In a recent decision, the Colorado Supreme Court reminded employers that state law often differs from federal law when it comes to properly paying employers. One such area involves calculating the regular rate of pay for purposes of determining overtime compensation owed to employees who work more than 40 hours in a workweek.
Under the Fair Labor Standards Act (FLSA), employers must pay non-exempt workers at a rate of no less than time and one-half the “regular rate of pay” for all hours worked over 40 hours in a workweek. The regular rate includes all renumeration an employee receives except for compensation falling within one of the eight examples set forth in 29 U.S.C. § 207(e)(1)-(8). See DOL Fact Sheet #56A: Overview of the Regular Rate of Pay Under the FLSA (Dec. 2019). An example of pay that may be excluded from the calculation is “extra compensation provided by a premium rate paid for work by the employee on Saturdays, Sundays, holidays, or regular days of rest, or on the sixth or seventh day of the workweek, where such premium rate is not less than one and one-half times the rate established in good faith for like work performed in nonovertime hours on other days.” 29 U.S.C. § 207(e)(6).
Many states, however, do not provide for such an express exclusion. Colorado is one such state, as reflected in the following wage-and-hour regulation:
The regular rate includes all compensation paid to an employee, including set hourly rates, shift differentials, minimum wage tip credits, non-discretionary bonuses, production bonuses, and commissions used for calculating hourly overtime rates for non-exempt employees. Business expenses, bona fide gifts, discretionary bonuses, employer investment contributions, vacation pay, holiday pay, sick leave, jury duty, or other pay for non-work hours may be excluded from regular rates.
7 Colo. Code Regs. § 1103-1.8.1 (emphases added).
In Case No. 24SA12, the Colorado Supreme Court was asked to answer the following certified question from the Tenth Circuit Court of Appeals (Case No. 23-1082): “Whether Colorado law includes or excludes holiday incentive pay from the calculation of ‘[r]egular rate of pay’ under 7 Colo. Code Regs. § 1103-1:1, secs 1.8 and 1.8.1.” The defendant-employer argued that additional compensation provided to workers for hours worked on holidays was not required to be included in the calculation under Colorado law because (1) it was a form of “holiday pay”—i.e., extra compensation for holiday work—under Colorado law; and (2) the FLSA regulations, 29 C.F.R. § 778.203(c), provide that such extra compensation for holiday work need not be included in the calculation of an employee’s regular rate of pay, and there was no indication that Colorado law intended to treat such premium pay differently.
The Colorado Supreme Court disagreed, finding that the defendant-employer should have included holiday incentive pay in the calculation of its employees’ regular rate of pay under Colorado law. The court held that the defendant-employer’s holiday incentive pay was a shift differential because it was tied to undesirable work hours and also that it was different from the exclusions set forth in the Colorado rule which are tied to non-work hours. Additionally, the court was not convinced that Colorado law and the FLSA should be harmoniously read. Instead, it provided an important reminder to employers that “states are free to provide employees with benefits that exceed those set out in the FLSA.”
In sum, Colorado is among a growing number of states (including California) that depart from the FLSA in multiple material respects, including with respect to how employees’ overtime pay should be calculated. Given the increase of claims alleging a failure to pay overtime wages, employers should be cognizant of the requirements in each state in which they operate and carefully evaluate whether they are properly calculating employee pay in each jurisdiction.
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