Court Clarifies Which Pay Premiums Count Toward Overtime

A recent Seventh Circuit court ruling focuses on a key overtime calculation issue for payroll: Which premiums belong in the regular rate of pay?

For a Wisconsin employer, certain pay differentials and incentive premiums had to be included before calculating the overtime premium. However, holiday premiums could be excluded because the pay exceeded 1.5 times the applicable bona fide hourly rate.

Employer Offers Pay Differentials, Incentives 

Froedtert Health, a hospital system in Wisconsin, pays its employees a base pay rate plus shift and weekend differentials, “Extra Pay” premiums for picking up shifts or working extra hours and holiday premiums.

For overtime purposes, Froedtert’s payroll team includes shift and weekend differentials and “Extra Pay” premiums in employees’ regular rates, but excludes holiday premiums.

Employee Nichole Lutz filed a class action asserting Froedtert improperly calculated overtime premiums and wrongly excluded holiday pay from the regular rate. A district court granted summary judgment to Froedtert, and Lutz appealed.

Overtime Calculation: Did Payroll Get It Right?  

The FLSA requires employers to pay employees at least 1.5 times their regular rates for hours worked beyond 40 in a workweek. The court walked through the formula for overtime calculations under the FLSA. 

1. Calculate the regular rate: Divide total workweek compensation, excluding statutory exclusions, by total hours worked in the workweek. 
2. Calculate the half-time premium for each overtime hour: Multiply the regular rate by 0.5. 
3. Calculate the overtime premium due: Multiply the half-time premium rate by overtime hours. Add that amount to the employee’s regular-rate compensation. 

The Seventh Circuit noted that the DOL’s Fact Sheet #56C: Bonuses under the Fair Labor Standards Act (FLSA) provides additional guidance on calculating overtime when employees receive shift differentials.

Froedtert said its methodology for calculating overtime was consistent with DOL’s guidance.

Lutz argued that a different method should be used. She said Froedtert should separately calculate pay for the first 40 hours worked, including shift differentials and weekend bonuses, and then pay 1.5 times the regular rate for overtime hours.

The court disagreed with Lutz, finding that Froedtert’s two-step calculation method follows an established, FLSA-compliant approach. Lutz’s proposed alternative, the court said, could create a pay disparity between employees who worked the same number of hours and the same number of differential shifts, depending on whether those shifts occurred early or late in the workweek. Froedtert’s method avoided that result.

What About Holiday Pay?

The court also rejected Lutz’s challenge to Froedtert’s exclusion of holiday premiums from the regular rate. The FLSA allows employers to exclude qualifying holiday premiums, and Froedtert’s holiday pay exceeded 1.5 times Lutz’s bona fide hourly rate.

The court reached the same result under Wisconsin law. Although Wisconsin’s overtime statutes do not explain how to calculate the regular rate, the court said their language parallels the FLSA and DOL guidance. And because Wisconsin law does not treat holiday premium pay as overtime pay, the court concluded that it should be interpreted consistently with federal law.

No wage violations existed, so the Seventh Circuit affirmed the ruling in the employer’s favor.

Payroll Takeaways

• Include eligible pay in the regular-rate calculation: Add shift, weekend and “Extra Pay” premiums to the regular rate.
• Calculate by workweek: Divide eligible pay by total hours, then add the half-time premium for OT hours.
• Review holiday premiums regularly: Ensure they meet the 1.5-times threshold for exclusion from the regular rate.

More info: Lutz v. Froedtert Health Inc.