How to Calculate Overtime Pay Correctly

11/02/2017 3:10pm

Written by: Andrew Dearing, Trailer Makers Insurance

The Fair Labor Standards Act (FLSA) is cracking down on employers who fail to pay their employees overtime in accordance with state and/or federal law. By using the following tips, you should be able to properly calculate overtime pay and when it’s required by law.

Let’s start with properly classifying your employees as exempt or non-exempt. The difference is that non-exempt employees are entitled to overtime compensation of 1.5X their regular rate. Job duties will primarily determine if the employee is exempt from overtime. However, even if you pay a non-exempt employee a salary, that does not make them exempt from overtime pay. If a non-exempt employee is paid a salary, the employer must convert their salary to a regular hourly rate to determine their overtime rate.

Regular rate of pay is based on hours worked. It does not include holiday, PTO/vacation time, or other fringe benefit payments such as gifts, discretionary bonuses, benefit plan contributions, or reimbursement for work-related expenses. It includes wages, commissions, non-discretionary bonuses, shift differentials, and some on-call payments.

To qualify as a discretionary bonus, the amount of the payment must be determined within the sole discretion of management. A key to maintaining the discretionary status of a bonus is to vary the bonus amounts to coincide with company performance. Paying a discretionary bonus that is regularly paid each year is not advised as it may lose its discretionary status if the employees come to expect the payments.

Conversely, a non-discretionary bonus would include: production bonuses, retention bonus, attendance bonus, quality assurance bonuses, cost of living bonus or a bonus that is intended to attract employees to an isolated or less desirable job or job site. The easiest way to spot a non-discretionary bonus is if it is tied to some type of metric. If it is, it must be included within the regular rate of pay and will then increase the amount of overtime pay that will be owed.

Another important item is compensable time or hours. The FLSA has a continuous workday principle where all hours between the beginning and the end of the workday must be paid. It includes ANY hours the employer has required work or the employee has been allowed to work. This includes the putting on and taking off protective gear and uniforms, pre-and-post work activities, travel time, call time, training and testing.

Non-exempt employees must record all hours worked daily. Employers should ensure accuracy of these records by having the employee sign their time records or any changes made. Train your managers and employees to understand “off the clock” and to recognize what are recordable working hours. By having your pay practices in writing and having them signed off by the employee, the employee will understand the policy and will report any errors immediately.

So, how do you pay overtime? Overtime must be calculated on a workweek basis defined by a fixed, regularly occurring, 7-day period (or 168 hours). You cannot average hours over a period of two weeks or more. Even if your company pays bi-weekly or semi-monthly, calculate overtime by the 7-day workweek. Employees can be paid on a piece rate, commission, or some other basis, but all earnings must be converted to an hourly rate (a.k.a. the regular rate).

Let’s say John makes $12/hour. He works 56 hours in a workweek and earns $50 in commission (or bonus). Let’s look at the math:

  • Straight time (ST) compensation is 56 hours x $12 an hour + $50 bonus = $722 (total ST compensation)
  • $722 (ST)/ 56 hours worked = $12.89 (regular rate)
  • $12.89 (regular rate) x ½ = $6.45 (half-time premium)
  • $12.89 (regular rate) + $6.45 (half-time premium) = $19.34 (overtime rate)
  • 40 hours straight time x $12.89 (regular rate) = $515.60 (ST earnings)
  • 16 overtime hours x $19.34 (OT rate) = $309.44 (OT earnings)
  • $515.60 (ST earnings) + $309.44 (OT earnings) = $825.04 (total weekly earnings)

Here’s another example. To attract manufacturing candidates, you give them a $2,000 bonus after 6 months. This would be a non-discretionary bonus, so it must factor into the regular hourly rate of pay. Let’s also say that this is a deferred bonus that will be paid out over a series of pay periods.

A retention bonus was earned over 6 months of 26 weeks for a weekly equivalent of $76.92 ($2000/26 weeks). If the employee worked OT during the 26-week period, the increase in the regular rate is calculated by dividing $76.92 by the total hours worked during the overtime week. If the employee worked 10 hours of overtime in their 9th week, the employee would be due an additional $7.70 of overtime.

Wage and hour violations are the number one litigated employment law topic. Additionally, the Department of Labor was given extra money as an initiative to crack down violations. They now target five industries: Manufacturing, Hospitality & Food Services, Healthcare & Social Assistance and Retail. If you are in one of them, you are at a higher risk of audit and having to pay fines if you are not compliant.

Failure to follow these rules can result in fines and damages, including back pay for up to three years for unpaid wages and overtime owed but not paid, liquidated damages, attorney’s fees and court costs. In addition, wage and hour violations can result in personal liability to the owners and decision makers who violated the law. Lastly, most insurance policies do not pay for any of the damages associated with violating wage and hour law.

Disclaimer: The information provided in this article is for informational purposes only and not for providing legal advice. Use of and access to this article do not create an attorney-client relationship between Trailer Makers Insurance and the user or browser.