimum wage at the time of his hiring), and in addition, was paid an additional $20 per hour, which was designated as a “per diem.” When calculating overtime, the employer didn’t include per diem payments in the employee’s regular rate of pay, meaning that he was paid time and a half based on $5.50 per hour, rather than based on $25.50 per hour. This resulted in a significant pay difference in any week in which the employee worked more than 40 hours.
The Fair Labor Standards Act (FLSA) requires that covered employers use the regular rate of pay to calculate the amount of overtime due for any hours worked over forty per week. And, the FLSA broadly defines “regular rate” as the hourly rate actually paid to the employee for “all remuneration for employment.” But sometimes it’s tricky to determine just what to include in this regular rate. Businesses that pay bonuses, commissions, premium or shift differential pay, non-monetary wages such as meals or lodging, or other non-typical compensation must be especially cautious when figuring which of these items to include.
In Gagnon, the court stated that the employer tried to avoid paying Gagnon a higher regular rate by artificially designating a portion of his wages as per diem pay. The court was suspicious of the employer’s motives because the hourly rate of $5.50 per hour was so far below typical wages for aircraft painting, which often ran $20-$24 per hour. The court also found it troublesome that the employer based the “per diem” payment on the number of hours work, rather than the number of days worked. These facts led the court to affirm a lower court ruling awarding Gagnon more than $8,000 in wages, including double damages for a willful violation of the law by the employer, and more than $55,000 for Gagnon’s attorney fees.
In many instances, per diem payments can be excluded from regular rate, along with certain other payments such as discretionary bonuses. However, employers should only exclude payments from the calculation of regular rate after a full and careful examination of FLSA requirements.