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Avoid overtime disputes: Do the math right the first time

by on
in Human Resources

Overtime: One and one-half times an employee's regular rate of pay for hours worked over 40 in a work week.

Each element of this deceptively simple definition carries a lot of baggage.

Miscalculation of overtime is one of the most common violations under the federal Fair Labor Standards Act.

What's a week?

A fundamental principle of overtime is that each workweek stands alone. That means you can't average the hours worked over two weeks to minimize your exposure to overtime.

A workweek is seven consecutive 24-hour days. You can have different workweeks for different employees, but you can't switch the days in an individual employee's week unless it's a permanent change.

An employee's weekly work hours could look like this:

M T W TH F

12 8 8 8 4

and you would avoid paying overtime because there's no federal law that requires daily overtime. However, some states, including California, do set daily overtime laws.

Reaching regular rate

Overtime pay is based on the employee's "regular rate of pay," but that's not necessarily the same as the hourly rate.

The regular rate is the employee's total compensation in the workweek divided by the total number of hours worked that week.

You must pay overtime based on all compensation: base rate, most bonuses, commissions, piece rates, incentives, education, longevity or training pay, shift differentials, etc.

Congress is considering an amendment that would eliminate the requirement that overtime premiums be calculated on bonuses, gainsharing payments and other incentive-based forms of compensation.

If an employee is paid only an hourly rate, that's also the regular rate. But if an hourly employee receives a bonus, that usually must be considered in the regular rate. Example:

Assume $10/hour, $80 bonus, 40 hours worked.

Regular rate = (40 X $10) + $80 = $480 = $12

40 40

When you pay, say, a monthly bonus, that bonus must be allocated over the weeks in the month. Therefore, you can only calculate the regular rate and full amount of overtime retroactively. But it's best to pay overtime based on the hourly rate each pay period, and make additional payments after the full amount can be calculated.

The FLSA requires you to consider a regular hourly rate even for employees paid exclusively by commission, piece rate, etc.

Assume $1 per piece, 400 pieces completed, 40 hours worked.

Regular rate = (400 X $1) = $400 = $10

40 40

Nonexempt workers on salary

The law allows you to put nonexempt employees on a salary, but you must still pay overtime. There are two ways to calculate the overtime:

Salary for a set number of hours: When you and the employee agree that the salary is for a set number of hours, such as 40, overtime is calculated by an exception to the regular rate principle. Example:

Assume $300/week salary intended to compensate 40 hours; employee works 50 hours.

Regular rate = $300 = $7.50/hour

40

$7.50/hour X 1.5 rate = $11.25/hour

$11.25 X 10 overtime hours = $112.50

Fluctuating work week: If you and the employee understand the salary is straight-time pay for all hours worked, whether many or few, rather than for a set number of hours, overtime is at half-time. Example, using the same assumption above:

Regular rate = $300 = $6/hour

50

$6/hour = $3 half-time rate

2

$3 rate X 10 overtime hours = $30

If you're thinking about using comp time, think again. Private sector employers may not grant time off to compensate nonexempt employees for overtime, even if those employees want it.

Brian T. Farrington is an attorney in Fort Worth, Texas.

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