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Calculating Overtime Properly


Overtime. It is a subject that you may think you know well, but do you? It is not always a simple matter of paying the employee “time and a half” for any hours worked in excess of 40 hours in a workweek. There is much more to take into consideration, and while this article is not intended to cover every scenario out there, we will touch a number of bases. What we will not cover, this time around, is who may be exempt from overtime.

Let’s start with the federal law, where the overtime provisions are contained in the Fair Labor Standards Act (FLSA). Employees covered by FLSA must receive overtime pay for hours worked in excess of 40 in a workweek, at a rate not less than time and one-half their regular rates of pay. Hours “worked” is literal, and hours counted towards the determination of overtime only include hours actually worked; Holiday pay, Paid Time Off (PTO), Vacation pay, paid lunch breaks, and other not-worked hours the employee may be paid for, are not counted towards the hours worked. There is no such federal requirement to pay overtime for work on Saturdays, Sundays or holidays.

Overtime is calculated on a workweek basis, which is a fixed and regularly-recurring period of 168 hours (seven consecutive 24-hour periods); the employer can set the workweek for its employees. Averaging of hours over two or more weeks is not permitted. For example, if your pay period is biweekly, an employee would be eligible for 10 hours of overtime if they worked 50 hours in the first week of the pay period and 30 hours in the second.

The rate in which overtime is paid can be tricky. The employee’s regular rate of pay includes all remuneration for employment, unless specifically excluded. A few of the excluded earnings include gifts on special occasions (their taxable value,) discretionary bonuses, reimbursements and payments for periods when no work is performed due to vacation, illness, or holidays. Included in the regular rate of pay are non-discretionary bonuses, tips, commissions and just about anything else paid to the employee. All included earnings, along with the regular wage for all hours worked, are added together and divided by the total number of hours worked to determine the regular rate of pay. The latter is a commonly overlooked rule, so here is an example:

John worked 45 hours in a workweek and earns $10 per hour. He also earned a $50 sales bonus and $400 in commissions. Most will pay the 5 hours of overtime at $15 per hour, but that would be in violation of the FLSA. To correctly calculate overtime, one would multiply 45 hours by $10 per hour to arrive at his regular earnings of $450. Add to that the bonus and commission, which is a total of $900 for the week, thus making his regular rate of pay $20 per hour and his overtime premium $10 per hour (half of his regular rate of pay) rather than $5 per hour.

This same principle should be used when the employee works at multiple rates of pay during the workweek where overtime is worked. The earnings from all such rates are added together and this total is then divided by the total number of hours worked at all jobs, in essence, a weighted average rate. There are specified conditions where the computation of overtime pay, based on one and one-half times the hourly rate, is in effect when the overtime work is performed, and can be located in section 7(g)(2) of the FLSA.

If you have tipped employees, then there is a further complication. A state may offer a ‘tip credit’ to the minimum wage, which allows you to pay a tipped employee a lesser rate. For example, the minimum wage in Florida is $10 per hour, but for a tipped employee, you can pay $6.98 per hour. Of course, this credit applies as long as the employee is receiving at least $3.02 per hour in tips. If a tipped employee works overtime, they receive $6.98 per hour plus half of the regular minimum wage of $10, therefore, $11.98 per hour. If you are simply multiplying their $6.98 per hour times 1.5 and paying $10.47 per hour, then that is in violation of FLSA.

The aforementioned should cover the major federal violations, so now you may need to look at the state in which the work is being performed. With the increase of work from home, you may have hired employees in new and unfamiliar states. Be sure to check out the employment laws in those states, as you may discover that overtime is not determined in the manner of which you are accustomed. A state, such as California, has rules for daily overtime. An employee is entitled to overtime pay for all hours worked over eight hours in any workday, double time for hours worked over 12 hours in any workday, overtime for all hours worked on the seventh consecutive day of work in a workweek and double time for any hours worked over eight hours on the seventh consecutive day. Whew! Now there are a few exemptions in California to that rule, but for most workers, that is it. Where it could get messy is if you have an employee working across multiple states in the same week, or even the same day.

Let’s say your company is based in Arizona and has a driver that delivers a product to a company in California. Arizona does not have a daily overtime law; California does. If that employee drives into California for an hour during the day and then spends another 7.5 hours delivering in Arizona, they would have worked an 8.5 hour day. Because the employee was in California, they are subject to California daily overtime rules. A rule of thumb, in this case, is to pay whatever comes out best for the employee. The last thing you want is an overtime lawsuit.

Lastly, overtime can be dictated by an employee union. There are unions that specify an employee must be paid overtime for hours worked over eight hours in any workday, hours worked on a scheduled day off and even hours worked on a holiday. I am sure you are aware that if your employees are unionized, this is probably the least violated set of overtime rules.

Sometimes we hear a few excuses for not paying overtime, so the following are a few debunked.

  • Overtime pay may never be waived by agreement between the employer and employees.
  • An agreement which signifies that only 8 hours a day, or only 40 hours a week, will be counted as working time, also fails the test of FLSA compliance.
  • An announcement by the employer that no overtime work will be permitted, or that overtime work will not be paid for unless authorized in advance, also will not impair the employee’s right to compensation for compensable overtime hours that are worked.
  • Finally, employees cannot be given comp time (compensatory time) in exchange for overtime hours worked. This is a violation of FLSA for most businesses.

In summary, be sure you know the laws that impact your employees, based on where they are performing the work. It could save you a costly FLSA/overtime lawsuit.

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While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. They may be additional situations that apply to you that are not mentioned above. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Labor Attorney, and/or HR Professional to ensure you are in compliance with correctly paying overtime.

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