Paying Employees Different Hourly Rates for Different Types of Work; Is it Legal?

In today’s business and regulatory environment, employees are sometimes asked to perform different tasks and job functions, which would normally be compensated at different rates, during the same workweek. For instance, there are times when employees may perform non-production tasks (such as inventory, back office operations, or maintenance) that are typically classified as a different job and compensated differently than tasks performed in a front-line production capacity. Additionally, it is often necessary to send employees to mandatory training or to ask employees to travel, both of which affect the employees’ profitability and production capability. Finally, what about employees who work undesirable hours or accept the risk of certain hazards when performing their jobs? When employees perform different tasks that are compensated at different rates, employers often ask – can I pay the same employee different hourly rates during the same pay period? The short answer is yes, but the employer must pay close attention to the specific situation of the particular employee to ensure compliance with applicable law and to avoid potential liability to the employee.

Other than certain limited exceptions (e.g., outside salespeople, some agricultural workers, etc.), federal law requires that employers pay all employees a minimum hourly wage (currently $7.25). Each state is also free to impose its own minimum wage, and some cities and counties have passed “living wage” laws, which may set an even higher minimum wage. As an employer, you must pay your employees whichever amount is highest regardless of whether you pay a salary, commission, wages plus tips, or piece rate (although the method of calculation may differ based on payment methodology). Provided that all employees are paid at least minimum wage, an employer is free to pay different hourly rates for different work that may be performed in the same pay period. An employer must first confirm that the employee is truly performing tasks that are different than the employee’s “normal” job classification. Assuming that the employee is truly performing different tasks, the employer is permitted to compensate the employee at different rates so long as the employee is paid at least minimum wage for all work.

The second issue that arises concerns how the employee’s overtime pay is calculated where the employee has worked at different rates during the pay period. Federal law typically requires overtime pay based on 1.5 times the employee’s “regular rate of pay.” Where an employee is performing different tasks at different rates of pay, the employer must first determine if the employee must be paid overtime at all, which requires an analysis of the employee’s primary job function (employees in an executive, administrative, or professional capacity may not require overtime pay). If the employee is covered by the federal overtime laws, then the employer must pay the employee at the overtime rate for any hours in excess of 40 hours worked per week (again, the employer must ensure that applicable state or local laws do not afford the employee with greater protections). While this is easy with a single rate of pay, the calculation can become more complicated if the employee has worked at more than one rate of pay.

Typically, under federal law (29 C.F.R. §778.115), the employee’s “regular rate of pay” when he works two jobs is calculated as the weighted average of the different rates of pay. For example, the regular rate of an employee who works 35 hours per week at $15 per hour as a drywall hanger ($525) and 10 hours that same week at $7 per hour mopping floors inside the warehouse ($70) is the total wages ($595) divided by total hours worked (45) is $13.22 per hour. The overtime rate for the pay period is therefore $19.83 ($13.22 times 1.5) for each hour over 40 that is worked regardless of which job the employee performs during the extra hours. Alternatively, federal law allows the employer and employee to agree, before the work is performed, that the overtime rate will be based on the regular rate that applies to the type of work performed during the hours in excess of forty (see 29 C.F.R. §778.419(a)). If in the above example the parties agreed as to the rate and the drywall hanger spent all hours in excess of 40 hours mopping the warehouse floors, the overtime rate would be $10.50 ($7 times 1.5). If he spent all additional hours hanging drywall, the overtime rate would be $22.50 ($15 times 1.5).

Employers who violate federal minimum wage and overtime laws may be liable for penalties up to triple the amount wrongfully withheld from the employee in addition to other potential liability, so a prudent employer will consult with an attorney or risk management professional to ensure compliance with all federal, state, and local laws. As discussed above, minimum wage and overtime laws may vary from state-to-state. Finally, notwithstanding the foregoing, care should be taken to ensure the employer complies with ERISA and other regulations governing pensions and benefits that may be affected by compensating an employee at different rates.

By Matthew A. Klopp, Shareholder