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Rule Title: DEVICES TO EVADE THE OVERTIME REQUIREMENTS
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Department: LABOR AND INDUSTRY, DEPARTMENT OF
Chapter: WAGES AND HOURS
Subchapter: Overtime Compensation
 
Latest version of the adopted rule presented in Administrative Rules of Montana (ARM):

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24.16.2571    DEVICES TO EVADE THE OVERTIME REQUIREMENTS

(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) PSEUDO "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.

 

History: 39-3-403, MCA; IMP, 39-3-405, MCA; Eff. 12/31/72.


 

 
MAR Notices Effective From Effective To History Notes
12/31/1972 Current History: 39-3-403, MCA; IMP, 39-3-405, MCA; Eff. 12/31/72.
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