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By Patrick Haggerty
Payroll departments have a critical responsibility to ensure that employees are paid accurately, especially when it comes to determining overtime compensation, which generally must be at a premium rate.
Under the Fair Labor Standards Act, overtime compensation is computed using the regular rate of pay. While this concept seems simple on the surface, it can be an issue of concern as compensation packages for nonexempt employees become more complex. Certain items of employee compensation or benefits have been identified as statutory exclusions from the regular rate of pay. The difficulty facing employers is distinguishing between compensation and benefits that must be included in the regular rate of pay and items that qualify as statutory exclusions.
Two of these statutory exclusions, thrift or savings plans and profit-sharing plans, are important considerations. The federal tax code regulations related to such plans can be complex and confusing. However, properly applying the rules can provide cost savings for employers as well as prevent penalties for overtime violations.
Statutory exclusions are specific types of payments described in the FLSA and the related regulations that are not included in the computation of the regular rate of pay for computing overtime compensation.
The FLSA provides that any sums paid to an employee under a thrift or savings plan do not need to be included in the regular rate of pay if the plan meets certain requirements and does not have any disqualifying provisions.
The plan may be combined into a single program with a plan or trust for providing profit-sharing payments to employees or a plan or trust providing other benefits such as old age, retirement, life, accident, or health insurance or similar benefits to employees. For such a combined plan, the applicable requirements for exclusion of the contributions from the regular rate of pay must be met for each of the other benefits included in the plan as well as those for a thrift or savings plan.
A thrift or savings plan is a program or arrangement adopted by an employer to encourage voluntary savings by employees by providing an incentive to regularly accumulate and retain cash savings.
The employer's total contribution to the plan for a participating employee in any year cannot exceed 15 percent of the employee's total earnings that year. The employer's total contribution in any year also may not exceed the total amount saved or invested by the participating employees during that year.
Employer contributions are to be apportioned among individual employees according to a formula or method of calculation.
There are a few disqualifying provisions which prevent the employer from coercing employees to participate in the plan or to use the plan to circumvent the overtime requirements by shifting otherwise regular pay to the plan.
Normally, profit-sharing bonuses are nondiscretionary bonuses and are included in the regular rate of pay. A number of years ago, employers began setting up profit-sharing plans for nonexempt employees to engage them and provide them with a share in the success of the company. The Labor Department informed employers that the relatively small annual amounts paid to nonexempt employees would have to be included in the regular rate of pay for any overtime weeks and additional overtime pay would have to be paid to the affected employees.
The department's Wage and Hour Division also commented that it agreed with the employers that the recordkeeping would be overly burdensome and that such plans were well intended and beneficial to both employees and employers. The division also suggested that interested employers ask Congress to change the law and that the Labor Department would support such a change.
The FLSA states that amounts paid to an employee under a profit-sharing plan or trust need not be included in the regular rate, provided the plan meets certain requirements and does not have disqualifying provisions.
As with thrift and savings plans, a profit-sharing plan or trust may be combined into a single program with a plan or trust for providing old age, retirement, life, accident or health insurance or similar benefits to employees.
A profit-sharing plan or trust is a program or arrangement for distributing a share of profits as remuneration to employees in addition to wages paid to employees. An important aspect of the plan is that employee wages and salaries are not dependent on or influenced by the existence of the profit-sharing plan or trust or payment amounts made under the profit-sharing plan or trust. That is, the regular hourly and salary rates are bona fide rates.
Amounts paid to individual employees are to be determined in accordance with a definite formula or method of calculation specified in the plan or trust. The formula or method of calculation may be based on any one or multiple factors, including straight-time earnings, total earnings, the employee's base rate of pay, employee straight-time hours, total hours worked by employees or length of service.
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