Calculating Overtime Pay

Many employers find it difficult to accurately calculate overtime due to complex calculations  and changing regulations. The burden falls on the employer to properly classify an employee (as exempt or non-exempt) and provide compensation in compliance with the Fair Labor Standards Act (FLSA). According to the Wage and Hour Division of the Department of Labor, employers were fined $3.1 million in penalties for FLSA violations in 2008 and more than 197,000 employees received a total of $140.2 million in lawsuits regarding minimum wage and overtime back wages. The growth in employee lawsuits can also be observed in 2010; the number of FLSA lawsuits filed in federal courts in the second quarter of 2010 were 22 percent higher than in the first quarter of 2010.

Exempt vs. Non-Exempt

As determined by the FLSA, employees are placed in an either the exempt or the non-exempt category based on the employee’s job duties and responsibilities. The exemption refers to an employee’s eligibility to be paid overtime for hours worked over 40 in a workweek. If an employee is in the non-exempt category, the employee must be paid overtime, which is an additional one-half of an employee’s regular rate of pay for all hours worked over 40 in a workweek. Some states may have different and more stringent guidelines.

To help avoid penalties involved in calculating overtime, the FLSA recommends compliance with three key guidelines:(1) identify an employee’s regular rate of pay; (2) determine what activities count as hours worked; and (3) apply the FLSA definition of a workweek. Employers are encouraged to comply with these guidelines and retain documentation of compliance to serve as a good faith effort during a Department of Labor (DOL) audit.

Determine What Counts as Hour Worked

Hours worked include the entire time an employee is on duty, on company gorunds or at any other prescribed place of work. The time the employee is “permitted” to work as well as time the employee voluntarily stays late to finish work or comes in early counts as hours worked.

Apply the FLSA Definition of a Workweek

FLSA defines a workweek as a fixed and regularly recurring period of 168 hours, or seven consecutive 24-hour periods. The workweek can begin on any day of the week and at any hour of the day. The frequency of an employee’s pay (i.e. bi-weekly, semi-monthly, monthly) has no impact on determining the fixed workweek. When calculating overtime payment, each workweek must be analyzed individually; two or more workweeks cannot be combined. The workweek is determined by the employee’s start and stop times which remain fixed regardless of the hours the employee is scheduled to work. However, the start and stop times can be changed, as long as the change is intended to be permanent and complies with overtime requirements.

Identify an Employee’s Regular Rate of Pay     

An employee’s regular rate of pay is the weighted average of the employee’s hourly rate. To calculate calculate the rate of pay, divide the total pay for employment in a workweek by the total number of hours actually worked. Total pay is all payments made to or on behalf of the employee including shift differential, non-discretionary bonuses, promotional bonuses and cost-of-living adjustments. Payments made in the form of goods or facilities customarily provided by the employer are also included. For example, if an employee’s wages include lodging, the reasonable cost or the fair value of that lodging is added to the employee’s earning before determining his/her regular rate. However, deductions for board, lodging or similar facilities do not affect the regular rate of pay calculation; thus the calculation should be made before the deductions are made.

Statutory Exclusions

As per the FLSA, certain payments are excluded from the regular rate of pay. These exclusions include:

  • Payment for gifts for holidays, special occasions, or as a reward for service;
  • Payment made for occasional periods when no work is performed due to vacation, holiday, or failure of the employer to provide sufficient work;
  • Premium payments for overtime, or for working on weekends and holidays; and
  • Benefits for life insurance and health insurance.

 Four Steps to Calculating Total Weekly Compensation

  • Step 1: Regular Pay= Total Pay for Workweek + Additional Compensation – Exclusions
  • Step 2: Regular rate of Pay= Regular Pay divided by Total Hours Worked
  • Step 3: Premium Pay for Overtime= Regular Rate of Pay multiplied by 0.5, multiplied by (Total Hours Worked – 40)
  • Step 4: Total Weekly Compensation= Total Pay for Workweek + Premium Pay for Overtime

Companies should review their compensation and incentive practices to ensure compliance with all applicable Wage & Hour laws to avoid problems or investigations by the DOL. For more information, please visit the DOL’s website: www.dol.gov.

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