May 31st, 2022

In my last article, I discussed unexpected overtime liability for transportation companies under the Fair Labor Standards Act (FLSA), 29 U.S.C. § 203 et. seq for non-exempt drivers. As a reminder, companies are generally required to pay non-exempt employees time-and-a-half, or 1.5 times their normal wage, for hours worked beyond 40 in a week. Although there are a number of exemptions to this requirement, the regulations involving trucking companies are particularly opaque and variable.

If feasible, the safest way of avoiding potential hidden overtime penalties is to simply structure driver pay rate in a way that allows for additional overtime payments. This may not be the ideal structure for some businesses, since it may create highly inconsistent pay rates that disproportionately pay out drivers who work more variable schedules and, on the other side, penalize drivers who keep a more regular work schedule. If your business needs more consistency in pay rates, it’s worthwhile to consult a lawyer about crafting a payment structure that falls within established FLSA exemptions.

Overtime payments under the FLSA are calculated as 1.5x the “**regular rate,**” which will vary by job, but is generally calculated as earnings in a week (without including overtime pay) divided by the number of hours worked. Here are some examples of payment structures for a driver:

- For a driver paid on a
**purely hourly**structure, the regular rate will simply be that hourly rate. For example, if the driver is paid $20 per hour on the job, the regular rate would also be $20. Therefore, if the driver works 45 hours in a week, they would be entitled to $20 per hour for the first 40 hours and $30 per hour ($20*1.5) for the 5 overtime hours.

- For a driver paid on a
**purely commission**structure, the regular rate will be the driver’s commission earned divided by the hours worked in that week. For example, if the driver is paid 25% of the contract for a job, and spends 20 hours driving on one job worth $1200 as well as 25 hours on a job worth $3000, their total payment would be $1200*.25 + $3000*.25 = $1050. Since the driver worked 45 hours, their regular rate would be $1050/45 = $23.33. Then, the driver would be entitled to $23.33 for the first 40 hours and $35 per hour ($23.33*1.5) for the 5 overtime hours.

- For a driver paid on a
**purely milage-based**structure, the regular rate will be the miles traveled times the milage rate divided by total hours worked. For example, if the driver is paid $.40 per mile, travels 2700 miles in a week, and spent 45 hours that week driving, then the regular rate would be $.40 * 2700 / 45 = $24. Therefore, the driver would be entitled to $24 per hour for the first 40 hours and $36 per hour ($24*1.5) for the 5 overtime hours.

- If a driver is paid based on some combination of payment structure, all payments are added together and averaged over total hours worked. For example, if the driver is paid $5 per hour on the job plus 10% commission plus $.15 per mile on a $3000 job, working 45 hours that week and driving 2500 miles, he would have earned $45*5 + .1*$4000 + 3000*$.15 = $225 + $300 + $375 = $900. The regular rate would then be $900 / 45 = $20. Therefore, the driver would be entitled to $20 per hour for the first 40 hours and $30 per hour ($20*1.5) for the 5 overtime hours.

There are some important caveats to keep in mind when structuring a policy to comply with the FLSA’s overtime payment policies.

First, payments should be calculated as a **forward-looking** structure, determined in advance of the employee beginning the work. In particular, the “regular rate” paid to employees (whether it be hourly, milage, commission, or otherwise) should not decrease if the employee works more than 40 hours in a week. Similarly, employees should not be given bonuses for working 40 hours or fewer in a week. Either scenario could be seen as an attempt to artificially reduce the guaranteed 1.5x overtime bonus, which would be unlawful under the FLSA.

Second, bonuses tied to hourly work (either directly or indirectly) must be included in the regular rate. However, the FLSA permits companies to pay a **purely discretionary bonus** at the end of the year without impacting the regular rate. This bonus must be purely discretionary, not guaranteed by contract, and not provided as an incentive for reaching certain productivity thresholds. For example, if a company is particularly profitable and provides $400 bonuses to drivers at the end of the year, that bonus would not need to be included in the calculation of the regular rate. However, if a company guarantees that drivers who hit 8000 miles in a month a year get an automatic $400 bonus, this $400 **would** be factored into the regular rate, and drivers claiming the bonus would therefore need to be paid **additional** overtime for each week that they worked over 40 hours that month.

Third, the FLSA permits a company to pay a floating (variable) rate, so long as that rate is determined **before** the work starts. For multiple jobs completed within a week (or a series of weeks), the regular rate is calculated as an average of all of those jobs (with a weighted average used for a job that spans beyond a workweek).

Fourth, variable payment work that **spans from one workweek to another** should be weighted based on the payment for each job and then averaged based on how much time in each workweek was spent on each job. For example, let’s assume a driver earns $600 for a 30-hour job that spans Monday through Wednesday, then earns $500 for a 20-hour job – spending 15 hours on Thursday and Friday and 5 hours the following week. In that case, the driver would have a rate of $20 for the first job ($600 / 30 hours) and $25 for the second job ($500 / 20 hours). The attributed earnings for the first week would therefore be $600 for the first job and $375 for the second job ($25*15), totaling $975. The regular rate would therefore be $975/45 = $21.66. The driver would be therefore entitled to $21.66 per hour for the first 40 hours and $32.50 per hour ($21.66*1.5) for the 5 overtime hours.

Fifth, reimbursements for work expenses (including gas) and payments for insurance/retirement plans are **not** included in the regular rate.

The FLSA’s wage/hour requirements are complex and nuanced, and companies can face harsh penalties and huge civil payments for noncompliance, even if the mistake was inadvertent. As such, it is of critical importance to have your company’s payment structure regularly reviewed by a professional. If you have questions, our legal team is happy to discuss with you further. For more information, please contact Matthias Kaseorg (mkaseorg@setlifflaw.com) at (804) 377-1273 or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.

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