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May 8, 2013 | Payroll Software | Posted by Vicki Lambert, CPP

Overtime Rules: Understanding a 75-Year-Old Sentence

The federal rule for paying overtime to employees is contained in the Fair Labor Standards Act (FLSA). This comprehensive law was passed by Congress and signed into law by President Franklin D. Roosevelt on June 25, 1938. With only a few minor updates, the rule has remained the same since Oct 24, 1940. The FLSA requires employers to pay employees not less than one and one-half times the employee’s regular rate of pay for all hours worked in excess of 40 in a workweek. A one-sentence law. Pretty easy, right? Think again.

To put that one-sentence rule into practice as an employer in today’s world is not quite as simple as it first seems.  The main cause for confusion with the law appears to be that over the 75 years since it was written the common understanding of the words used have spread, evolved and grown, but the actual terms used in the law have not changed at all.  A perfect example is the term “regular rate of pay”.

If you ask someone today to define the term “regular rate of pay” they might answer “the file rate an employee is paid,” or even “the rate the employee is normally paid." And that seems logical. Being paid a standard rate is common practice in today’s workplace, but not so much back before 1938. To ensure that the employer paid the employee correctly under the new law, the “term regular rate of pay” was introduced.  But it was never meant to be a fixed rate. Under the FLSA this term is a calculated rate that must be recalculated every time the employee is paid overtime. It includes all payments made to the employee for services including certain bonuses, commissions, shift differential and other types of similar payments.

Remember, the thinking at the time the FLSA was written, during the Great Depression, was that employers would hire more employees if it were more expensive to work one-man extra hours because of overtime. But the powers that be were also concerned that if overtime were based solely on a fixed hourly rate, employers would pay the lowest rate possible and then pay the worker an extra sum to make up the difference. So, in essence, the employee would not really receive overtime. But this was avoided by requiring that all payments be included when calculating overtime. The broad coverage of the term meant that employees would receive the most money for the work performed.

But other terms in the one-sentence law are confusing by today’s standards as well. Take the term “all hours worked." Back in 1938 this was a simple term because employees came to work, performed the work, and went home. But unlike in 1938, today’s employees work from home, attend meetings or receive training online, work while traveling in hotel rooms and airplanes and take advantage of the flexibility of the modern century. But that does not actually change the original goal under the FLSA, it just broadens it. Employers still must determine when the employee is working and include those hours in the overtime calculation even if it is from home, a hotel room, or an airplane.

As we have discussed this one sentence law can be tricky to decipher but it can and must be done to ensure compliance when paying overtime.

Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor™, a firm specializing in payroll education and training. The company’s website offers a payroll news service which keeps payroll professionals up-to-date on the latest rules and regulations. With 40 years of hands-on experience in all facets of payroll functions as well as over three decades as a trainer and author, Ms. Lambert has become the most sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States that have been attended by executives and professionals from some of the most prestigious firms in business today. A pioneer in electronic and online education, Ms. Lambert produces and presents payroll related audio seminars, webinars and webcasts for clients, APA chapters and business groups throughout the country. Ms. Lambert is also an adjunct faculty member at Brandman University in Southern California where she is the instructor for American Payroll Association’s “PayTrain” online program.