Pay Methods

Employers across the country have come up with a variety of methods for paying their employees. The type of pay method that an employer uses to compensate employees is important because it affects how much overtime pay an employee is due.

Certain pay methods are more error prone than others. Certain pay methods are more susceptible to employer abuse than others. Certain pay methods are more likely to shortchange employees, in violation of the Fair Labor Standards Act (FLSA).

This webpage provides an overview of common pay methods and the FLSA’s application to each method.

Use following links to navigate to the different pay methods on this page:

Hourly Rate

An employee who is paid an “hourly rate,” or “by the hour,” is someone who is paid a fixed amount of money for each hour of work. The federal minimum-wage law requires that employers pay employees at least $7.25 per hour worked.

Under the FLSA, overtime pay is calculated based on an employee’s “regular rate” of pay. For employees who are paid on an hourly basis, the regular rate is simply the hourly rate at which they are paid.

The overtime rate is calculated by simply multiplying the regular rate by 1.5. This is sometimes referred to as “time-and-a-half” because employees receive one and one-half times their regular hourly rate for each hour of overtime they work.

For example, an employee who is paid $10 per hour has a regular rate of $10. Their overtime rate is simply 1.5 times that amount. Thus, the employee’s overtime rate is $15 per hour of overtime work because 1.5 times $10 equals $15. See 29 CFR § 778.110.

Day Rate

“Day rate” refers to a pay method whereby an employer pays an employee a single daily payment regardless of the number of hours actually worked.

To calculate the regular rate of an employee who is paid on a day rate basis, you must first calculate their weekly regular rate. The employee’s weekly regular rate is calculated by simply adding up all of the day rates that the employee received in a given week.

Next, to calculate the employee’s regular rate on an hourly basis, you simply divide the weekly regular rate by the total hours that the employee actually worked during the week in question.

If the employee worked more than forty hours that week, they are entitled to overtime pay for each hour worked in excess of forty. The employee’s hourly overtime rate is equal to one half the regular rate of pay. See 29 C.F.R. § 778.112.

Piece Rate or Production Pay

Some employees are paid a fixed amount of money for each task or “piece” of work they complete. The FLSA refers to this type of pay method as a “piece rate.” Some employers refer to it as “production pay.” Employees who are paid on a piece-rate basis are often referred to as “piece-workers” or “production workers.”

In theory, production pay is supposed to encourage employees to be as productive as possible by paying them not for their time at work, but the number of tasks or jobs they complete. For example, employers in the warehouse-logistics industry typically pay “unloaders” a fixed amount of money for each truck they unload at their warehouse. As such, an unloader who unloads five trucks at $10 per truck would receive a total of $50 in piece rates for those trucks.

Under the FLSA, the time that the unloader actually spent unloading goods from the five trucks is treated as “productive time.” The time that the unloader spent in between trucks, waiting for another truck to unload or completing other tasks like cleaning the dock is treated as “unproductive time.”

Employers run into trouble when they don’t pay their piece-workers at least $7.25 per hour (the federal minimum wage) for each hour of unproductive time at work because the FLSA requires that employers count and pay employees for both productive and unproductive time at work.

Absent an agreement stating otherwise, the FLSA treats the piece-rate wages that an employee receives as covering only their productive hours worked, not their unproductive hours worked. An employer violates the FLSA by failing to pay piece-workers for their unproductive time at work.

As mentioned above, an employer and employee may mutually agree that the employee’s piece-rate wages will cover not only their productive hours worked, but their unproductive hours worked as well. This is important because it affects the calculation of the employee’s regular and overtime rates. To agree to a pay structure, the employer and employee must have a meeting of the minds about the manner in which the employer will pay a piece-worker for their unproductive time at work. Such agreements are usually made in writing at the outset of the employment relationship.

An implied agreement or “mutual understanding” about how the employer will pay its piece-workers for their unproductive hours worked may exist if the employer provides the piece-workers with clear and consistent disclosure of the fact that their piece-rate pay will be treated not only as payment for their productive hours worked, but also as payment for all of their unproductive hours worked. The mere fact that piece-workers continue working for their employer under a piece-rate pay plan does not, by itself, mean that they understood and agreed to treat their production pay as payment for their unproductive hours. See 29 C.F.R. § 778.318.

Salary

Many salaried employees are entitled to overtime wages when they work more than forty hours in a given week. Under the FLSA, an employee is paid on a “salary basis” if they regularly receive a predetermined amount of money on a weekly or less frequent basis. To qualify as a “salary,” the predetermined amount must not be subject to employer reduction because of variations in the quality or quantity of the work performed. See 29 C.F.R. § 541.602.

Weekly Salary

If an employee receives a weekly salary, their regular rate is calculated by dividing the salary by the number of hours that their salary is intended to compensate. For example, if an employee is hired at a salary of $350 and if it is understood that this salary is compensation for a regular workweek of 35 hours, the employee’s regular rate of pay is $350 divided by 35 hours, or $10 an hour, and when the employee works overtime the employee is entitled to receive $10 for each of the first 40 hours and $15 (one and one-half times $10) for each hour thereafter. If an employee is hired at a salary of $375 for a 40-hour week the regular rate is $9.38 an hour. See 29 C.F.R. § 778.113.

Monthly or Semi-Monthly Salary

If an employee is paid a salary for a period longer than a week, such as a monthly or annual salary, their salary must be converted into a “weekly wage” in order to calculate the regular rate.

To calculate the weekly wage for an employee who is paid a monthly salary, multiply their monthly salary by 12 and then divide that number by 52. To calculate the weekly wage for an employee who is paid a semimonthly salary, multiply their semimonthly salary by 24 and then divide that number by 52. The regular rate is then calculated by dividing the employee’s weekly wage by the number of hours that their salary is intended to compensate.

For example, assume an employee receives a monthly salary of $1,560. The employee understands that this salary is compensation for a regular workweek of 40 hours. Here is how you would calculate the employee’s regular rate:

  • $1,560 multiplied by 12 is equal to $18,720.
  • $18,720 divided by 52 is equal to $360, the weekly wage.
  • $360 divided by 40 is equal to $9, the regular hourly rate.

The overtime rate is simply 1.5 times the regular hourly rate. So, in the example above, the employer must pay the employee $13.50 per hour for each hour of overtime worked in a given week. See 29 C.F.R. § 778.113.

The FLSA allows employers to use a different formula that results in lower overtime wages if each of the following elements are met:

  • the employee is paid a “fixed” salary;  
  • the employer and employee have a clear mutual understanding that the fixed salary is compensation for all of the hours they must work in a given week, rather than for 40 hours per week or some other fixed weekly work period;
  • the employee’s salary is large enough to ensure that their average hourly rate never dips below the minimum wage in a given week; and
  • the employee’s salary is paid in full even if they work less than a “full schedule of hours” in a week.

If each of the elements above are met, the employer may calculate the employee’s regular rate by dividing all of the hours that the employee worked in a given week by their weekly wage. The employee’s overtime rate is equal to one-half their regular rate. This is known as a the “fluctuating workweek method” for calculating the regular rate because this method results in regular and overtime rates that fluctuate from week to week.

For example, assume an employer and employee agree that the employee will be paid a monthly salary of $2,000 for all hours the employee must work in a given week. Let’s also assume that the employee worked 50 hours last week. Here is how you would calculate the employee’s regular rate that week:

  • $2,000 multiplied by 12 is equal to $24,000.
  • $24,000 divided by 52 is equal to $461.54, the weekly wage.
  • $461.54 divided by 50 is equal to $9.23, the regular hourly rate.

The overtime rate is 0.5 times the regular hourly rate. So, in the example above, the employer only has to pay the employee $4.62 per hour for each hour of overtime worked in a given week. So even though the employee’s monthly salary in this example is higher than in the previous example, the employee’s overtime pay is significantly lower due to the manner in which the regular and overtime rates are calculated under the fluctuating workweek method.

Not surprisingly, employers prefer to use this method to calculate the overtime wages owed to salaried employees. Many employers calculate overtime wages this way even though one or more of the elements above are not met. An employer that uses the fluctuating workweek method to calculate an employee’s overtime pay violates the FLSA if one or more of the elements listed above are not met. See 29 CFR § 778.114.

If you are paid a fixed sum of money each week (or on a less frequent basis) and your employer pays you “half-time” for overtime hours worked, also known as “Chinese overtime,” your employer may be doing so in violation of the FLSA. This is particularly true if you have never given express, written consent authorizing your employer to treat your salary as compensation for all of the hours your job requires each week, however many or few.

Bonuses

A “bonus” refers to extra compensation that an employee receives above and beyond their normal pay. The FLSA distinguishes between discretionary and nondiscretionary bonuses for purposes of calculating an employee’s regular and overtime rates.

A bonus is “discretionary” if the employer retains control over whether to pay a bonus to an employee and the amount of the bonus, and the employee has no contractual right to the bonus. Employers do not have to treat discretionary bonuses as part of an employee’s total compensation when calculating their regular rate.

In contrast, a bonus is “nondiscretionary” if it was announced to employees to induce them to work harder, faster, or more efficiently, or to persuade employees to continue working for the employer. Employers must include nondiscretionary bonuses in an employee’s total compensation when calculating the employee’s regular rate. See 29 C.F.R. § 778.211.

In addition to discretionary bonuses, an employer does not have to count the following items as compensation for purposes of calculating an employee’s regular rate:

  • gifts,
  • payments in the nature of gifts on special occasions,
  • contributions by the employer to certain welfare plan, and
  • payments made by the employer pursuant to certain profit-sharing, thrift, and savings plans.

29 C.F.R. § 778.208.

A number of lawsuits for overtime violations have arisen in situations where employers unlawfully shaved the amount of overtime wages paid to employees by misclassifying a portion of employees’ salary as a “bonus.”  An employer violates the FLSA if artificially suppresses an employee’s regular rate of pay by misclassifying a portion of an employee’s base pay as a “bonus.”

An employer that pays a salaried employee a time-based bonus—such as extra pay for holiday pay, weekend pay, day-off pay, off-shore pay, or night work—may not use the fluctuating workweek method described above when calculating the employee’s overtime pay. On the other hand, an employer that pays a salaried employee a performance-based bonus may use the fluctuating workweek method for calculating the employee’s overtime pay so long as they satisfy the other elements listed above.

Commissions

Many employees who are paid on an hourly or salary basis also have the opportunity to earn a “commission.” A “commission” is a fee paid to an employee for a particular business transaction and is typically a percentage of the money received from the transaction. Real-estate brokers, for example, often receive a percentage of the price at which the property they brokered sold. An employee of a clothing store may earn a percentage of the sales price of each shirt sold during their shift. The FLSA requires that employers include commissions in the employee’s total compensation when calculating their regular rate of pay.    

Tips

Many employees receive tips as part of their compensation. Examples of professions in which employees are typically paid in tips include servers, waiters and waitresses, bartenders, drivers, valet, and casino dealers.

Federal regulations define “tip” as money that a customer gives an employee as a gift or gratuity in recognition of the service that the employee performed for the customer. To qualify as a “tip” under the FLSA, the customer must have the sole control over who will receive the tip and the amount of the tip. A mandatory charge for service, such as 15% of the amount of the bill, that an employer’s establishment imposes upon customers is not a tip, even if the establishment calls it one. See 29 C.F.R. §§ 531.52, 531.55.

Under the FLSA, an employer may credit an employee’s tips toward the minimum wage. This is called a “tip credit.” An employer may only take a tip credit if two conditions are met. First, the employees must be engaged in an occupation in which they customarily and regularly receive more than $30 a month in tips. 29 U.S.C. § 203(t). Second, the employer must inform tipped employees that their hourly rate is below the minimum wage. 29 U.S.C. § 203(m).

When an employer takes a tip credit, the employer must pay the employee a “cash wage” of at least $2.13 per hour. If the employee’s hourly wages from the employer and tips from customers do not add up to at least $7.25 per hour, the employer must pay the employee the additional cash needed to bring their pay up to $7.25 per hour.

If an employer takes a tip credit for a given week, the employee’s regular rate is calculated by adding the tip credit taken by the employer and the hourly cash wages that the employer paid that week, and then dividing that number by the total number of hours that the employee worked that week. See 29 C.F.R. § 531.60. The employee’s hourly overtime rate is equal to 1.5 times their regular rate.

Call Now for a Free Case Evaluation (469) 810-0473

Whether you live in Dallas, Fort Worth, or elsewhere in Texas, the Wagoner Law Firm will examine your claim and may advise you on the best way to proceed. When you contact the Wagoner Law Firm, you will receive a free case evaluation from a knowledgeable and experienced lawyer during which you may learn whether you have grounds to recover monetary damages and how much your case may be worth.