Regular Rate of Pay Explained: What the FLSA Requires Employers to Include

Understanding the FLSA concept of “regular rate of pay”

The expression “regular rate of pay” under the U.S. Fair Labor Standards Act (FLSA) does not simply mean an employee’s hourly wage. It is a legal construct used to determine whether overtime has been paid correctly and whether the employer has included all required compensation items. The U.S. Department of Labor (DOL) is clear: when a worker who is not exempt from overtime works more than 40 hours in a workweek, the employer must pay at least one and one-half times the employee’s regular rate for the overtime hours. If the regular rate is calculated too low because items were left out, the result is an underpayment of overtime.

Therefore, identifying what must be included in the regular rate is critical. The FLSA assumes that, except for specific statutory exclusions, all remuneration for employment should be part of the regular rate. That means bonuses, differentials, incentive payments, shift premiums, and many forms of non-cash compensation may have to be counted. Only amounts that are expressly excluded under 29 U.S.C. § 207(e) can be left out.

This section will walk through the main items that must be included, explain the logic behind them, and highlight the most common mistakes employers make — mistakes that often lead to back-pay claims, audits, and lawsuits.

Legal foundation: “all remuneration for employment”

The starting point is the statutory language. The FLSA says that, for overtime purposes, the regular rate “shall be deemed to include all remuneration for employment paid to, or on behalf of, the employee,” unless the payment fits within one of the specifically listed exclusions. This is an intentionally broad rule. Congress wanted to prevent employers from artificially labeling parts of pay as “bonuses” or “allowances” just to keep overtime costs low.

The U.S. Supreme Court has reinforced that overtime protections must be liberally construed in favor of workers. Because of that, the Department of Labor and the courts will usually presume that a payment belongs in the regular rate unless the employer can point to a statutory provision or a well-recognized exception that removes it.

In practical terms, this means: if an employee earns anything beyond a purely reimbursable expense or a purely discretionary, unpredictable gift, the employer should ask, “Does this increase the employee’s pay for work performed?” If the answer is yes, it likely belongs in the regular rate.

Core components that must be included

Most regular-rate problems do not arise from the base hourly rate itself; they arise from other earnings in the same week that are not added into the numerator when the employer calculates the average hourly pay.

1. Hourly wages and day rates

All amounts an employee earns for hours actually worked in the week — including straight hourly wages, day rates, or job rates — must be in the regular rate. If the employee is paid on a day rate or a job rate, the employer has to convert that to an hourly equivalent by dividing total earnings for the week by the total number of hours actually worked.

2. Salaries for nonexempt employees

When a nonexempt employee is paid a fixed salary but is still entitled to overtime, the salary is understood to compensate a specific number of hours (often 40 per week). To determine the regular rate, the salary for the week is divided by the number of hours the salary is intended to cover. If the employee works more than that, overtime is due based on the regular rate that results from the division.

3. Nondiscretionary bonuses

This is one of the most important inclusions. A bonus is nondiscretionary if the employee knows in advance, or has a reasonable expectation, that performing certain work, reaching certain goals, or simply staying employed through a period will result in extra pay. Attendance bonuses, safety bonuses, production bonuses, promised holiday bonuses linked to hours worked, shift completion bonuses, and measurable performance incentives are all examples of nondiscretionary bonuses. Because they are tied to work or to hours, they must be allocated back to the workweeks they cover and included in the regular rate for those weeks.

For example, if an employee receives a $120 production bonus for work done over four weeks, that $120 must be spread over those four weeks ($30 per week) and added to the employee’s earnings in each of the weeks to recalculate the regular rate and determine whether additional overtime is owed.

4. Commissions

Commissions — whether percentage-of-sales, piece-of-business, or another formula — generally must be included in the regular rate. Even though commissions may be paid monthly or biweekly, they relate to work performed over a period, and the law requires the employer to allocate the commission to the workweeks in which the sales or activities occurred. After allocation, the employer reviews which of those weeks had overtime and pays the required additional overtime on the commission portion. Failing to do so is one of the most common FLSA mistakes in sales and service industries.

5. Shift differentials and premiums

If an employer pays more for evening shifts, night shifts, weekends, or hazardous conditions, those extra amounts are part of the compensation for work and therefore must be in the regular rate. For example, an employee may earn $18 per hour base and an extra $2 per hour for working the night shift. The total straight-time earnings for those hours is $20 per hour, not $18, and overtime must be computed using that higher figure.

6. Piece-rate and day-rate earnings

When an employee is paid on a piece-rate basis (for example, $5 per unit produced), FLSA requires the employer to add up all piece-rate earnings for the week and divide by the total hours worked that week. The result is the regular rate. If the employee worked more than 40 hours, the employer must pay an additional half-time premium for each overtime hour, because the employee has already received full straight-time pay through the piece-rate earnings.

7. On-call pay and short rest premium pay (when tied to work)

Some employers pay small amounts to employees who remain on call or who agree to work split shifts or irregular schedules. If those payments are not excludable as reimbursements or as purely discretionary, they will be treated as part of the weekly remuneration and must be factored into the regular rate.

Items that cannot be excluded unless an exception applies

Because the FLSA rule is “include everything except what we say you can exclude,” many employers run into trouble when they assume an item is “extra” or “gift-like.” Below are items that often must be included even though employers try to leave them out:

• Attendance and punctuality bonuses (because they reward showing up for work)
• Retention or motivation payments promised in advance (“stay through the busy season and you’ll get $300”)
• Payments for working undesirable hours (Sunday premium, second shift, rotating shift)
• Sales incentives that are formula-based, even if employer says “management can change it”
• Quality or accuracy incentives in manufacturing or data entry
• Production bonuses in warehouses or fulfillment centers

In all of these cases, the key is that the employee could predict or earn the payment by performing work in a certain way. That makes it nondiscretionary, and therefore part of the regular rate.

What may be excluded from the regular rate

To understand inclusion, it helps to see what the FLSA allows employers to exclude. The law specifies several categories that do not have to be counted:

• Gifts and discretionary bonuses — for example, an unexpected holiday bonus not tied to hours or efficiency, or a purely discretionary year-end amount determined at management’s sole option
• Payments for time not worked — such as vacation pay, holiday pay, or sick pay, when not tied to hours worked
• Expense reimbursements — travel, mileage, per diem, tools, when reasonably approximate to the actual expense
• Employer contributions to retirement or health plans
• Premium payments for overtime itself — the extra half-time or the time-and-a-half paid for working over 40 does not have to be re-included

But even within these categories, the details matter. A “bonus” that is not truly discretionary must be included. A “reimbursement” that is really extra pay for working at a remote site may have to be included. Employers must examine the real purpose of the payment.

Why bonuses create special overtime obligations

Bonuses are the area where the most payroll corrections arise. A nondiscretionary bonus paid at the end of a month or quarter will almost always cover multiple workweeks. Because overtime must be paid on all remuneration, the employer cannot simply pay the bonus and move on. The employer must go back over the weeks the bonus covers, recompute the regular rate for each week that had overtime, and pay an additional overtime premium on the bonus amount.

Here is a simplified illustration:

This looks small, but across dozens of employees, months, and years, failing to include bonuses in the regular rate can lead to significant liability.

Common mistakes employers make

Mislabeling bonuses as “discretionary”

Employers often call a payment “discretionary” in policy documents, but in practice they pay it every month or every quarter if certain targets are met. DOL and courts will look at the reality, not the label. If the employee could reasonably expect the money by doing the work, it belongs in the regular rate.

Omitting shift or hazard differentials

Some payroll systems calculate overtime only on the base hourly rate and ignore the $1–$3 per hour that the employee received for the night shift or for dangerous work. That practice produces incorrect overtime because the employee actually earned more than the base.

Failing to allocate commissions to the correct weeks

Commissions paid monthly or biweekly must still be tied back to the weeks where the underlying work occurred. Employers that pay commissions but never recompute overtime may owe back wages for every overtime week in the commission period.

Not including “extra pay” for short notice or schedule changes

In retail, hospitality, and health care, employees sometimes get extra dollars for picking up an extra shift or accepting a last-minute change. If that payment is for working, it is part of remuneration. It should be added in.

Assuming salaried nonexempt employees are “covered” already

Paying a salary does not exempt an employee from the FLSA. If the employee is nonexempt, the salary must be converted to an hourly equivalent, and all other earnings in the week must be added in. Only then can overtime be properly calculated.

Who is affected by improper regular-rate calculations

Any industry that uses multiple pay components is exposed. That includes manufacturing, logistics, warehouses, hospitals, home health, restaurants, hotels, call centers, and almost all sales environments. It also includes public employers that pay incentives, stipends, or on-call pay. Even small employers that pay occasional bonuses can be affected, because the FLSA applies regardless of size when the business is engaged in interstate commerce or meets the revenue tests.

Employees affected by undercalculated regular rates can file complaints with the DOL, bring private lawsuits, or participate in collective actions. Often, the claims go back two or three years, and employees may be able to recover liquidated damages (essentially doubling the amount owed) if the employer cannot show good faith.

Compliance practices to get the regular rate right

To avoid underpayments, employers should implement a few disciplined practices:

• Inventory all pay codes — identify every way in which the company pays employees (hourly, weekend premium, attendance bonus, referral bonus, “thank-you” pay, spot awards, call-back pay, training pay, travel stipends, etc.).
• Classify each code — for each payment type, decide: is it remuneration for work? If yes, it likely goes in the regular rate. If no, document the statutory basis for excluding it.
• Automate allocation of bonuses and commissions — payroll or HRIS systems should be able to spread nondiscretionary payments over covered weeks and trigger recalculation of overtime.
• Train managers — many improper payments start with supervisors promising small extras (“I’ll give you $25 if you stay late”). If it is tied to work, payroll must count it.
• Audit periodically — at least annually, run a test on a sample of nonexempt employees with the most complex pay patterns to ensure that overtime is being calculated on the correct regular rate.

When in doubt, the safer position is to include the payment in the regular rate. The cost of slightly higher overtime in the present is usually lower than the cost of defending a DOL audit or a collective action years later.

Conclusion

The FLSA concept of regular rate of pay is broader than most people think. It is not just the hourly wage, and it is not just the base salary. It is a composite number that captures all the economic benefits the employee receives for working in a given week, minus only those items the law specifically allows employers to ignore. Hourly wages, salaries for nonexempt workers, nondiscretionary bonuses, commissions, shift premiums, piece-rate earnings, and various incentive payments generally must be included. Leaving them out leads directly to underpaid overtime.

Because many of the payments that must be included are paid on cycles that do not match the weekly overtime cycle (for example, monthly bonuses or monthly commissions), employers have to take the extra step of allocating those payments back to the weeks in which the work was done. This is not optional; it is a central feature of the regular-rate rules. The Department of Labor, and increasingly the courts, view failures in this area as serious violations because they affect multiple employees across long periods.

On the other hand, the law also offers clear exclusions for true gifts, discretionary bonuses, genuine expense reimbursements, and contributions to benefit plans. Employers that carefully document why a payment falls into one of these categories can defend their position. But that documentation must reflect reality: if the employee could earn the payment by working a certain way, the payment is likely nondiscretionary and therefore belongs in the regular rate.

In short, the safest compliance mindset is: “If it looks like pay, treat it like pay.” Build your payroll system around inclusion, not exclusion. That approach will protect workers from hidden overtime losses and protect employers from costly retroactive corrections.

FAQ – Regular Rate of Pay (English)

1. What exactly is the “regular rate of pay” under the FLSA?

It is the average hourly earnings for an employee in a specific workweek, including all compensation for employment except for items the law specifically allows to be excluded. It serves as the base to calculate overtime pay at 1.5 times that rate.

2. Does the regular rate include bonuses?

Yes, if the bonus is nondiscretionary—that is, the employee knew or could expect to receive it for meeting performance, attendance, or production goals. Such bonuses must be allocated to the workweeks they cover when calculating overtime.

3. Are commissions part of the regular rate?

Yes. Commissions, whether paid weekly, biweekly, or monthly, must be distributed back across the workweeks during which the sales or activities occurred. Overtime must be recalculated accordingly.

4. Are discretionary bonuses excluded?

Yes, but only if they are truly discretionary. This means the employer retains full control over the fact and amount of payment until right before it is made, and the employee had no prior expectation of receiving it.

5. Do shift differentials and night premiums count?

Yes. Shift differentials, hazard pay, and similar premiums are compensation for work performed and therefore must be included when determining the regular rate of pay.

6. How do employers calculate the regular rate for salaried employees?

The employer divides the weekly salary by the number of hours the salary is intended to cover (usually 40). If the employee works beyond that, overtime is owed at one-half of the regular rate for each hour over 40, because the salary already includes straight-time pay.

7. What happens if the regular rate is calculated incorrectly?

Improper calculations lead to underpayment of overtime, which can result in back-pay orders, double damages under the FLSA, and legal fees. The Department of Labor and courts treat regular-rate errors as serious violations.

8. Are reimbursements or expense payments part of the regular rate?

Generally no—reasonable reimbursements for travel, lodging, tools, or other expenses incurred for the employer’s benefit can be excluded, as long as they reflect actual costs and are not a disguised form of pay.

9. How far back can employees claim unpaid overtime due to a wrong regular rate?

Usually up to two years under the FLSA, or three years if the violation was “willful.” Some state laws may allow longer recovery periods or additional penalties.

10. What’s the best practice to stay compliant?

Employers should review all pay codes, document the basis for any exclusions, ensure payroll systems allocate bonuses and commissions correctly, and train supervisors not to promise informal “extra pay” without notifying payroll. Regular audits and transparency with employees are key to avoiding costly errors.

Technical and Legal Basis (English)

The rules defining the regular rate of pay are set by the Fair Labor Standards Act (FLSA), primarily at 29 U.S.C. §207(e), and further interpreted by the U.S. Department of Labor (DOL) regulations found in 29 C.F.R. Part 778. These laws establish that the regular rate must include all remuneration for employment, except specific categories expressly excluded by statute.

Main statutory and regulatory sources:

• 29 U.S.C. §207(a) – Establishes the overtime requirement of “one and one-half times the regular rate” for hours over 40 in a workweek.
• 29 U.S.C. §207(e) – Defines the “regular rate” and lists eight categories of payments that may be excluded, such as gifts, true discretionary bonuses, expense reimbursements, and benefit contributions.
• 29 C.F.R. §778.108 – Clarifies that the regular rate includes all remuneration for employment and must reflect the actual earnings of the employee.
• 29 C.F.R. §§778.109–778.122 – Explain how to compute the regular rate for hourly, salaried, piece-rate, day-rate, and commission-based employees.
• 29 C.F.R. §§778.208–778.224 – Provide guidance on bonuses, distinguishing between discretionary and nondiscretionary payments and describing how to allocate bonuses to the correct workweeks.
• 29 C.F.R. §§778.315–778.329 – Cover additional examples and clarifications on how to determine overtime premiums correctly once the regular rate is established.
• U.S. Supreme Court precedent: The Court has repeatedly held that overtime protections must be liberally construed, emphasizing inclusion of all compensation in the regular rate (see Walling v. Youngerman-Reynolds Hardwood Co., 325 U.S. 419 (1945)).

These sources collectively ensure that employees receive the full protection Congress intended when it required overtime to be based on the real economic value of the work performed, not merely on a nominal hourly rate. Employers who ignore these principles or classify payments incorrectly risk substantial liability for unpaid wages and penalties.