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Avoid overtime disputes: Do the math right the first time

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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.

Figuring the regular rate of pay

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.

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/week

$480/40 = $12/hour

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. 

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

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

Regular rate = (400 X $1) = $400/per week

$400/40 = $10/per hour

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 = $300/40 = $7.50/hour

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

Overtime pay: $11.25 X 10 overtime hours = $112.50

Fluctuating work week: If you and the employee mutually agree the salary is straight-time pay for all hours worked, no matter how many, payment for overtime hours is one-half times the regular rate, instead of one and one-half times the rate. The straight-time rate is understood to compensate employees for all hours actually worked.

The regular rate of pay will vary from week to week and is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week.

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