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6 Mistakes to avoid when calculating overtime

10/07/21

Author: ADP Admin/Sunday, October 3, 2021/Categories: Bulletin News

The Fair Labor Standards Act (FLSA) requires employers to pay non-exempt employees 1.5 times their "regular rate of pay" for all hours worked over 40 in a workweek (some states require overtime pay in additional circumstances and at different rates). Miscalculating overtime can result in back pay due, fines, and other sanctions. Here are six mistakes to avoid when calculating overtime.

Mistake #1: Thinking “regular rate of pay” is just the employee’s hourly wage.

Reason: An employee's regular rate of pay includes not only their hourly rate but also the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. Therefore, if the employee receives these other types of compensation, you must factor them in when determining their regular rate of pay. Here’s an example:

A non-exempt employee is paid $12 per hour. In one workweek, they work 50 hours and receive a $100 nondiscretionary productivity bonus. Overtime is calculated as follows:

Step 1: Add straight-time hourly wages for all hours worked and bonus to determine total straight-time compensation.

($12 hourly rate x 50 hours worked) + $100 bonus =  $700 

Step 2: Divide total straight-time compensation by total hours worked to determine regular rate of pay.

$700 straight-time pay divided by 50 hours worked = $14

Step 3: Multiply regular rate of pay by .5 and then multiply by total overtime hours.

$14 regular rate of pay x .5 x 10 overtime hours = $70

Since the straight-time earnings have already been calculated for all hours worked (see Step 1), the employee is entitled to an additional 10 hours of overtime pay, calculated at one-half the regular rate of pay.

Step 4: Calculate total compensation.

$70 overtime pay + $700 straight-time pay = $770

State Law: Your state law may require a different formula. California , for example, requires a different methodology for calculating overtime when an employee receives a flat sum bonus.

Mistake #2: Assuming bonuses are discretionary and therefore can be excluded from the regular rate of pay.

Reason: Under the FLSA, most bonuses are considered nondiscretionary and therefore must be included in the regular rate of pay calculation, including those:

  • Based on a predetermined formula, such as individual or group production bonuses;
  • Bonuses for quality and accuracy of work;
  • Bonuses announced to employees to induce them to work more efficiently;
  • Attendance bonuses; and
  • Safety bonuses (i.e., number of days without safety incidents).

These bonuses are nondiscretionary because the employees know about and expect the bonus. The understanding of how an employee earns the bonus may lead them to expect to receive the bonus regularly. The fact that the employer has the option not to pay the bonus doesn’t make the bonus discretionary.

Mistake #3: When a nondiscretionary bonus is earned over more than one workweek, failing to prorate it over the entire bonus period.

Reason: If the nondiscretionary bonus is earned over a single workweek, the bonus is added to the employee's regular earnings for that workweek when determining the regular rate of pay. However, if the bonus is earned over a series of workweeks, the prorated bonus must be included in the regular rate of pay in all overtime weeks covered by the bonus period. If the calculation of the bonus is deferred over a period longer than a workweek, the employer may temporarily disregard the bonus in computing the regular rate until the amount of the bonus can be determined. In other words, the employer would pay compensation for overtime at 1.5 times the hourly rate until the bonus can be determined. Once the amount of the bonus can be ascertained, it must be apportioned back over the workweeks of the bonus period. The employer must then recalculate the regular rate of pay for each overtime workweek in the bonus period and pay the overtime pay due on the bonus.

Mistake #4: Forgetting to factor in multiple hourly rates.

Reason: When the employee has two or more rates of pay during an overtime week, the regular rate for that workweek is generally the weighted average under federal law. Here’s an example:

A non-exempt employee works for the same employer in two different jobs. In one workweek, the employee works 10 hours for $10 per hour and 40 hours for $20 per hour. To calculate overtime:

Step 1: Calculate total straight-time pay.

($10 hourly rate x 10 hours) + ($20 hourly rate X 40 hours) = $900

Step 2: Divide total straight-time compensation by total hours worked to determine regular rate of pay.

$900 straight-time pay divided by 50 hours worked = $18

Step 3: Calculate overtime premium pay.

$18 regular rate of pay x .5 x 10 overtime hours = $90

Since the straight-time earnings have already been calculated (see Step 1), the additional amount to be calculated is one-half the regular rate of pay.

Step 4: Calculate total compensation for week.

$900 straight-time pay + $90 overtime pay = $990

State Law: For the purposes of determining the regular rate of pay, federal law also allows employers to use the hourly rate in effect when the overtime work is performed, as long as the employee agreed to this method in advance of performing the work and certain other conditions are met. These agreements should be in writing. Some states have different rules. Check your state law to ensure compliance.

Mistake #5: Misusing the fluctuating workweek method.

Reason: Federal rules include a special formula for calculating overtime for salaried non-exempt employees whose work hours fluctuate from week to week (known as the fluctuating workweek). To use the fluctuating workweek method under the FLSA:

  • The employee's hours must fluctuate from week to week;
  • The employee must receive a fixed salary for whatever hours they are called upon to work in a workweek, regardless of how few or many;
  • The employee and employer must have a clear mutual understanding (which should be in writing) that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek;
  • The salary must be sufficient enough to provide compensation to the employee at a rate no less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours worked is greatest; and
  • The employee must receive extra pay for overtime hours worked at a rate no less than one-half times their regular rate of pay. Since the salary is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the employee’s regular rate 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.

While the fluctuating workweek method can seem like an attractive option for reducing overtime costs when compared with the standard overtime calculation, there are some caveats to consider. First, some states, including California, expressly prohibit employers from using the fluctuating workweek method for paying overtime. Additionally, this method is also a common source of employee lawsuits. Employers should check their state (and local) law and consult legal counsel as necessary before using it.

Mistake# 6: Miscalculating tipped employees’ regular rate of pay.

Reason: The FLSA permits employers to pay tipped employees a direct cash wage as low as $2.13 per hour, provided the employee's direct cash wages plus tips equal or exceed the federal minimum wage (currently $7.25 per hour). In such cases, the employer then may take a tip credit toward its minimum wage obligation equal to the difference between the required direct cash wage and the federal minimum wage (or $5.12 per hour). When the employer takes the tip credit, overtime is calculated based on the full minimum wage, rather than the direct cash wage. However, the employer may be able to apply the tip credit to the overtime rate if it doesn't exceed the tip credit taken for non-overtime hours. Here’s an example.

A tipped employee works 50 hours in a workweek. Let's assume the employee is subject to the federal minimum wage rather than a higher state or local minimum wage. The employee receives a direct cash wage of $3 per hour and their employer applies a tip credit of $4.25 per hour toward the minimum wage. Beyond tips and direct cash wages, the employee receives no other compensation during the workweek. To calculate overtime:

Step 1: Because the tip credit was taken, use the full minimum wage to calculate the overtime rate.

$7.25 x 1.5 = $10.88

Step 2: Subtract the appropriate tip credit from the overtime rate to achieve the adjusted overtime rate and multiply by the number of overtime hours worked that week. The tip credit generally cannot be greater than the one you applied to non-overtime hours.

$10.88 - $4.25 = $6.63

$6.63 x 10 overtime hours = $66.30

Step 3: Add the employee's straight pay to the overtime pay to calculate total pay that week.

40 hours x $3 = $120

$120 straight-time pay + $66.30 overtime pay = $186.30

Remember, this employee must also have received at least $212.50 in tips ($4.25 x 50 hours) for the employer to take the tip credit.

State Law: Some states have stricter rules related to tip credits or prohibit them altogether. Many states and local jurisdictions also have higher minimum wages. Check your state and local law for compliance requirements.

Conclusion:

Review your pay practices to ensure that you’re calculating and paying overtime in accordance with state and federal laws.

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