Calculating overtime is one area where many employers unintentionally run into trouble. Wage payment laws are complicated and employees who receive variable rates of pay can complete things even further. Let’s start with the basics.

The Fair Labor Standards Act (FLSA) states that nonexempt employees must be paid time and one-half their regular rate of pay for all hours worked over 40 in a seven-day workweek. Nonexempt employees are defined under the FLSA, and appropriate classification of employees is critical. In accordance with the FLSA, overtime pay must be calculated on a weekly basis and not over a two-week (or longer) pay period.

Overtime is typically calculated by multiplying an employee’s hourly rate by 1.5—pretty easy, right? Only if employees have one rate of pay that never changes and they never have any additional wages. What do we mean by that?

An employee’s overtime compensation is based on his or her regular wage rate. An employee’s regular wage rate represents the average compensation an employee received per hour during a workweek. An employee’s regular wage rate can vary from week to week and may be different from the employee’s contractual rate of pay.

To calculate an employee’s regular rate for a specific work period, employers must divide the employee’s total wages for a workweek by the number of hours the employee worked during that workweek. Unless an exemption applies, averaging hours over two or more weeks is not permitted.

What is included in an employee’s total wages?

An employee’s total wages includes all forms of compensation given for employment, whether paid directly to or on behalf of the employee. Some things typically left out of overtime calculations include:

  • Gifts and monetary awards that are not measured by hours worked, productivity or efficiency;
  • Irrevocable employee benefit contributions (such as life insurance, health benefits and retirement accounts);
  • Paid time off (including vacation, sick, holiday and production downtimes);

Some tricky situations

The FLSA offers the following guidelines for calculating the regular rate for employees receiving a bonus, salary, commission, piece rate, day rate, job rate, book rate, flag rate, or a combination of two or more wage rates.

Employees Paid at Two or More Rates: If an employee receives wages for work completed at two or more different rates during the workweek, an employer must calculate the employee’s regular rate by using either the weighted average method or by using the rate for the job that caused the employee to work overtime.

Under the weighted average method, an employer must first calculate the total wages the employee earned during a workweek using all applicable rates. Then, the employer must divide the employee’s wages by the total number of hours he or she worked at all jobs.

Employee Bonuses: Employers must add an employee’s bonus to the employee’s wages and divide the total compensation given to the employee for that workweek by the total number of hours the employee actually worked during that workweek. The same procedure applies to employees who receive additional wages for working unusual shifts.

Salaried Employees: Yes, you can have a salaried employee who is nonexempt from overtime payments. To calculate a salaried employee’s regular rate, an employer must divide the employee’s weekly salary by the number of hours the salary is intended to compensate for that workweek. Employers should not use the actual number of hours an employee worked during the workweek for this calculation.

If an employee’s compensation is a monthly or yearly salary, the employer must reduce the monthly or yearly salary to its weekly equivalent. The employer can then follow the same procedure described above to calculate the employee’s regular and overtime rates.

If a salaried employee receives a bonus or commission, the employer must add this payment to the salary for the period in question before calculating the regular rate.

Commissioned Employees: Employers must include all commissions paid to an employee when calculating that employee’s regular rate. Commission wages must be included in the pay period when they were earned, not when they are paid.

If an employer cannot tie a commission to a specific period, the employer should treat the commission as a bonus when calculating the employee’s regular rate.

Piece, Day, Job, Book and Flag Rate Wages: To calculate overtime wages for employees paid on a piece, day, job, book or flag rate, employers can divide the employee’s total earnings for a workweek by the total number of hours the employee worked during that same period.

Employees Paid at Two or More Rates: If an employee receives wages for work completed at two or more different rates during the workweek, an employer must calculate the employee’s regular rate by using either the weighted average method or by using the rate for the job that caused the employee to work overtime.

Under the weighted average method, an employer must first calculate the total wages the employee earned during a workweek using all applicable rates. Then, the employer must divide the employee’s wages by the total number of hours he or she worked at all jobs.

An opinion letter recently published by the Department of Labor (DOL) talks about pay rates, as they relate to calculating overtime

The FLSA also requires employers to pay all overtime hours an employee actually works, even if that overtime is not authorized before it actually takes place. Employers may choose to discipline their employee for working unauthorized overtime, but the overtime hours must be paid.

Keep in mind that these rules apply to federal overtime requirements. Some states (such as California) have different rules for overtime calculations, so be sure to check your state laws as well.

Paying employees correctly is vital not only to avoid costly fines and penalties, but also to keep employees happy and productive. If you have questions, reach out to our HR experts at humanresources@helpside.com