The Riddle of Overtime: Hourly vs. Regular Rate of Pay

Before we start: We promised to keep our blogs short and entertaining. This one is neither.

I’ve never worked with an employer who doesn’t want to pay their employees properly.  But still, we find that many employers still do not understand the rules on hourly pay and overtime. Worse, they heavily rely on payroll companies and bookkeepers who are not getting it right, either.

So with that in mind, did you know…?
If you pay an outcome-based bonus to an employee, and that employee works overtime during the bonus period, the bonus increases the overtime rate of pay (wage) you owe the employee.

My guess is that there are at least a few of you now running off to check the legitimacy of that information. But trust me, it’s true.

Which of course leads to this next question:  “You mean I have to go back and pay more money to that employee who worked four hours of overtime in week 2 of last month?

The answer, according the government, is a resounding yes!

Now, riddle me this: Overtime means 1.5 x the hourly rate, right?

If you answered yes, then no HR cookie for you!

Overtime is actually 1.5 times an employee’s regular rate of pay for hours worked in excess of 40 hours in a workweek.

Ok, so what’s regular rate of pay, and how does it differ from hourly?

Short answer: Hourly means just that. But Regular Rate includes the hourly rate PLUS all other forms of compensation added up, then divided by the number of hours actually worked.

I’ve included the equation below to determine an employee’s regular rate of pay:

Step 1: Total weekly pay = Base hourly wages + additional compensation

Step 2: Regular rate of pay = Total weekly pay ÷ hours worked

Never heard that regular rate of pay may not be the same as hourly rate? Don’t feel bad. Nine out of 10 business owners and managers are also not aware of the difference.

When regular and hourly rates of pay are the same:

An employee works for McDonald’s and is paid $9/hour. There are no bonuses or commissions paid to this employee. Therefore, his regular and hourly rates of pay are always the same.  There is no extra math. All time worked that exceeds 40 hours in a week is 1.5 x $9/hour.

Typical misunderstandings:

I pay my hygienist a commission on what she produces, and therefore I don’t have to worry about overtime or tracking hours.

If this employee works overtime, this presents two wage violations you may be falling victim to: failure to track hours of an hourly employee, and failure to accurately calculate and pay the overtime due to a commissioned employee. Both are big no-no’s!

I’ve been directed to call my bonuses and other incentive systems “discretionary.” Therefore they don’t count towards the base rate of pay.

It’s important to understand the difference between outcome-based bonuses and discretionary bonuses. Discretionary bonuses are those that are not based on an outcome, such as Christmas bonuses, because they are based on no particular criteria and of an undetermined amount. Simply put, they are at the discretion of the business owner.  Outcome-based bonuses are those that are based on sets of goals or outcomes, such as an increase in profit, number of new patients, sales, and internal referrals. These types of bonuses are actually considered wages and are factored into wages paid.

The same holds true for commissions, which are wages based on outcomes by agreement and are promises of additional wages. In both instances, the additional amount for either a bonus or a commission affects overtime calculations.

Example 1:

A hygienist works 46 hours (6 hours of overtime). Her compensation is 33% of net production and she generates $3800.00 in net production for the week.

33% of $3800.00 = $1254.00 (earned income)

$1254.00/46 hours = $27.26 per hour, which is her regular rate of pay.

The next part gets a little tricky, but bear with me. Remember that time and a half for all hours worked over 40 is owed for overtime. Since you’ve already paid the employee $27.26 for the 6 hours of overtime, the only thing left is the half time.

$27.26/2 = $13.63 per hour. Since the employee worked 6 hours of overtime, you owe an additional $13.63 x 6 hours = $81.78. So added together, you owe the hygienist $1254.00 + $81.78.

Example 2:

A front office associate works 46 hours (6 hours overtime).  Her compensation is $12/hour and she earns an $80 dollar bonus for that week.

$12.00 x 46 (hours) = $552.00

$80.00 bonus + $552.00 hourly wage = $632.00 (earned income)

$632.00/46 (hours) = $13.73 per hour (regular rate)

$13.74, not $12.00, is the employee’s regular rate of pay used to determine the amount owed for overtime.

$13.74/2 = $6.87 per hour. Since the employee worked 6 hours of overtime, you owe an additional $6.86 x 6 (hours), which is an additional $41.22. So that ends up as $552.00 + $41.22 = $593.22.

You’re probably thinking:

You mean I have to go back and recalculate what I owe anyone that worked overtime once they earn the commission or bonus?

Or

What! You mean I have pay overtime to them even though they are getting a day rate and commissions?

The answer to both is yes.

You may also be thinking that all hygienists or other highly paid professionals automatically fall under the professional exemption for overtime. But that’s not always true. Here’s more on that.

In short, it’s important to determine the difference between regular and hourly rates of pay because otherwise it could turn into a real mess when payday rolls around. CEDR can help prevent headaches for you and your employees in these matters – just contact us at 866-414-6056.

Friendly Disclaimer: This article is general education and guidance and is not a substitution for legal advice. Employment issues are complicated and often require specific expert or legal guidance based on the circumstances.