Why the Regular Rate Is the Wrong Number on More Payrolls Than You Think
When a Department of Labor Wage and Hour Division (WHD) investigator opens an overtime audit, the first document requested is usually time records and payroll registers – specifically to test whether the employer computed overtime on the correct base. That base is the regular rate of pay, and it is almost never as simple as an employee’s stated hourly wage.
Under the FLSA, the regular rate includes “all remuneration for employment paid to, or on behalf of, the employee.” The FLSA (29 U.S.C. § 207(e)) provides an exhaustive list of types of payments that can be excluded from the regular rate of pay when calculating overtime compensation. Everything else goes in. The gap between what employers assume is excludable and what the statute actually excludes is where the violations live—and where the back-pay liability accumulates.
The six mistakes below represent the patterns that appear most consistently in WHD enforcement actions and in the opinion letters the agency has issued in 2026. Each one is fixable before an audit finds it.
Mistake 1: Treating the Regular Rate as the Hourly Rate
The “regular rate” under the FLSA is a rate per hour, but the Act does not require employers to compensate employees on an hourly rate basis. Earnings may be determined on a piece-rate, salary, commission, or other basis—in each case, overtime compensation must be computed on the basis of the hourly rate derived from total compensation.
The regular hourly rate is determined by dividing total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked in that workweek for which such compensation was paid. That means a non-exempt employee who earns a base wage of $18.00 per hour but also earns a $150 production bonus in a 50-hour week does not have a regular rate of $18.00. The bonus must be folded in first.
In addition to base hourly wages, examples of types of pay that must be included in the regular rate are non-discretionary bonuses, commissions, and shift differentials. Employers who skip this step and simply pay 1.5 times the base hourly rate are systematically underpaying overtime on any week a bonus, commission, or differential is earned.
Mistake 2: Misclassifying Non-Discretionary Bonuses as Discretionary
This is the single most common regular-rate error the WHD has flagged in recent guidance. Whether bonuses must be included in an employee’s regular rate for purposes of calculating the amount of overtime due depends on what type of bonus is paid. Some bonuses are statutorily exempt and do not need to be included in an employee’s regular rate, while others are not.
The exclusion for discretionary bonuses is narrow. To qualify as a discretionary bonus, all three of the following conditions must be met under the FLSA: both the fact and amount of the payment are determined at the sole discretion of the employer; the employer makes that determination at or near the end of the period in which the employee’s work is performed; and the payment is not made pursuant to any prior contract, agreement, or promise causing employees to expect it.
In January 2026, the U.S. Department of Labor’s Wage and Hour Division issued six opinion letters providing guidance on federal labor standards under the FLSA. One of these letters addressed a key topic for employers: how and when bonuses are incorporated into overtime calculations. In Opinion Letter FLSA2026-2, the employer implemented a bonus plan under which drivers could earn a set bonus amount based on punctuality, attendance, and completion of daily safety tasks. Two of the three criteria for a discretionary bonus were not satisfied: the employer announced the bonus plan well in advance of the period in which the employee’s work was performed, and both the fact and amount of the bonus were determined before the end of the work period. The DOL determined that this was nondiscretionary and had to be included in the drivers’ regular rate.
The practical test is simple: if employees know in advance that hitting a target pays a stated amount, the bonus is non-discretionary, regardless of what the employer labels it. The label given a bonus does not determine whether it is discretionary.
Retroactive Recalculation When Bonuses Span Multiple Weeks
When a non-discretionary bonus covers a period longer than a single workweek—a monthly attendance award, a quarterly production incentive—employers cannot simply add the bonus to the week it is paid and recalculate that one week’s overtime. The bonus must be allocated across all workweeks in the period it covers, the regular rate recalculated for each week, and any additional half-time premium paid for overtime hours worked in those weeks. Employers that use bonuses or incentive pay for non-exempt employees should periodically review their pay practices to identify which bonuses are nondiscretionary and confirm that all nondiscretionary bonuses are properly incorporated into the regular rate. Opinion Letter FLSA2026-2 underscores how easy it is to misclassify bonuses or miscalculate overtime – errors that can lead to costly back-pay liability, liquidated damages, and attorneys’ fees.
Mistake 3: Ignoring Shift Differentials and Premium Pay
Employees who work nights, weekends, or hazardous assignments often receive a shift differential on top of their base rate. Many employers pay the 1.5x overtime multiplier on the base rate and treat the differential as separate, when it must be blended into the regular rate first.
There is a limited exception. Extra compensation paid at a premium rate for certain hours worked because such hours are hours worked in excess of eight in a day, in excess of 40 hours in the workweek, or in excess of the employee’s normal working hours may be excluded from the regular rate of pay, and such payments may be credited toward overtime compensation due under the FLSA. However, except for emergency or hazardous-work premiums, any premium of more than 150% of the hourly rate usually does not have to be folded back into the period it covered and may be creditable against overtime owed. Any other premium usually must be included, and overtime is then owed on that revised hourly rate.
A Saturday premium paid simply because it is Saturday—not because it represents hours over 40—goes into the regular rate. Applying the wrong classification here produces systematic underpayment on every overtime week those employees work.
Mistake 4: Averaging Hours Across Pay Periods
Biweekly and semi-monthly pay schedules create a structural temptation: look at total hours for the pay period and calculate overtime only on hours over 80 (for biweekly) or an equivalent threshold. The FLSA requires overtime to be calculated on a “workweek” basis—defined as any fixed, regularly recurring period of 168 hours, which equals seven consecutive 24-hour periods. You cannot average hours across two weeks to reduce overtime. If an employee works 50 hours in week one and 30 hours in week two, you owe 10 hours of overtime for week one. The fact that the two-week total is 80 hours does not eliminate the week-one overtime obligation.
The DOL’s own guidance is unambiguous: averaging of hours over two or more weeks is not permitted. Employers running biweekly payroll must configure their systems to evaluate overtime on a per-workweek basis, not a per-pay-period basis. This is a configuration decision, not a policy one—it must be set correctly in the payroll system before the first pay cycle runs.
Mistake 5: Mishandling Multiple Pay Rates in a Single Workweek
An employee who works at two different rates within the same workweek presents a specific calculation problem. Where an employee in a single workweek works at two or more different types of work for which different straight-time rates have been established, the regular rate for that week is the weighted average of such rates. The earnings from all such rates are added together and this total is then divided by the total number of hours worked at all jobs.
Many employers instead pay overtime at 1.5 times whichever rate was in effect during the overtime hours. That approach is only permissible under FLSA Section 7(g)(2) when there is a prior written agreement with the employee to use that method. Without such an agreement, the weighted-average method applies. Using the wrong approach produces an overpayment in some weeks and an underpayment in others—and the underpayments are the only ones that generate liability.
Mistake 6: Computing the Salaried Non-Exempt Regular Rate Incorrectly
A salaried non-exempt employee—one who is paid a fixed salary but does not qualify for any overtime exemption—requires a specific calculation to establish the regular rate. The FLSA does not require employers to compensate employees on an hourly rate basis; earnings may be determined on a piece-rate, salary, commission, or other basis, but in such case the overtime compensation due must be computed on the basis of the hourly rate derived therefrom.
The DOL’s Handy Reference Guide provides a concrete example: if a salary is paid on other than a weekly basis, the weekly pay must be determined to compute the regular rate. If the salary is for a half month, it must be multiplied by 24 and the product divided by 52 weeks to get the weekly equivalent. A monthly salary should be multiplied by 12 and the product divided by 52. The resulting weekly salary is then divided by actual hours worked in the workweek to obtain the regular rate, and the employee is owed an additional half-time premium (not 1.5x) for overtime hours, because the straight-time rate has already been paid through the salary.
Employers frequently default to dividing the weekly salary by 40 and multiplying overtime hours by 1.5x. When the employee works more than 40 hours, that approach overstates the regular rate and often double-counts the straight-time component already embedded in the salary. The correct method depends on whether the salary was intended to compensate a fixed number of hours or all hours worked.
What Is Actually Excluded from the Regular Rate
Knowing the exclusions matters as much as knowing the inclusions. Among the excludable payments are discretionary bonuses, gifts and payments in the nature of gifts on special occasions, contributions by the employer to certain welfare plans, and payments made pursuant to certain profit-sharing, thrift, and savings plans. Additional statutory exclusions under FLSA Section 7(e) include vacation and holiday pay, overtime premiums that qualify under the rate-in-effect method, and certain stock option and stock appreciation right values.
On whether a remote-work stipend must be included in the regular rate when employees do not submit receipts, WHD Administrator Rogers stated it “depend[s] on some of the details,” including how the stipend is structured and whether there is evidence of actual business expense. Flat-rate stipends paid regardless of actual expense incurred are at higher risk of being treated as wages subject to inclusion in the regular rate. Employers paying work-from-home or equipment stipends to non-exempt employees should document the business-expense basis for those payments or risk having them folded into the regular rate calculation.
The Cost of Getting It Wrong
The FLSA allows the Department of Labor or an employee to recover back wages and an equal amount in liquidated damages where minimum wage and overtime violations exist. Generally, a two-year statute of limitations applies to the recovery of back wages and liquidated damages. A three-year statute of limitations applies in cases involving willful violations. For an employer with 50 non-exempt employees who have been underpaid even $20 per week in overtime for two years, the back-pay exposure alone exceeds $100,000 before liquidated damages double it.
The WHD’s Payroll Audit Independent Determination (PAID) program provides a structured path for self-correction. WHD Administrator Rogers described PAID as a “win” that can resolve self-identified violations faster and with less penalty exposure. Using it requires the employer to calculate and pay back wages in full, but avoids the liquidated-damages doubling that accompanies a contested investigation.
2026 Reporting Note: Qualified Overtime and Form W-2
One additional compliance layer took effect this year. Starting with tax year 2026, employers must separately report qualified overtime on W-2s using Box 12 code ‘TT’ or face penalties. The amount reported in Box 12 code TT is the excess above the straight-time portion of overtime pay—precisely the half-time premium that the regular rate calculation determines. An incorrect regular rate produces an incorrect Box 12 TT figure, which cascades into incorrect employee tax deductions under the One Big Beautiful Bill Act’s overtime deduction provision. Correct overtime calculation and correct W-2 reporting are now directly linked.
Compliance Checklist
- Identify every form of additional compensation paid to non-exempt employees: bonuses, commissions, differentials, stipends, and prizes. Assess each one against the eight statutory exclusions in FLSA Section 7(e) before excluding it from the regular rate.
- Audit bonus plan documents. If criteria are announced in advance or tied to productivity, attendance, or performance, the bonus is almost certainly non-discretionary.
- Confirm your payroll system evaluates overtime on a per-workweek basis, not a per-pay-period basis, regardless of whether your pay frequency is weekly, biweekly, or semi-monthly.
- Review any employees paid at two different rates in the same workweek. Confirm your system uses the weighted-average method unless a valid prior written agreement elects the rate-in-effect method under FLSA Section 7(g)(2).
- Verify the regular-rate formula applied to salaried non-exempt employees. Confirm whether the salary is intended to cover all hours worked or a fixed number, and apply the correct divisor.
- Review flat-rate remote-work and equipment stipends paid to non-exempt employees. Confirm they are either reimbursing documented actual expenses or are included in the regular rate.
- Ensure your payroll system is configured to separately track and report qualified overtime for Box 12 code TT on 2026 Forms W-2, as required for the overtime tax deduction introduced under federal law.
FAQ
What is the regular rate of pay under the FLSA?
The regular rate of pay is the hourly rate used as the base for overtime calculations under the Fair Labor Standards Act (FLSA). It is not simply an employee’s stated hourly wage. Per 29 C.F.R. § 778.109, the regular rate is calculated by dividing total remuneration for employment in a workweek—excluding only payments that fall within the eight statutory exclusions in FLSA Section 7(e)—by the total number of hours actually worked that week. Non-discretionary bonuses, commissions, shift differentials, and most supplemental pay must be included before the rate is finalized.
Do non-discretionary bonuses always have to be included in the regular rate for overtime?
Yes. A bonus that does not meet all three criteria for a discretionary bonus under FLSA Section 7(e)(3) must be included in the regular rate. The criteria are: (1) both the fact of payment and the amount are determined solely by the employer; (2) the determination is made at or near the end of the work period; and (3) there is no prior contract, agreement, or promise that caused employees to expect the payment. Bonuses tied to attendance, productivity, safety records, or other pre-announced criteria fail this test. The DOL reaffirmed this in Opinion Letter FLSA2026-2, issued January 5, 2026.
Can overtime be calculated over a two-week pay period instead of by workweek?
No. The FLSA requires overtime to be evaluated on a workweek-by-workweek basis. A workweek is a fixed, regularly recurring period of 168 hours (seven consecutive 24-hour periods). Hours cannot be averaged across two weeks to reduce overtime obligations, regardless of an employer’s pay-period schedule. An employee who works 50 hours in week one and 30 in week two is owed 10 hours of overtime for week one, even if the biweekly total is exactly 80 hours.
What is the current federal overtime salary threshold in 2026?
As of 2026, the federal salary threshold for the executive, administrative, and professional (EAP) white-collar exemptions is $684 per week ($35,568 annually). The threshold for highly compensated employees is $107,432 annually. The DOL published a technical amendment on May 15, 2026, formally restoring these 2019-era figures after the 2024 rule that would have raised the threshold to $1,128 per week was vacated by federal courts. Earning above these thresholds is necessary but not sufficient for exemption—employees must also satisfy the applicable duties test. Several states, including California, Washington, Colorado, and New York, maintain higher thresholds that supersede the federal level for employers operating in those jurisdictions.
This article is provided for general informational purposes only and does not constitute legal, tax, or accounting advice. FLSA requirements are fact-specific, and the rules governing the regular rate of pay are subject to regulatory updates, court decisions, and state-law variations. Payroll professionals and employers should verify current figures against guidance from the U.S. Department of Labor’s Wage and Hour Division (dol.gov/agencies/whd) and consult a qualified employment law attorney before making decisions based on this content.