(a) Section 548.3(f)(1) authorizes as an established basic rate:
A rate per hour for each workweek equal to the average hourly
remuneration of the employee for employment during the annual period or
the quarterly period immediately preceding the calendar or fiscal
quarter year in which such workweek ends, provided (i) it is a fact,
confirmed by proper records of the employer, that the terms, conditions,
and circumstances of employment during such prior period, including
weekly hours of work, work assignments and duties, and the basis of
remuneration for employment, were not significantly different from the
terms, conditions, and circumstances of employment which affect the
employee's regular rates of pay during the current quarter year, and
(ii) such average hourly remuneration during the prior period is
computed by the method or methods authorized in the following
subparagraphs.
(b) There may be circumstances in which it would be impossible or
highly impracticable for an employer at the end of a pay period to
compute, allocate, and pay to an employee certain kinds of remuneration
for employment during that pay period. This may be true in the case of
such types of compensation as commissions, recurring bonuses, and other
incentive payments which are calculated on work performance over a
substantial period of time. Since the total amount of straight-time
remuneration is unknown at the time of payment the full regular rate
cannot be ascertained and overtime compensation could not be paid
immediately except for the provisions of Sec. 548.3(f). In many such
situations, the necessity for any subsequent computation and payment of
the additional overtime compensation due on these types of remuneration
can be avoided and all overtime premium pay due under the Act, including
premium pay due on such a commission, bonus or incentive payment, can be
paid at the end of the pay period rather than at some later date, if the
parties to the employment agreement so desire. This is authorized by
Sec. 548.3(f)(1), which provides an alternate method of paying overtime
premium pay by permitting an employer, under certain conditions, to use
an established basic rate for computing overtime premium pay at the end
of each pay period rather than waiting until some later date when the
exact amounts of the commission, bonus, or other incentive payment can
be ascertained. Such established rate may also be used in other
appropriate situations where the parties desire to avoid the necessity
of recomputing the regular rate from week to week.
(c)(1) The rate authorized by Secs. 548.3(f)(1) is an average hourly
rate based on earnings and hours worked during the workweeks ending in a
representative period consisting of either the four quarter-years or the
last quarter-year immediately preceding the calendar or fiscal quarter-
year in which the established rate is to be used. Such a rate may be
used only if it is a fact, confirmed by proper records of the employer,
that the terms, conditions, and circumstances of employment during this
prior period were not significantly different from those affecting the
employee's regular rates of pay during the current quarterly period.
Significant differences in weekly hours of work, work assignments and
duties, the basis of remuneration for employment, or other factors in
the employment which could result in substantial differences in regular
rates of pay as between the two periods will render the use of an
established rate
based on such a prior period inappropriate, and its use is not
authorized under such circumstances.
(2) However, an increase in the basic salary or other constant
factor would not preclude the use of such a rate provided that accurate
adjustments are made. For instance, assume that during the previous
annual period an employee was compensated on the basis of a weekly
salary of $70 plus a commission of 1 percent of sales. If his weekly
salary is raised to $80 for the next annual period (assuming he still
receives his commission of 1 percent of sales) the annual rate on which
the established rate is to be computed must be adjusted by an increase
of $520 ($10 x 52 weeks). For instance, assume the above employee earned
a total of $4,244 and worked 2,318 hours during the previous annual
period when his salary was $70 per week. Normally his established basic
rate would be computed by dividing 2,318 hours into $4,244, thus
arriving at a rate of $1.83. However, since the rate must reflect the
increase in salary it must be computed by adding the anticipated
increase to the pay received during the previous annual period ($4,244+
$520=$4,764). The established basic rate would then be $2.05.
(d) Establishment of the rate explained in paragraphs (b) and (c) of
this section is authorized under the circumstances there stated,
provided it is computed in accordance with Sec. 548.3(f)(2), which
prescribes the following method: First, all of the employees'
remuneration for employment during the workweeks ending in the
representative four-quarter or quarter-year period immediately preceding
the current quarter, except overtime premiums and other payments
excluded from the regular rate under section 7(e) of the Act, must be
totaled. All straight-time earnings at hourly or piece rates or in the
form of salary, commissions, bonus or other incentive payments, and
board, lodging, or other facilities to the extent required under section
3(m) of the Act and Part 531 of this chapter, together with all other
forms of remuneration paid to or on behalf of the employee must be
included in the above total. Second, this total sum must be divided by
the total number of hours worked during all the workweeks ending in the
prior period for which such remuneration was paid. The average hourly
rate obtained through this division may be used as the established rate
for computing overtime compensation in any workweek, in which the
employee works in excess of the applicable maximum standard number of
hours, ending in the calendar or fiscal quarter-year period following
the four-quarter or quarterly period used for determination of this
rate. This is authorized irrespective of any fluctuations of average
straight-time hourly earnings above or below such rate from workweek to
workweek within the quarter.
(e) As a variant to the method of computation described in paragraph
(d) of this section, it is provided in Sec. 548.3(f)(3), with respect to
situations where it is not practicable for an employer to compute the
total remuneration of an employee for employment in the prior period in
time to determine obligations under the Act for the current quarter
year, a one-month grace period may be used. This method is authorized,
for example, in employment situations where the computation of bonuses,
commissions, or other incentive payments cannot be made immediately at
the end of the four-quarter or quarterly base period. If this one month
grace period is used, it will be deemed in compliance with
Sec. 548.3(f)(1) to use the basic rate authorized therein for the
quarter commencing one month after the next preceding four-quarter or
quarter-year period. To illustrate, suppose an employer and employee
agree that the employee will be paid for overtime work at one and one-
half times a basic rate computed in accordance with Sec. 548.3(f)(1),
but on the pay day for the first workweek ending in the current quarter
his records do not show all commissions earned by the employee in the
preceding quarter. The employer and employee may therefore elect to use
a one month grace period. This would mean that a basic rate for the
quarter January 1-March 31, for example, which is derived from the prior
four-quarter (January 1-December 31) or quarterly (October 1-December
31) period, as the case may be, would be applied during a quarterly
period commencing one month later (February 1-
April 30) than the period (January 1-March 31) in which it would
otherwise be applicable. The same adjustment would be made in succeeding
quarters. Once the grace method of computation is adopted it must be
used for each successive quarter.
(f) The established basic rate must be designated and substantiated
in the employer's records as required by part 516 of this chapter, and
other requirements of such part with respect to records must be met. An
agreement or understanding between the parties to use such rate must be
reached prior to the quarter-year period in which the work to which it
is applied is performed. The agreement or understanding may be limited
to a fixed period or may be a continuing one, but use of the established
rate under such an agreement or understanding is not authorized for any
period in which terms, conditions, and circumstances of employment
become significantly different from those obtaining during the period
from which the rate was derived. This method of computation cannot be
used if there is any change in the employee's position, method of pay,
or amount of salary or if the employee was not employed during the full
period used to determine the rate.
(g) To function properly and to provide, over an extended period,
overtime premium pay substantially equivalent to the pay the employee
would receive if overtime were paid on the true regular rate, the plan
must provide that overtime be computed on the established basic rate in
every overtime week without regard to the fact that in some weeks the
employee receives more premium pay than he would using the true regular
rate and in some weeks less. Plans initiated pursuant to this section
are based on averages and, if properly applied, will yield substantially
the same overtime compensation in a representative period as the
employee would have received if it were computed on the true regular
rate.
(h) The following examples assume the employee is due overtime
premium pay for hours worked over 40 in the workweek.
(1) Example. A sales employee whose applicable maximum hours
standard is 40 hours enters into an agreement with his employer that he
will be paid a salary plus a commission based on a certain percentage of
sales. He agrees that this compensation will constitute his total
straight-time earnings for all hours worked each week, provided such
compensation equals or exceeds the applicable minimum wage.
The employee further agrees that he is to receive overtime premium
pay for each workweek on the normal pay day for that week; based each
quarter on one-half his established basic rate derived by taking the
hourly average of the total straight-time remuneration he received
during the workweeks ending in the four-quarter period immediately
preceding the current quarter. For example, his established basic rate
for each workweek ending in the first quarter of 1964 (January through
March) is determined by computing his average hourly rate for employment
during all workweeks ending in the four quarter periods of 1963.
Assume the employee worked the following number of hours and
received the straight-time pay indicated:
------------------------------------------------------------------------
Pay Hours worked
Line No. Quarters --------------------------------
------------------------------------------------------------------------
1............. 1st--1963.............. $1,074 ...... 550 ......
2............. 2d--1963............... 980 $980 480 489
3............. 3d--1963............... 1,069 1,069 542 542
4............. 4th--1963.............. 1,365 1,365 619 619
--------- --------
5............. 1, 2, 3, 4--1963....... 4,488 ...... 2,200 ......
6............. 1st--1964.............. ....... 1,168 ...... 531
-------- -------
7............. 2, 3, 4 (1963) 1 (1964) ....... 4,582 ...... 2,181
------------------------------------------------------------------------
The employee's basic rate for the first quarter of 1964 (line 6) is
determined by the hours worked and pay received in the four previous
quarters (lines 1, 2, 3 and 4). Total pay received during that period
($4,488.00, line 5) is divided by the total hours worked (2,200 hours,
line 5) to derive the established basic rate ($2.04 per hour). This is
the hourly rate on which overtime is computed in each workweek ending in
the first quarter of 1964 in which the employee worked in excess of the
applicable maximum hours standard. For instance, if in the first week of
that quarter the employee worked 47 hours he would be due his guaranteed
salary, his commission (at a later date) plus $7.14 as overtime premium
pay (7 hours x 2.04 x 1/2 ). It does not matter that the employee
actually earned and ultimately received $90.71 in salary and commission
as his total straight-time pay for that week and that his true hourly
rate would be only $1.93 ($90.71/47 hours). The established basic
rate is an average rate and is designed to be used, and must be used, in
every overtime week in the quarter for which it was computed, without
regard to
the employee's true hourly rate in the particular week.
The employee's basic rate for the second quarter of 1964 will be
similarly computed at the end of the first quarter of that year by
adding together the hours worked and pay received in the second, third,
and fourth quarters of 1963 and the first quarter of 1964 (lines 2, 3, 4
and 6) so that the totals now reflect the figures in line 7. The regular
rate is again computed by dividing pay received ($4,582.00) by hours
worked (2,181) and the new basic rate would be $2.10.
(2) Example. Assume that an employee employed under a similar
arrangement agrees to receive overtime premium pay for each workweek on
the normal pay day, based each quarter on one-half his established basic
rate determined by the quarterly method rather than by the annual method
previously discussed. His established basic rate for the first quarter
of 1964 would therefore be determined by computing his average hourly
rate for the last quarter of 1963. To illustrate, if in the latter
quarter the employee received $1,156.00 in straight time compensation
and worked 561 hours, his basic rate for the first quarter of 1964 would
therefore be $2.06 ($1,156.00/561 hours). During the overtime
weeks in this quarter there would be due him, in addition to his
straight time compensation, premium pay of $1.03 ($2.06 x 1/2) for each
hour he works in excess of the applicable maximum hours standard.
As in the previous example the established basic rate must be used
in every overtime week in the quarter for which it was computed without
regard to the employee's true hourly rate in the particular quarter.
(Sec. 1, 52 Stat. 1060, 1062, as amended, 29 U.S.C. 201, et seq.)
[28 FR 11266, Oct. 22, 1963, as amended at 32 FR 3293, Feb. 26, 1967]
