By Elizabeth Arce and Jennifer Palagi

Law360 (June 3, 2020, 4:18 PM EDT )

Elizabeth Arce

Jennifer Palagi

Now that covered employers are providing paid leaves under the Families First Coronavirus Response Act, or FFCRA, employers are asking many questions about how to calculate pay for these leaves and are facing many challenges in doing so. The FFCRA requires certain employers to provide employees with emergency paid sick leave or expanded family and medical leave for specified reasons related to COVID-19, paid at the employee's average regular rate of pay.

As such, the FFCRA is forcing many public agencies to update their payment systems to adhere to regular-rate-of-pay calculations under the Fair Labor Standards Act. However, despite recent decisions from the U.S. Court of Appeals for the Ninth Circuit providing guidance on proper calculation, many public agencies are still relying on outdated payment systems, which can result in litigation from employees who catch the errors on their paychecks.

Not only must a public agency evaluate how it calculates the regular rate of pay to comply with the FLSA, but it must also do so in order to correctly pay employees exercising emergency paid sick leave and expanded family and medical leave rights, a concept far easier in theory than in practice.

Amount of Pay Under FFCRA

Employees taking emergency paid sick leave because they are subject to a federal, state, or local quarantine or isolation order related to COVID-19; are advised to self-quarantine related to COVID-19; or who are experiencing COVID-19 symptoms and are seeking a medical diagnosis, are entitled to up to two weeks of pay at either their regular rate or the applicable minimum wage, whichever is higher, up to $511 per day and $5,110 in the aggregate.

Employees taking emergency paid sick leave to care for an individual subject to federal, state, or local quarantine or isolation order; to care for an individual in self-quarantine; or to care for a child whose school or place of care is closed, or child care provider is unavailable, for reasons related to COVID-19, are entitled to up to two weeks of pay at two-thirds their regular rate or two-thirds the applicable minimum wage, whichever is higher, up to $200 per day and $2,000 in the aggregate.

The first two weeks of expanded family and medical leave is unpaid. However, an employee may take emergency paid sick leave for the first two weeks of that leave period. For the following 10 weeks, employees taking expanded family and medical leave to care for a child whose school or place of care is closed, or child care provider is unavailable, for reasons related to COVID-19, are entitled to pay at two-thirds their regular rate or two-thirds the applicable minimum wage, whichever is higher, up to $200 per day and $10,000 in the aggregate, over a 10-week period.

Calculation of the FLSA Regular Rate of Pay

The first step in calculating compensation under the FFCRA is to figure out the regular rate of pay. The FFCRA utilizes the regular rate of pay as that term is defined under Section 7(e) of the FLSA. 

Under the FLSA, all compensation that is remuneration for employment must be included in the regular rate unless it falls within one of several statutory exceptions. The regular rate of pay is not to be confused with the base hourly rate or salary and must include all requisite bonuses, add-on pays and special pays in the overtime calculation. Determination of the regular rate of pay is a two-step process.

Step one, which can be a landmine for public agencies, is identifying all various items of compensation provided to an employee for his or her services to the employer to include in the regular rate of pay. Compliance with this federal mandate is complicated by the fact that public agencies generally provide many different types of add-on or special pay items that must be included in the overtime calculation process.

In recent years, there has been an uptick in FLSA regular-rate-of-pay litigation, in part, because of the employers' failure to include requisite pays in the regular rate compounded by outdated payroll systems and, in part, because employers face strict liability for violations, meaning no defense for honest or unintentional mistakes. Good faith can be a defense to avoid certain penalties, such as liquidated damages, but it is not a defense to the underlying wage, back pay and attorney fees awarded under the statute.

Case law illustrates the hazards for agencies in calculating the regular rate of pay. For, example, in Flores v. City of San Gabriel in 2016,[1] the Ninth Circuit held on an issue of first impression that cash payments to police officers made in lieu of health benefits must be included in the regular rate for overtime purposes under the FLSA, and that under some circumstances, health plan payments made on behalf of employees must also be included.

Generally, pay that makes employees smarter, stronger and more productive are included in the regular rate, including but not limited to: shift differentials, education and other incentive pays, standby pay, and bilingual pay. Examples of pay excluded in the regular rate include, but are not limited to, discretionary bonuses, payments for time not worked (vacation, holiday, sick leave) and reasonable expenses.

Step two, which can also present challenges for public agencies, is to calculate an employee's regular hourly rate of pay, which is determined by dividing an employee's total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by the employee in that workweek for which such compensation was paid.[2] Employers and employees are not free to define or agree upon the employee's FLSA regular rate of pay. However, employers and employees are free to agree to pay more than the FLSA requires, which may offset any FLSA liability. 

In a Ninth Circuit case from January, Wallace v. City of San Jose, firefighters who were paid more than required by the FLSA failed to prove allegations that they were underpaid for nearly six months.[3] Specifically, the firefighters alleged that the city miscalculated its FLSA overtime liability and in turn, underpaid them.

San Jose adopted a 28-day work period for purposes of calculating overtime under the FLSA, which public agencies employing firefighters are allowed to do. This meant that the firefighters were entitled to FLSA overtime pay for each hour worked over 212.

However, pursuant to a collective bargaining agreement, the firefighters were paid a base amount for 224 hours per work period, regardless of whether they actually worked this full amount of time, and were also paid contractual overtime at a time-and-a-half rate for each additional hour worked. The Ninth Circuit concluded that the firefighters were paid more than was legally required, so San Jose had no liability under the FLSA.

The Flores and Wallace decisions highlight the importance of correctly identifying all forms of compensation to be included in the regular rate of pay and to develop a system for performing a dual calculation where employers can compare the amount an employee is paid under collective bargaining agreements with the amount the employee is required to be paid under the FLSA. 

Applying the Regular Rate of Pay to FFCRA Leave

The second step in calculating compensation under the FFCRA is to determine the employee's average regular rate for each hour of emergency paid sick leave or expanded family and medical leave taken.

According to the U.S. Department of Labor's FFCRA regulations, the pay rate for an employee's FFCRA leave is the average of the employee's regular rate over a period of up to six months prior to the date the employee takes the leave. If the employee has not worked for the employer for at least six months, the regular rate used to calculate any FFCRA paid leave is the average of the employee's regular rate of pay for each week the employee has worked for the employer. 

If during the past six months, an agency pays an employee exclusively through a fixed hourly wage or a salary equivalent, the average regular rate would simply equal the hourly wage or the hourly equivalent of their salary. However, if an employee is paid through a different compensation arrangement (such as piece rate) or received other types of payments (such as nondiscretionary bonuses or incentive pays), his or her regular rate may fluctuate week to week, and an agency may compute the average regular rate using these steps.

For hourly employees, first, an agency must calculate the employee's nonexcludable remuneration for each full workweek during the six-month period. Second, the agency must compute the number of hours the employee actually worked for each full workweek during the six-month period, which do not include hours when the employee took leave.

Third, the agency must divide the sum of all nonexcludable remuneration received over the six-month period by the sum of all countable hours worked in that same time period. The result is the average regular rate.

For salaried employees, the employee's regular rate is computed by dividing the salary, with any additional remuneration earned, during the six-month period by the number of hours, which the salary is intended to compensate over the six-month period.

Once the hourly regular rate of pay is determined, the agency must pay an employee for each FFCRA leave hour taken at the regular rate up to the daily/aggregate maximums set forth above.

Based on the FFCRA requirement to pay leaves at the employee's regular rate of pay, now is the time for agencies to take a close look at their policies, practices and payroll systems to ensure they are in strict compliance with the FLSA. An essential preventive tool for agencies is an FLSA audit that can identify potential issues and resolve compliance concerns under both the FLSA and FFCRA. Indeed, it is only through a comprehensive analysis into an agency's payroll practices for FLSA and FFCRA compliance that an agency can properly navigate through those legal requirements.

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Elizabeth T. Arce is a partner and Jennifer K. Palagi is an associate at Liebert Cassidy Whitmore.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Flores v. City of San Gabriel , 824 F.3d 890 (9th Cir. 2016).

[2] 29 C.F.R. § 778.109.

[3] Wallace v. City of San Jose , No. 18-16083 (9th Cir. Jan. 15, 2020).

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