How to Calculate Overtime Pay Under the FLSA
The Fair Labor Standards Act (“FLSA”) as enforced by the US Department of Labor requires that overtime pay be paid at a rate of not less than one and one-half times an employee’s regular hourly wage rate of pay after 40 hours of work in a workweek. There is some confusion, however, as to how this apparently simple formula should be calculated under the wage and hour laws and how it relates to key labor laws.
The Regular Rate of Pay
The regular rate of pay includes all remuneration for employment except certain payments excluded by the Act itself. Shift differentials, non-discretionary bonuses (bonuses promised to employees before the work begins), promotional bonuses, and cost of living adjustments bonuses are some of the payments that must be included in calculating the “regular” rate.
Overtime rules also make clear that payments that are an exemption in calculating the regular rate include expense reimbursement payments, premium payments for overtime work or the true premiums paid for work on Saturdays, Sundays, and holidays, discretionary bonuses, gifts and payments in the nature of gifts on special occasions, and payments for occasional periods when no work is performed due to vacation, holidays, or illness.
The Formula for Calculating the Overtime Rate for Hourly Employees
The regular rate of pay is an hourly rate, minimum wage for example, and overtime must be computed on an hourly basis. To calculate overtime, salaried employees’ total remuneration (excluding certain categories as provided by law) in a workweek is divided by the total number of hours actually worked in the workweek to calculate the number of overtime hours to be paid at the one and a half wage rate.
Step-by-Step Example of Regular Rate of Pay Calculation:
- Step 1: Total pay for workweek – exclusions = regular pay
- Step 2: Regular pay divided by hours worked = regular rate of pay
- Step 3: Regular rate of pay x .5 x hours of overtime = premium pay for overtime
- Step 4: Total pay for workweek + premium pay for overtime = total weekly compensation
In the case of double time pay, the ‘.5’ would replaced with a ‘1’
Employee has a regular hourly rate of $8.00 and worked 46 hours in the workweek
The common method: 40 x $8.00 = $320.00; $8.00 x 1.5 = $12.00; 6 x $12.00 = $72.00; $320.00 + $72.00 = $392.00
The FLSA method: 46 x $8.00 = $368.00 / 46=$8.00 x .5 = $4.00; 6 x $4.00 = $24.00; $368.00 + $24.00 = $392.00
Under this scenario, the “common” and FLSA methods of calculating overtime reach the same result. It should be recognized, however, that this will not always be the case.
Assume, for example, that a nondiscretionary bonus of $10.00 is added to the employee’s compensation.
Common Method: 40 x $8.00 = $320.00; $8.00 x 1.5= $12.00; 6 x $12.00 = $72.00; $320.00 + $72.00 = $392.00 + $10.00 = $402.00.
FLSA Method: 46 x $8.00 = $368.00 + $10.00 = $378.00; $378 / 46 = $8.21; $8.21 / 2 = $4.10; $4.10 x 6 = $24.60; $378.00 + $24.60 = $402.60.
Adding the nondiscretionary bonus, there is now a difference of $.60 in the overtime calculations under the common and FLSA methods. An employer’s use of the common method for calculating overtime would not pass a DOL audit and would result in back wages owed to the employee. While the amount of liability is small, there is no de minimis exception for an employer’s obligation to pay wages owed.
Multiples Rates of Pay Within a Workweek
For hourly employees working at two or more rates during a single workweek for two or more different types of work, the regular rate of pay for that workweek is computed by taking the weighted average of such rates. The earnings for all rates for the week are added together, and this total is then divided by the total number of hours worked for the week at all different jobs.
Bonuses or Commissions Covering More Than One Workweek
When a non-discretionary bonus covers a period of time longer than a workweek, it must be apportioned back over the workweeks of the period during which it was earned. If it is not possible or practicable to allocate the bonus on the basis of when the bonus was actually earned, some other reasonable or equitable method must be adopted (for example, allocation of an equal amount for each workweek covered by the bonus). The employee must then receive additional overtime pay for each workweek in which overtime was worked during the period. This is done on a workweek basis by dividing the amount of the bonus allocated to a particular workweek by the number of hours worked in that workweek to get the increase in the employee’s regular rate. One half of the increase in the regular rate is due for each overtime hour in that week.
Other Items and Their Effect on Regular Rate of Pay
For deductions for board, lodging or other facilities do not affect the regular rate of pay computations, the computation is done before the deduction is made. Non-cash payments that are regarded as part of wages must be included in the regular rate of pay calculations. Benefits such as life insurance or health insurance are not included in the calculations.
Salaried Nonexempt Employees
Nonexempt employees may lawfully be paid by means of a salary. These salaried nonexempt employees, however, are still entitled to FLSA overtime pay under overtime laws if they actually work more than 40 hours in a work week. When a nonexempt employee is salaried, the salary must be converted to its hourly equivalent to determine the regular rate of pay for purposes of calculating overtime.
The formula for determining the regular rate is to divide the total amount of straight time compensation received by the employee “for work” by the number of hours for which the salary was intended to compensate the employee. For example, if a nonexempt employee is paid a salary of $400 per week for a normal 40 hour work week, the hourly equivalent is $10 per hour. There may be a dispute, however, as to the number of hours expected from the employee for the salary.
The Definition of Workweek under the FLSA
The FLSA uses the work week as the standard for computing overtime pay due, and each work week stands alone. Thus, a nonexempt employee’s time worked “vests” at the end of each work week (or work period). Work time may not be “averaged” from work week to work week. For example, an employee who works 44 hours in week one, followed by 36 hours in week two, is entitled to 4 hours of FLSA overtime pay for week one and may not be paid based on an “average” of 80 hours in the two week period when calculating their weekly salary.
The employer must use the FLSA definition for workweek when calculating overtime. A workweek is defined as a fixed and regularly recurring period of 168 consecutive hours (i.e., seven consecutive 24-hour periods). It does not need to coincide with the calendar week, but may start on any day at any hour that is convenient for the employer. Different workdays and workweeks may be established for different groups or departments to meet the needs of the workers or employer. Once the workweek is established, it remains fixed regardless of hours worked. The employer is, however, free to change the workweek, provided the changes are permanent and not done to avoid the paying of overtime.
For purposes of overtime payment, each workweek stands alone; there can be no averaging of two or more workweeks no matter how often the employee is paid. For example, an employee who is paid biweekly will be paid for two separate 40-hour workweeks, and overtime will be calculated accordingly. Overtime is not calculated on an 80-hour work period for an employee paid biweekly. For example, an employee works 39 hours in workweek one of a biweekly pay period and 41 hours in the second workweek. The total is 80 hours. However, each workweek stands alone for overtime, so the employee is paid 39 regular hours for week one and 40 regular hours and one hour of overtime for week two for a total of 79 regular hours and one hour of overtime for that biweekly payroll.
If you have questions as to whether your or an employee’s hours have been properly calculated under the FLSA or other applicable federal laws, please feel free to contact Baird Quinn’s labor and employment lawyers in Denver, Colorado. You may obtain additional information regarding our Denver FLSA lawyers at the following link. Contact Us
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