On January 12, 2024, the federal Tenth Circuit Court of Appeals asked the Colorado Supreme Court to clarify whether, under Colorado law, holiday incentive pay must be included when calculating an employee’s regular rate of pay. On September 9, 2024, the Colorado Supreme Court responded: yes, it must be included.
The Regular Rate of Pay
Employees who work more than forty hours per week must receive overtime pay at a rate that is 1.5 times their regular rate of pay. Some states also have daily overtime requirements; for example, in Colorado, employees who work more than 12 hours per workday or 12 consecutive hours must also receive overtime pay at 1.5 times their regular rate of pay.
Importantly, the regular rate of pay is not the same as the base hourly rate. The regular rate of pay is a calculation that incorporates non-overtime compensation received for work performed during a workweek.
For many reasons, calculating the regular rate of pay is complicated. One complication arises because federal requirements can differ from state requirements. The federal Fair Labor Standards Act (FLSA) sets minimum requirements upon which states can set their own more stringent requirements. So employers must ensure their regular rate of pay calculations comply with both federal and state requirements.
Case Background
Dan Hamilton worked for a Colorado employer. His employer offered him holiday pay at his base hourly rate, even when he did not work on a company holiday. If he worked on a company holiday, he received holiday pay and holiday incentive pay; the holiday incentive pay was compensated at 1.5 times Hamilton’s base hourly rate. In three instances, Hamilton earned holiday incentive pay in the same workweek that he worked overtime. In those three instances, Hamilton’s employer did not include the holiday incentive pay in its calculation of Hamilton’s regular rate of pay.
Hamilton filed a class action lawsuit, alleging that his employer violated the Colorado Wage Act because it did not include his holiday incentive pay in its regular rate of pay calculation.
Relevant Colorado and FLSA Requirements
The current Colorado Overtime Minimum Pay Standards Order (“COMPS Order”) states that the regular rate of pay calculation should include “all compensation paid to an employee,” such as hourly rates, shift differentials, non-discretionary bonuses, and commissions. It also states that payments for non-work hours, such as business expenses, gifts, vacation pay, and holiday pay, can be excluded from the regular rate of pay calculation.
The FLSA also states what must be included in the regular rate of pay calculation. It also has exceptions. Relevant to Hamilton’s lawsuit is an exception that can apply when employees work on “special days.” We don’t have space to detail the exception here. But, in general, the exception allows an employer to pay a premium of at least 1.5 times an employee’s base hourly rate when the employee works on a qualifying “special day.” When the employer does so, the employer does not need to include the premium pay in the regular rate of pay calculation.
Colorado’s Requirements Apply, Not the FLSA Exception
In Hamilton’s lawsuit, the employer argued that the FLSA exception should apply: they paid him at the “premium” of 1.5 times his base hourly rate, and he performed work on a “special” company holiday.
But the Colorado Supreme Court determined that the COMPS Order applied, not the FLSA exception. The COMPS Order requires all compensation to be included in the regular rate of pay calculation; because the holiday incentive pay was for time worked, it qualified as compensation that must be included in the calculation. Additionally, the holiday incentive pay is a shift differential—or a higher wage paid to an employee for working undesirable hours, like company holidays—and the COMPS Order specifically states that shift differentials must be included in the regular rate of pay calculation. Finally, although the FLSA provides an exception for “special day” premium payments, Colorado has no similar exception. Thus, the FLSA exception doesn’t apply under Colorado law.
Takeaway
The obvious takeaway is that the FLSA’s “special day” exception does not apply under Colorado law, and Colorado employers who rely on the exception should immediately review their pay practices.
But there are two other important takeaways. First, a wage and hour practice can be proper under federal law but be improper under state or local law. When implementing pay practices, be sure your company complies with all relevant requirements. Second, calculating the regular rate of pay is complicated, and it’s good practice to regularly review your pay practices with counsel. Just one small misclassification can create an expensive class action lawsuit; after all, Hamilton filed his lawsuit based on overtime underpayments during just three workweeks.
