Good Deeds Unpunished - The Fair Labor Standards Act and the Regular Rate

One of my mentors used to say that when it comes to paying employees in compliance with the Fair Labor Standards Act (FLSA), no good deed goes unpunished. That may be exactly how technology giant Apple felt after it awarded restricted stock units (RSUs), a future right to receive shares, to employees, and some of them then turned around filed a lawsuit seeking additional overtime pay as a consequence of being awarded the RSUs. But my mentor was overly pessimistic, and Apple prevailed in the lawsuit.

Let's start at the beginning: One of the most basic requirements of the FLSA (29 U.S.C. § 201 et seq.) is that non-exempt employees be paid one-and-one-half their regular rate for all hours worked in excess of 40 hours in a workweek. But what is an employee's “regular rate”? If the employee receives a fixed hourly wage and nothing more, the answer is obvious—the regular rate is the employee's hourly wage. For example, if an employee is paid $20 per hour for each hour worked and receives no other compensation, that employee's regular rate is $20 per hour. In such a case, the employee's overtime rate will be 1.5 x $20 per hour, or $30 for each hour after the 40th hour worked.

Calculating the regular rate becomes more complicated when employees receive additional compensation, such as a bonus or commissions. Unless an exception applies, additional compensation must be factored back into the employee's hourly pay to determine a new regular rate for the employee. The example in the regulations (29 C.F.R. § 778.110) describes an employee paid $12 per hour who works 46 hours in one week and receives a production bonus of $46. That bonus equates to an additional dollar of straight-time pay for each hour worked, meaning that the “regular rate” used to calculate that employee's overtime pay in that specific workweek will not be $12 per hour, the employee's hourly wage, but $13 per hour. Therefore, for the six overtime hours worked, the employee's overtime rate should be $19.50 per hour (1.5 x $13 per hour) instead of $18 per hour (1.5 x $12 per hour). In effect, the employer must pay a second bonus—in this case, on top of the additional $1 per hour straight-time bonus that was already paid, an additional 50 cents for each of the six overtime hours, for a total of $3 more. The same principle applies, but the calculations get more complicated, if the bonus is not paid for one week's work, but for a month, a quarter, or a year. And if there are multiple employees, each with a different wage rate and a different number of hours worked, the calculation must be done for each employee and each separate workweek.

Certain payments may be excluded from the regular rate, such as when both the fact and amount of a bonus are discretionary (29 C.F.R. § 778.211), or when an employer gives an employee a gift for Christmas, birthday, or other special occasion, so long as the amounts are not measured by or directly dependent upon an employee's hours worked, production, or efficiency (29 C.F.R. § 778.212). 

In the Apple lawsuit, the employees asserted that the value of the RSUs needed to be factored retroactively into their hourly pay, thus bumping up their regular rate and the applicable overtime rate. Apple argued, however, that the RSUs were gifts, because Apple had no obligation to award them, and under the statute, gifts do not get factored into the regular rate. Apple also argued that RSUs should be treated like stock options, which are expressly excluded by the FLSA from the requirement to include additional compensation in the regular rate (29 U.S.C. § 207(e)(8)).

Apple prevailed with these two arguments. This result is notable, because the FLSA and its regulations do not address RSUs, which were not widely used when the relevant section of the FLSA was enacted. Rather, the court had to inquire into Congress' intent in excluding gifts and stock options from the regular rate and then decide that the same logic applies to RSUs. In doing so, the court accepted the testimony of an expert witness that companies “generally use both RSUs and stock options for the same purposes, including to encourage equity ownership among employees and to recruit and show appreciation for employees.” The court reached this conclusion despite acknowledging the general principle that the FLSA should be interpreted narrowly in favor of the employee.

Key takeaways for employers :

• Employers can take comfort that offering employees incentive compensation in the form of RSUs should not trigger additional past overtime pay.
• Calculating overtime premiums is not always straightforward, as many types of additional pay that employees receive in addition to their hourly wage may need to be factored into the calculation of overtime compensation.

Even if an employer has complied with the law, as Apple did, litigation to defend overtime calculations can be costly. As a practical matter, many employers end up paying substantial settlements even when they have calculated overtime correctly, to avoid the cost of litigation. 

The case is Francis Costa v. Apple, Inc., No. 23-cv-01353-WHO (N.D. Cal. June 11, 2026). 

If you are interested in learning more about how these issues may affect your business, please reach out to us.