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FEDERAL APPELLATE COURT WEIGHS IN ON REGULAR RATE OF PAY CALCULATION UNDER THE FLSA

The U.S. Court of Appeals for the Seventh Circuit (covering Illinois, Indiana, and Wisconsin) has issued a wage and hour decision affirming a dismissal for an employer in a class action arising out of its alleged failure to pay overtime in violation of the Fair Labor Standards Act (FLSA).

In Nichole Lutz v. Froedtert Health Inc., Lutz filed suit alleging that her employer violated the FLSA on two grounds. First, she argued that Froedtert Health failed to properly include shift differentials, premiums, and other types of nondiscretionary pay when calculating employees’ regular rate of pay in determining overtime compensation owed. Second, Lutz claimed that Froedtert Health wrongfully excluded holiday pay from the regular rate calculation.

The Calculation of Overtime Compensation.
The FLSA requires that employees receive overtime pay for any hours worked beyond 40 hours in a workweek that is 1.5 times their “regular rate.” Froedtert Health calculated its employees’ regular rate by dividing each employee’s total weekly remuneration—including shift differentials and certain bonuses and premiums—by the total number of hours worked during that week (including overtime hours). It then multiplied the total number of overtime hours worked by 0.5 times the regular rate to determine the overtime premium amount owed to employees, which Froedtert Health paid in addition to any remuneration that employees earned during those hours. Lutz challenged this approach, arguing on appeal that employers should segregate non-overtime hours from overtime hours and separately calculate an employee’s total overtime pay by multiplying the number of overtime hours worked by 1.5 times the regular rate, regardless of the remuneration the employee would have earned during those hours absent the overtime designation. The Seventh Circuit rejected Lutz’s argument and held that Froedtert Health’s methodology complied with the FLSA. According to the court, the appropriate approach for calculating the “regular rate of pay” is to use all remuneration earned by the employee during the workweek (minus statutory exclusions) and then use that rate to calculate the amount of overtime premium pay owed to the employee—not the employee’s total overtime pay. The court emphasized that this “aggregate” methodology is most consistent with the text of the FLSA, U.S. DOL regulations, and cases from other courts.

Exclusion of Holiday Premiums from the Regular Rate of Pay.
The court further held that Froedtert Health properly excluded holiday premium pay when calculating its employees’ regular rate. Under the FLSA, “extra compensation provided by a premium rate” for holidays may be excluded from the regular rate calculation if the total premium rate is at least 1.5 times the “bona fide rate” for similar work performed during the regular workweek on other days. The court held that Froedtert Health properly excluded the holiday premiums from its calculation of the regular rate because the total pay rate for holidays was greater than 1.5 times the employees’ bona fide rates.

BACKGROUND CHECK AUTHORIZATIONS AND PROCESS

For employers that use third-party background checks, the legal risk often lies less in the substance of the report and more in the process employed to obtain and use it. The Fair Credit Reporting Act (FCRA) requires an employer to take specific steps before it may procure a consumer report for employment purposes and before it may take adverse action based on that report.
FCRA Disclosure, Authorization, and Timing Requirements for Employment Background Checks.
On the front end, the FCRA requires a “clear and conspicuous” written disclosure, in a stand-alone document, that a consumer report may be obtained for employment purposes. The FCRA also demands that the applicant or employee provide written authorization for such report. The disclosure and authorization should not be buried in the employment application. Lean, vetted forms are usually the safest course. Required disclosures should be provided, and authorizations obtained, before ordering a background check.
Pre-Adverse and Adverse Action Process Under the FCRA.
The adverse action process poses further risk. If information in a background report may lead to an adverse decision—such as rescinding a conditional offer or declining to hire—the employer usually cannot move straight to the final decision. Generally, it must first provide the applicant or employee with a pre-adverse action notice, along with a copy of the report and a summary of FCRA rights. That step gives the applicant or employee a chance to review the report, flag possible inaccuracies, and provide context. Only after the employer has waited for the requisite amount of time and considered any applicant or employee response should it make a final decision. If the employer ultimately decides to take adverse action, it also generally must provide an adverse action notice to the applicant or employee.

TREASURY ISSUES GUIDANCE ON EMPLOYER TAX CREDIT FOR PAID FAMILY AND MEDICAL LEAVE

The U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (IRS) have released Notice 2026-28 (the “Notice”), which provides guidance on the employer tax credit for paid family and medical leave under the One Big Beautiful Bill Act (OBBBA). Public comments are due by October 16.

There are two ways an employer may calculate the tax credit: (i) the traditional “wage method,” which is a percentage of actual wages not in excess of the threshold that are paid during an employee’s family and medical leave or (ii) the “premium method,” which is a percentage of the premiums paid for family and medical leave insurance coverage.

The Notice focuses primarily on implementation of the new “premium method,” under which an eligible employer that maintains a paid family and medical leave insurance policy may elect to calculate the credit by reference to premiums paid or incurred for that policy rather than wages actually paid to employees during qualifying leave. The Notice’s central substantive approach is to make the premium method dependent on the existing wage method: a premium is creditable only to the extent it funds a benefit for which a credit would have been available under the wage method if the benefit had been paid directly.

Taxpayers may rely on the Notice for taxable years beginning after December 31, 2025, and before proposed regulations are issued.