Current through Register Vol. 24, December 22, 2023
(1) Artificial regular rates.
(a) Since the term "regular rate" is defined
to include all remuneration for employment (except statutory exclusions)
whether derived from hourly rates, piece rates, production bonuses or other
sources, the overtime provisions of the law cannot be avoided by setting an
artificially low hourly rate upon which overtime pay is to be based and making
up the additional compensation due to employees by other means. The established
hourly rate is the "regular rate" to an employee only if the hourly earnings
are the sole source of his compensation. Payment for overtime on the basis of
an artificial "regular" rate will not result in compliance with the overtime
provisions of the Law.
(b) It may
be helpful to describe a few schemes that have been attempted and to indicate
the pitfalls inherent in the adoption of such schemes. The device of the
varying rate which decreases as the length of the workweek increases has
already been discussed. It might be well, however, to reemphasize that the
hourly rate paid for the identical work during the hours in excess of the
applicable maximum hours standard cannot be lower than the rate paid for the
nonovertime hours nor can the hourly rate vary from week to week inversely with
the length of the workweek. It has been pointed out that it is not possible for
an employer lawfully to agree with his employees that they will receive the
same total sum, comprising both straight time and overtime compensation, in all
weeks without regard to the number of overtime hours (if any) worked in any
workweek. The result cannot be achieved by the payment of a fixed salary or by
the payment of a lump sum for overtime or by any other method or
device.
(c) Where the employee is
hired at a low hourly rate supplemented by facilities furnished by the
employer, other than those specifically excluded, commissions, pay ostensibly
(but not actually) made for idle hours, or the like, his regular rate is not
the hourly rate but is the rate determined by dividing his total compensation
from all these sources in any workweek by the number of hours worked in the
week. Payment of overtime compensation based on the hourly rate alone in such a
situation would not meet the overtime requirements of the Law.
(d) One scheme to evade the full penalty of
the Law was that of setting an arbitrary low hourly rate upon which overtime
compensation at time and one-half would be computed for all hours worked in
excess of the applicable maximum hours standard; coupled with this arrangement
was a guarantee that if the employee's straight time and overtime compensation,
based on this rate, fell short, in any week, of the compensation that would be
due on a piece-rate basis of x cents per piece, the employee would be paid on
the piece-rate basis instead. The hourly rate was set so low that it never (or
seldom) was operative.
(e) The
scheme is no better if the employer agrees to pay straight time and overtime
compensation on the arbitrary hourly rates and to make up the difference
between this total sum and the piece-rate total in the form of a bonus to each
employee.
(2) The
"split-day" plan.
(a) Another device designed
to evade the overtime requirements of the Law was a plan known as the "Poxon"
or "split-day" plan. Under this plan the normal or regular workday is
artificially divided into two portions, one of which is arbitrarily labeled the
"straight-time" portion of the day and the other the "overtime" portion. Under
such a plan, an employee who would ordinarily command an hourly rate of pay
well in excess of the minimum for his work is assigned a low hourly rate (often
the minimum) for the first hour (or the first 2 or 4 hours) of each day. This
rate is designated as the regular rate; "time and one-half" based on such rate
is paid for each additional hour worked during the workday. Thus, for example,
an employee is arbitrarily assigned an hourly rate of $2 per hour under a
contract which provides for the payment of so-called "overtime" for all hours
in excess of 4 per day. Thus, for the normal or regular 8 hour day the employee
would receive $8 for the first 4 hours and $12 for the remaining 4 hours; and a
total of $20 for 8 hours. (This is exactly what he would receive at the
straight time rate of $2.50 per hour.) On the sixth 8-hour day the employee
likewise receives $20 and the employer claims to owe no additional overtime pay
under the statute since he has already compensated the employee at "over-time"
rates for 20 hours of the workweek.
(b) Such a division of the normal 8 hour
workday into 4 straight time hours and 4 overtime hours is purely fictitious.
The employee is not paid at the rate of $2 an hour and the alleged overtime
rate of $3 per hour is not paid for overtime work. It is not geared either to
hours "in excess of the employee's normal working hours or regular working
hours", or for work "outside of the hours established in good faith * * * as
the basic, normal or regular workday", and it cannot therefore qualify as an
overtime rate. The regular rate of pay of the employee in this situation is
$2.50 per hour and he is owed additional overtime compensation, based on this
rate, for all hours in excess of the applicable maximum hours
standard.
(3)
Artificially labeling part of the regular wages a "bonus".
(a) The term "bonus" is properly applied to a
sum which is paid as an addition to total wages, usually because of extra
effort of one kind or another, or as a reward for loyal service or as a gift.
The term is improperly applied if it is used to designate a portion of regular
wages which the employee is entitled to receive under his regular wage
contract.
(b) For example, if an
employer has agreed to pay an employee $125 a week without regard to the number
of hours worked, the regular rate of pay of the employee is determined each
week by dividing the $125 salary by the number of hours worked in week. The
situation is not altered if the employer continues to pay the employee, whose
applicable maximum hours standard is 40 hours, the same $125 each week but
arbitrarily breaks the sum down into wages for the first 40 hours at an hourly
rate of $2.00 an hour, overtime compensation at $3.00 per hour and labels the
balance a "bonus" (which will vary from week to week, becoming smaller as the
hours increase and vanishing entirely in any week in which the employee works
55 hours or more). The situation is in no way bettered if the employer,
standing by the logic of his labels, proceeds to compute and pay overtime
compensation due on this "bonus" by prorating it back over the hours of the
workweek. Overtime compensation has still not been properly computed for this
employee at his regular rate.
(c)
An illustration of how the plan works over a 3-week period may serve to
illustrate this principle more clearly:
(i)
In the first week the employee whose applicable maximum hours standard is 40
hours works 40 hours and receives $125. The books show he has received $80 (40
hours X $2.00 an hour) as wages and $45 as bonus. No overtime has been worked
so no overtime compensation is due.
(ii) In the second week he works 45 hours and
receives $125. The books show he has received $80 for the first 40 hours and
$15 (5 hours X $3.00 an hour) for the 5 hours over 40, or a total of $95 as
wages, and the balance as a bonus of $30. Overtime compensation is then
computed by the employer by dividing $30 by 45 hours to discover the average
hourly increase resulting from the bonus - 66 2/3 cents per hour -and half this
rate is paid for the 5 overtime hours - $1.67. This is improper. The employee's
regular rate in this week is $2.78 per hour. He is owed $131.83, not
$126.67.
(iii) In the third week
the employee works 50 hours and is paid $125. The books show that the employee
received $80 for the first 40 hours and $30 (10 hours X $3.00 per hour) for the
10 hours over 40, or, a total of $110, and the balance as a bonus of $15.
Overtime pay due on the "bonus" is found to be $1.50. This is improper. The
employee's regular rate in this week is $2.50 and he is owed $137.50, not
$126.50.
(d) Similar
schemes have been devised for piece-rate employees. The method is the same. An
employee is assigned an arbitrary hourly rate (usually the minimum) and it is
agreed that his straight-time and overtime earnings will be computed on this
rate but that if these earnings do not amount to the sum he would have earned
had his earnings been computed on a piece-rate basis of "x" cents per piece, he
will be paid the difference as a "bonus". The subterfuge does not serve to
conceal the fact that this employee is actually compensated on a piece-rate
basis, that there is no bonus and his regular rate is the quotient of
piece-rate earnings divided by hours worked.
(e) The general rule may be stated that
wherever the employee is guaranteed a fixed or determinable sum as his wages
each week, no part of this sum is a true bonus and the rules for determining
overtime due on bonuses do not apply.
(4) PSUEDO "percentage bonuses".
(a)
(i) The
device does not improve when it becomes more complex. If no true bonus in a
flat sum amount can be legitimately separated out of the employee's wages,
certainly no bonus in the form of a percentage of total earnings can be so
derived. Yet some employers, seeking to evade the overtime requirements of the
Law entirely while apparently complying with every requirement, have devised
schemes of this kind. Such an employer pays his employee $125 a week without
regard to the number of hours worked. He sets up a fictitious regular rate of
$2.00 an hour. In a week in which the employee whose applicable maximum hours
standard is 40 hours works 48 hours, his records show the following:
(The material in brackets does not usually appear in the
final records.)
Straight time for 40 hours at $2.00 an hour
--------------------- $80.00
Overtime for 8 hours at $3.00 an hour
---------------------------- $24.00
$104.00
($125 - $104 = $21.00, total amount to be distributed as a
bonus.) ($21.00/$104.00 = 20.2%)
Percentage of total earnings bonus at 20.2% of $104.00
------------------------------------------------------------------
$ 21.00
Total ---------------------------------------------
$125.00
(ii) Obviously,
this employee can no more be said to be receiving proper overtime than the
employee in the examples already discussed. This employee's regular rate in
this week is $2.60 per hour and he is owed a total of $135.20 for the
week.
(b)
(i) No better claim of compliance can be made
by an employer who arbitrarily pieces out a bonus from all or part of group
wages. The scheme tends to be more complex, but the principle is the same and
the same results follow.
(ii) One
relatively simple example of such a scheme is the following: Two employees are
hired as salesmen on an hourly-rate-plus-commission basis. Each is hired at the
rate of $2 an hour for the first 40 hours and $3 an hour for over-time and in
addition, is entitled to a share in the commissions earned by each at the rate
of one percent of sales. In a given week one employee works 40 hours and the
other works 50. Together they sell $1,900 worth of merchandise and are thus
entitled to $19 as commissions. In order to avoid payment of overtime on the
commissions, the employer decides to distribute the $19 in the form of a
percentage of total earnings. The total wages of the two employees are $190 in
the particular week. The $19 commissions represent 10 percent of this figure.
The employer therefore pays a 10 percent "bonus" to each employee on his total
earnings. One receives $8 as bonus the other $11. The employer claims that no
additional overtime is due because the "bonus" was a percentage of total
earning and the percentage was determined before the amount due any individual
employee had been determined.
(iii)
If the commissions were a "bonus" at all, the method of distribution might be
proper. But a bonus, as has been stated, is a sum paid in addition to regular
wages and not as a part of such wages. The employees have contracted to work on
a wage plus-group-commission basis. No extra pay over and above the contract
wage is involved. As a regular part of their duties, the employees make sales
and regularly receive a one percent commission on the amount of the sale.
Moreover, since the employees are owed the commissions in an amount related
only to the amount of total sales and without regard to the number of hours
worked, no part of such commissions is paid as overtime compensation.
(c)
(i) In the example just given the employer
sought only to relieve himself of the burden of paying proper overtime on part
of the wages. The example must grow more complex but the principle does not
change when the employer seeks to relieve himself of the entire burden of
overtime by a fictitious division of regular group wages into hourly earnings
and "bonus". This scheme is usually tried with respect to employees who work
solely on a group piece rate or group commission basis. For simplicity we will
assume that the two employees in the previous example receive no base hourly
rate but are working solely on a commission basis-11 percent of total sales. In
order for the scheme to function the employer must provide a minimum hourly
guarantee. A low rate such as $1.64 is the best suited to his purpose for it
provides a greater leeway as to the number of hours that may be worked without
the payment of any additional overtime compensation whatever. In a week in
which the total sales amount to $1,558 the two employees are together entitled
to $171.38 (11 percent). They will receive this amount regardless of the number
of hours they have worked individually or collectively. If they work the same
number of hours, each will get half-$85.69. This would be true whether the
hours worked by each were 40, 43, or 48 hours. Only the bookkeeping is altered.
If each works 40 hours the record will show for each:
Wages at $1.64 per hour
--------------------------------------------------------------- $65.60
Bonus
-----------------------------------------------------------------------------------------
20.09
Total
-----------------------------------------------------------------------------
$85.69
If each works 45 hours, the record will show:
Wages at $1.64 per hour for 40 hours
---------------------------------------------- 65.60
Overtime pay at $2.46 per hour for 5 hours
---------------------------------------- 12.30
Bonus at 10 percent of total earnings
(10 percent of $77.90
----------------------------------------------------------------------
7.79
Total $85.69
(ii) The total amount earned by each employee
is exactly the same in each of the 2 weeks because it is determined not by the
hours he works nor by the established rate but only by two unrelated factors:
the total amount of sales and the relation between his hours of work and those
of the other employees; not the total hours worked by either or both but merely
the ratio of the two.
(iii) This
will become apparent if we look at a workweek in which one works 40 hours and
the other 50. The books then read this way:
1st employee:
Wages at $1.64 per hour for 40 hours
--------------------------------------------- $65.60
Bonus at 10 percent of total
earnings-------------------------------------------------- 6.56
Total----------- $72.16
2nd employee:
Wages at $1.64 per hour for 40 hours
----------------------------------------------- $65.60
Overtime pay at $2.46 per hour for 10 hours
----------------------------------------- 24.60
Bonus at 10 percent of total earnings (10% of 90.20)
----------------------------------------------------------------------------------------------
9.02
Total----------- $99.22
(iv) Note that in each case, as long as the
amount of sales remains constant, the two employees together earn $171.38
regardless of whether either works overtime, or both do, and regardless of the
number of hours of overtime worked. The first employee worked 40 hours in the
first week and receives $85.69, yet he received only $72.16 for a 40-hour week
in the third week of the series. The only reason for this was that in the third
week the other employee worked 10 hours of overtime for which someone had to
pay. The employer had invented the scheme so that he, the employer, would not
have to pay. The burden would devolve in part on the overtime worker himself.
The latter worked 10 hours of overtime yet he received only $13.53 more than he
received in a 40hour week.
(v) The
system is an ingenious bookkeeping device but obviously it must fail of its
purpose. It is only a more elaborate method of claiming that a rate-whether a
salary or a piece rate or a commission-somehow "includes" overtime even though
it is paid regularly when no overtime is worked and without regard to the
amount of overtime worked.
(d) The examples dealt with two employees. It
is the same for 2 as for 1 or for 20. A "bonus" which is derived by subtraction
of compensation, based on an assigned rate, from the total amount agreed to be
paid to an employee or a group is not a bonus and cannot be treated as
such.
(e) Regardless of bookkeeping
devices, the regular rate of pay of employees employed on group piece rates or
commissions is determined first by ascertaining the total amount which is due a
particular employee under the contract and then dividing this sum by the number
of hours he worked in the week. Extra overtime compensation, at half the rate
thus determined, is due for each hour in excess of the maximum hours standard
applicable.
Eff.
12/31/72.
Sec.
39-3-403,
MCA; IMP, Sec.
39-3-405,
MCA;