Employers ‘shifting’ away from hourly pay should be aware of potential pitfalls
In many states, the practice of paying nonexempt employees a “day rate,” “shift rate” or “job rate,” is gaining in popularity. A day rate occurs when a set amount of pay is guaranteed for a shift without regard to the hours worked. The appeal is obvious. For the employee, a guaranteed day rate means the employee is paid for a full shift even if he or she completes work early. For the employer, overtime is less likely, as employees are incentivized to complete work early. For both employers and employees, a day rate offers accounting predictability.
However, employers must be careful when implementing these types of shifts, as there are several potential pitfalls.
· First, a day rate is permissible only if it results in compensation of at least minimum wage for all hours worked. Accordingly, hours must still be tracked, both to comply with recordkeeping requirements and to ensure that the hourly rate exceeds the applicable minimum wage.
· Second, employees subject to day rates must still be paid overtime. In fact, the Department of Labor has pursued claims against employers for paying flat daily/shift rates without regard to how many hours the employees worked and without additional premium pay for overtime. To calculate the appropriate overtime rate for a day shift employee, multiply the amount the employee is paid for a day’s work by the number of days worked that week and then divide the weekly pay by the number of hours worked to get the employee’s “regular rate” of pay. The regular rate is then multiplied by 1.5 to come up with the overtime rate.
· Third, while federal law permits compliant day rate pay practices, this method is prohibited in some states and is regulated in others. Also, administrative complications may occur in states that have mandatory daily overtime requirements. Thus, it is essential to consult with counsel regarding applicable state law before implementing day rates.
· Fourth and finally, other factors may come in to play when determining whether a day rate is appropriate. For example, in states or cities with strict meal or rest period rules, an employee’s desire to complete a shift quickly in order to benefit from the day shift arrangement could result in violation of meal or rest period rules. There could also be safety issues associated with an employee rushing through a shift.
Accordingly, obtaining legal advice before instituting day rates, implementing proper policies governing day rates, and monitoring hours for day rates will ensure that day rates are a help, not a hindrance.
This article originally appeared on the Foley & Lardner website. The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.