Make Sure Overtime is Calculated Correctly
By Nicole L. Stangl
August 17, 2022
The Fair Labor Standards Act provides an employee should receive compensation for overtime hours at a rate “not less than one and one-half times the regular rate at which he is employed.” 29 U.S.C. § 207(a)(1). This is a well-known principle by employers and employees alike. However, “regular rate” is not the same as the employee’s “hourly rate.”
Regular rate
Regular rate is defined to include all remuneration for employment paid to the employee by the employer. The regular rate calculation for a work week is total compensation ÷ total hours worked. The total compensation calculation must include all forms of “remuneration” (anything given to the employee that is of value) unless the remuneration fits in the identified exclusions in the statute.
Calculating overtime
Step one: Classifying compensation
The first step in ensuring overtime is being paid correctly is to determine whether types of compensation given to an employee are excludable or not. Forms of compensation that can be excluded are:
1. Premium pay for hours worked in excess of daily or weekly standard.
2. Premium pay for work on Saturdays, Sundays or other special days.
3. Premium pay for hours worked outside of normal start or end time.
4. Discretionary bonuses.
5. Gifts.
6. Contributions to employee benefit plans.
7. Payment when no work is performed (i.e., vacation, holiday, illness).
8. Reimbursement for business expenses.
Exclusions under the regulation are extremely technical, and in order to exclude a type of compensation from the calculation, the statutory elements must be met.
For example, in order to exclude premium pay for work on Saturdays and Sundays the premium pay must be at least one and one-half times the employee’s rate of pay. If the premium pay does not meet that threshold, then it must be included in the calculation.
Another example of the technical distinctions is the difference between a discretionary and non-discretionary bonus. The distinction is important because non-discretionary bonuses must be included in the calculation whereas a discretionary bonus can be excluded. If the existence of the bonus and the amount of the bonus are determined at the sole discretion of the employer and not pursuant to a contract, agreement, or promise, then the bonus may be considered discretionary and excludable from the regular rate calculation.
Often the structure of a bonus (i.e. the existence of a claw-back provision) affects the excludability of the bonus from the regular rate calculation.
Step two: Overtime calculation—Workweek
Once an employer has determined what compensation must be included, an employer can properly calculate regular rate in the weeks an employee works overtime.
If an employee does not earn any additional compensation in the workweek, then the regular rate will be equal to the hourly rate. However, if the employee received extra non-excludable compensation, for example, an attendance bonus for the week, then the regular rate calculation is required to determine the correct regular rate and overtime owed to the employee.
The regulations provide an example:
Employee A:
- Hourly rate: $12/hour.
- Extra compensation: $46 attendance bonus for the week.
- Employee worked a total of 46 hours [40 hours regular and 6 OT hours]
Employee’s regular rate for the week is $13/hour.
(46 hours x $12/hour) + 46 = $598 (total compensation).
$598 ÷ 46 hours = $13/hour.
Thus, the “employee is then entitled to be paid a total wage of $637 for 46 hours (46 hours at $13 plus 6 hours at $6.50, or 40 hours at $13 plus 6 hours at $19.50).” 29 CFR § 778.110
Step three: Overtime Calculation – Monthly, Quarterly, Annual Bonuses
An employee may receive a bonus that was earned over a period of time (i.e., a month, a quarter, or even a year). In that case, at the time of the bonus, the employer must calculate the applicable overtime premium also due to the employee.
To determine the overtime premium due, the bonus must be apportioned over the period in which it was earned. For example, a bonus that was earned over a four-week period would be apportioned evenly over each week. Sometimes, a bonus cannot be easily apportioned over workweeks. In those cases, the bonus can be apportioned in some other reasonable manner (i.e., apportioning it over the hours worked in the period).
Once the bonus is apportioned, the employer must determine what is due to the employee as extra OT premium based on the bonus. The employee should be paid that extra premium at the time the bonus is paid.
Conclusion
The implications of regular rate on other compensation structure is also addressed by the FLSA. The calculation may be affected by many types of common compensation/incentives. Employers should evaluate pay practices to ensure employees are paid properly for overtime hours worked.
© 2022 The Business News, Wausau, WI. Reprinted with permission.
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