Should I Pay My Employees a Flat Rate by Budget or by Actual Hours Worked?

A group of mechanics employed at a South Carolina chain of tire and automobile repair stores was paid under a compensation plan that contained two components. They received an amount determined by multiplying the particular mechanic’s “flat rate”;—an hourly pay rate assigned to each mechanic based on that mechanic’s particular skill, experience, and certifications—by the mechanic’s " turned hours," a pre-established amount of time designated by the employer for each mechanical task, for all tasks completed by the mechanic during the relevant pay period.

The compensation for turned hours did not account for the actual time spent working on a particular task or during the pay period overall, however. Instead, it was based exclusively on the number of tasks completed and the pre-assigned turned hours for such tasks (the same measure of turned hours used to form a mechanic’s pay for a particular task also was used as the basis for the labor costs charged to the customer for that task, although the rates paid by the customers were greater than mechanics’ flat rates).

While the above describes the key component of the compensation plan, the secondary component is that of differential pay. When the amount of a mechanic’s turned hours compensation earned over a given pay period was less than 1.5 times the statutory minimum wage multiplied by the mechanic’s actual hours worked during the same period, he or she also received a supplemental amount, referred to as “differential pay”; and designed to ensure that mechanics always earned at least 1.5 times the statutory minimum wage for all actual hours worked. The differential pay rate was set at whatever amount was needed to render the mechanic’s total compensation—i.e., turned hours pay plus differential pay—equal to $11.02 per hour for all actual hours worked during the period. As a result, if a mechanic’s turned hours fell below a certain percentage of their actual hours, he or she was compensated as though having earned a straightforward wage of $11.02 per hour.

The mechanics filed a putative class-action suit against the company, after which both sides filed motions for summary judgment seeking a ruling in their favor regarding whether the employer’s method of compensation is a bona fide commission plan under the FLSA—and, if so, whether the plan was exempted from the statute’s overtime pay requirements. The employees argued that the employer’s commission rate was a “sham” that did not meet the requirements to qualify for the Section 7(i) overtime exemption, that the totality of the employer’s conduct demonstrated a clear pattern of reckless disregard for the FLSA, and that the court should find that a three-year statute of limitations applied in denying the company’s motion for summary judgment concerning employees who had filed their written consents to be part of the class within those three years.

The FLSA provides two potential limitations periods: a two-year statute of limitations applies for non-willful violations, but a three-year statute of limitations applies when the violation is willful (employees bear the burden of proof when alleging that a violation is willful). In the case at bar, the employees conceded that the company’s failure to consult with a lawyer concerning its compensation plan could not alone demonstrate a willful violation of the statute. Rather, they contended that, combined with its other conduct, the company’s failure to have consulted with an employment lawyer or with the Department of Labor (DOL) when it implemented the at-issue compensation plan was sufficient to establish a willful violation.

The court found that the employees provided no evidence that the employer was on notice that its compensation plan violated the FLSA, however, noting that the company’s corporate counsel had worked with the DOL during an investigation of the plan and that a DOL audit had revealed no statutory violations. Consequently, the court granted the employer’s motion for summary judgment concerning all employees who had failed to file written consent within the two-year limitations period.

Noting that several courts have held that the turned hours pay compensation plan utilized by the employer in the instant case constitutes a bona fide commission rate for purposes of Section 7(i), the court nevertheless characterized the compensation plan as a “hybrid plan” because at times the employer utilized a “straight commission without advances” compensation method that is a bona fide commission rate and at other times the company utilized a “straight hourly rate” compensation method that was not a bona fide commission rate. Looking at the commission rate as a whole, it passed the “smell test,” the court determined, reiterating that the employer’s corporate counsel had worked with the DOL during an investigation of its compensation plan and that an audit had revealed no violations of the FLSA.

This plan passed almost all the requirements, and most of the individual claimants’ complain were dismissed in summary judgment. However, there is still a question concerning those employees who rarely made more than the “guaranteed rate” or draw. If you have a situation like this, and an employee is not exceeding their draw, you cannot just let that continue. The employees allege that they did other things that didn’t generate turned hours, and that is why they didn’t exceed the guaranteed rate. Work such as more administrative duties may or may not be why they didn’t exceed the guaranteed rate.

Do not let, out of your 30 employees, if five consistently miss their quota, not make enough so that the commission plan kicks in. If you continue to pay them the guaranteed minimum hourly rate, you will get in trouble. In Tire Kingdom’s example, they allowed their employees to remain for a long enough period not making enough turned hours, effectively making $11.02 an hour, flat, without overtime. Their plan passed, benefiting some employees but negatively impacting others who have worked long hours.

About the author, Rhamy

Rhamy grew up watching and working with his mother and grandmother in the senior insurance market. This familiarity with the struggles faced by people trying to navigate the incredibly complicated and heavily regulated healthcare market led him to start Poplar Financial while working on his degree at the University of Memphis. After completing his MBA and Bachelors in Finance and Economics, Rhamy guided Poplar Financial through the disruptive opportunity that is the Affordable Care Act. Since then Poplar Financial has received numerous awards from major insurance carriers and has completed its fourth year in a row of doubling in size. Now his team focuses on the processes around human resources and specializes in providing companies with between 20 and 1000 employees with the payroll, benefits, and HR needs.