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DOL wage investigation highlights dangers of day rate

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Rodney L. Bean Rodney L. Bean
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Rodney L. Bean is a member of Steptoe & Johnson's Morgantown office. 

If you work in the shale gas industry, be prepared for the possibility that you might get some extra attention over the next few years from United States Department of Labor inspectors. The DOL is conducting a multi-year enforcement initiative focused on, among other things, wage violations in what it calls the "fracking industry." 

One of the wage and hour problems common to the industry involves calculation of workers' pay based on a "day rate." Although federal law allows payment of non-exempt employees based on a day rate, the problem is that many employers who are using day rate are inadvertently underpaying overtime. 

The Fair Labor Standards Act — the federal law that governs the payment of wages — specifically allows employers to pay employees an agreed-upon fixed rate for a day's work without regard to the number of hours worked in the day. As long as the day rate keeps the employee at or above minimum wage, this form of day rate compensation is permissible. 

But paying employees on a day rate basis does not dissolve the employer's obligation to track employees' working time and pay them the appropriate overtime premium. You still must track each employee's hours, calculate his or her "regular rate" for the work week and pay him or her overtime for each hour beyond 40 that he or she works in a work week. The employee is entitled to extra half-time pay at his or her regular rate for all hours he or she worked in excess of 40 in the work week. It is this overtime requirement that often trips up employers who use day rate to compensate workers.

Calculation of overtime for a day rate employee is a little different than for a normal worker paid on an hourly basis. If a day rate employee receives no other compensation for his or her services, his or her regular hourly rate for purposes of overtime is determined by totaling all the sums received in the work week at the day rate and dividing by the total hours actually worked. 

For example, let's say that an employee works a 50-hour week over five days, and his day rate compensation is $352 per day. His total straight-time compensation for the week would be $1,760 ($352 x 5). His regular rate for the week would be $35.20 per hour ($1,760 divided by 50). He would then be entitled to overtime at the half-time rate for the 10 hours he worked beyond 40 in the workweek ($35.20/2 x 10 = $176). His total compensation for the week including the overtime premium would be $1,936 ($1,760 + $176).

Often, improper use of day rate doesn't come to light immediately because workers are accustomed to being paid in this way, or are happy with their wages, or are just so busy that they don't have time to think about it. But the rash of FLSA lawsuits and DOL investigations have brought this issue into the public eye, and the large damages often available in such cases have caught the attention of plaintiffs' lawyers, particularly in the areas of the country where the shale plays are happening. 

Damages in these claims can be enough to shutter a company, and there often are very few defenses to be raised. The best time to audit your pay practices and make sure you're paying employees correctly is before the DOL investigator calls.