Questions about overtime are some of the most common questions we get in the Solution Center. For good reason, too. Overtime is the number one area where the DOL (Department of Labor) hopes to catch you messing up. Messing up overtime is extremely easy to do, especially when you start adding in performance bonuses and differential pay rates. This week’s 2-Minute Trainer gives you just enough information to recognize that you might be getting it wrong. If you don’t know enough to fix it, keep the Solution Center number handy. We’ll help you get in compliance with as little pain as possible.
What you already know: The Fair Labor Standards Act (FLSA) requires all employers to pay overtime of 1 ½ times an employee’s “regular rate of pay” for hours worked in excess of 40 hours in a workweek. Depending on the state you’re in (e.g. California), the overtime rules can be even stricter. (Call CEDR at 866-414-6056 to find out about your state’s laws.)
What you might not know:
- A workweek must consist of 7 consecutive 24 hour periods/days. However, those 7 days do not need to coincide with the calendar week. We often recommend that companies adopt a Sunday through Saturday workweek. This breaks up the weekend in the event of mandatory weekend training events, and may also help you manage overtime.
- Employees CANNOT waive overtime and you cannot enforce a policy that says unauthorized overtime will not be paid. If they work it, you have to pay it. You can discipline them for working unauthorized overtime, but you still have to pay it.
What you likely don’t know and will wish you didn’t: What the DOL calls “the regular rate of pay” is probably not what you would think. An employee’s regular rate of pay actually includes all forms of compensation (not expressly exempted), including base hourly wage, non-discretionary bonuses, commissions, on-call pay, shift differentials, reasonable cost of meals, lodging, and cash benefit payments from Section 125 Cafeteria Plans. It does not include gifts, such as purely discretionary Christmas Bonuses or turkeys, vacation or sick pay.
If you’re multiplying the employee’s Base Hourly Wage by 1.5 to get the Overtime Rate, you may be getting the calculation wrong if you have a bonus or commission plan.
Calculating Overtime with Bonuses
To most of our clients, bonus pay is the big worry, for good reason. If bonus pay is at all tied to performance, it must be included in your overtime calculation. Here’s a formula to determine normal overtime rate of pay:
Step 1: Total weekly pay = Base hourly wages + additional compensation
Step 2: Regular rate of pay = Total weekly pay ÷ hours worked
Step 3: Overtime premium = Regular rate of pay x 0.5 x total overtime hours
Step 4: Total weekly compensation = Total weekly pay +overtime premium
NOTE: The Regular Rate of Pay is only used to calculate the correct Overtime Premium. It does not replace the employee’s Base Hourly Wage.
Sample Overtime Calculation with Bonus Policy
Sally receives $15/hour. Last week she worked 45 hours, and received a $500 bonus.
Total weekly pay: ($15 x 45 hours) + $500 bonus = $1,175
Regular rate of pay: $1,175 ÷ 45 hours = $26.11
Overtime premium: $26.11 x 0.5 x 5 overtime hours = $65.28
Adjusted Total Weekly Compensation: $1,175 + $65.28 = $1,240.28
Sample Overtime Calculation with Travel Pay or Different Pay Rates:
An employee works 50 hours in a week. 30 hours at $10/hour and 20 hours at $8/hour for training.
Total weekly pay: (30 x $10) + (20 x $8) = $460
Regular rate of pay: $460 ÷ 50 hours = $9.20
Overtime premium: $9.20 x 0.5 x 10 overtime hours = $46
Adjusted Total Weekly Compensation: $460 + $46 = $506
It’s Up to You
One of the most common denials we hear when an employer is charged with an overtime violation is: “But my accountant/bookkeeper/payroll company should have been taking care of this for me!”
While some do, you shouldn’t count on it. The ultimate responsibility for understanding, reporting, and paying overtime falls on you, not them. If the Department of Labor comes knocking, you are the one penalized – not them.
Also, try to limit the amount of overtime employees work by using progressive corrective action when they work overtime without authorization. However, NEVER EVER refuse to pay them for it if they work it.
Finally, most people go into overtime only when they go to required overnight training events. Once you start paying for employee’s expenses, tuition, and compensable travel and training time, adding overtime to that is just plain painful! The good news is that you can pay a lower rate of pay for travel and training, and this lower rate is also used to calculate overtime, so the regular rate of pay is actually lowered this time, to make the bite a bit easier to chew. The caveat is that you must inform the employee(s) of the lower rates in writing before the event starts.
Contact the CEDR Solution Center at 866.414.6056 for additional guidance in your state (especially California).
Now, go have a productive, lawsuit-free day!