Computing overtime pay generally is a straightforward process, but certain situations can make the calculations complex.
Payroll professionals must be aware of circumstances that can cause the employer to fall out of compliance with the minimum wage and overtime provisions of the Fair Labor Standards Act (FLSA) or other federal, state, and local laws.
Under the FLSA, employers must pay nonexempt employees at least one-and-one-half times the regular rate of pay for each hour worked in excess of the applicable maximum number of hours per workweek, which generally is 40.
The FLSA does not require that employers pay the overtime premium for hours worked in excess of a daily maximum or on weekends or holidays. However, employers are free to pay workers overtime wages for hours worked in excess of a daily minimum or on weekends and holidays. Employers also are permitted to define a shorter workweek, such as 37 hours, and pay overtime for hours worked in excess of that time.
FLSA exemptions to overtime are available for white-collar employees, such as executives, administrators, professionals, outside sales representatives, and computer technicians. Other exemptions apply to employees in specified industries, including transportation, agriculture, and seasonal recreation. The law does not cover employees working under special certificates, such as full-time students, disabled employees, and apprentices.
As with many areas of regulatory law, applying the calculation is not that simple.
Many of the complexities related to computing overtime wages revolve around determining the number of hours an employee is considered to have worked and the employee's regular hourly rate of pay as defined for purposes of determining the required overtime wage rate.
Subpart D of Title 29, Part 778, of the Code of Federal Regulations (CFR) addresses some of the issues that arise when computing overtime pay, including change of workweek, additional pay for a past period, and deductions from cash wages.
Change of workweek
In general, an employee's workweek is a fixed and regularly recurring period of 168 hours, or seven consecutive 24-hour periods. A workweek can begin on any day and at any hour of the day.
Example: The workweek at Able Co. begins at 7 a.m. Monday and ends 168 hours later at 7 a.m. on the following Monday.
An employer can establish a single workweek for a plant or organization as a whole, or the employer can establish different workweeks for different employees or groups of employees. For administrative purposes, many employers find it better to establish a single workweek for all employees.
Once the start time of an individual employee's workweek is established, it generally stays the same regardless of changes in that employee's schedule of hours. The workweek remains fixed for individual employees so that the employer cannot circumvent the requirement to pay overtime by manipulating the timing of the workweek.
There are situations when the employer may want to change the starting time of the workweek. Under Section 778.105 (29, CFR) of the FLSA, an employer can change the beginning of the workweek if the change is meant to be permanent and does not purposely evade the overtime requirements of the FLSA. Such a change necessarily causes one or more hours or days to fall in both the old and the new workweek.
Example: Able Co., the workweek begins at 7 a.m. Monday, but management wants to change the start of the week to 11 p.m. Sunday to accommodate a third shift. Any hours worked from 11 p.m. Sunday to 7 a.m. Monday will make up the last hours of one workweek and the first hours of the next workweek.
The computations for employees who do not work during the overlap period are unaffected by the change in the workweek. The statutory compensation is computed the same way it would be if the overlap did not exist.
James works the second shift from 3 p.m. to 11 p.m. Even if he works seven days, all of his hours worked would fall within one workweek as long as he does not work from 11 p.m. on the Sunday the change occurs to 7 a.m. the Monday morning after the change. The computation of his hours worked and overtime compensation would not be affected by the change in the workweek.
Janice, however, moves from the first shift, which starts at 7 a.m. and ends at 3 p.m., to the third shift, which starts at 11 p.m. and ends at 7 a.m. Her move to the third-shift occurs during the changeover week.
Before the change, she works the first shift Monday through Friday for a total of 40 hours. On Sunday, the changeover day, she reports to work at 11 p.m. Janice works the regular third shift all week, to 7 a.m. Friday, plus four extra hours from 11 p.m. Friday to 3 a.m. Saturday. She has overlapping workweeks, and special overtime computations can be required.
The enforcement policy of the Labor Department, under Section 778.301 (29, CFR), is to assume that the overtime requirements are satisfied if the employer uses these procedures to determine overtime wages:
• First, assume the overlapping hours are counted as hours worked only in the old workweek and not in the new workweek. Compute the straight time and overtime compensation that is due the workers for each of the two workweeks on this basis. Total the sums.
• Next, assume the overlapping hours are counted as hours worked only in the new workweek and not in the old week. Determine the total compensation due for the two work weeks.
• Pay the employee an amount that is not less than the greater of the amounts computed in methods 1 and 2 above.
Assuming Janice is paid $10 an hour, this is how her pay would be computed:
• Method 1: For the first (“old”) week, 40 hours Monday to Friday at $10 an hour ($400), plus eight hours from 11 p.m. Sunday to 7 a.m. Monday at $15 an hour ($120), plus 36 hours the second week at $10 an hour ($360). Total: $880 for two weeks.
• Method 2: For the first week, 40 hours Monday to Friday at $10 an hour ($400) plus, for the second (“new”) week, 40 hours at $10 an hour ($400) plus four hours from 11 p.m. Friday to 3 a.m. Saturday at $15 an hour ($60). Total: $860 for the two weeks.
Janice should be paid $520 for the first week and $360 for the second week as the total of the first method ($880) is greater than the total of second method ($860).
To continue the example, assume a different schedule for the second week. The first week is the same, but during the second week Janice works the third shift all week (to 7 a.m. Friday) plus eight hours from 11 p.m. Friday to 7 a.m. Saturday and four hours from 11 p.m. Saturday to 3 a.m. Sunday.
In this situation, the compensation under Methods 1 and 2 would include an additional eight hours at $15 an hour during the second week for total compensation of $980 for the two weeks. She should be paid $520 for the first week and $460 for the second week.
In the second example, if Janice is paid $400 for the first week and $580 for the second week, the requirement that she be paid “an amount not less than the greater of the amounts computed by Methods 1 and 2” appears to be satisfied.
Federal regulations do not indicate how soon Janice must be paid overtime wages. However, state wage and hour rules may apply. In any event, it should be evident that she will be entitled to at least eight hours of overtime pay after the first week. It may be advisable to choose an earlier payment to avoid compliance issues, particularly if weekly payments are required and the lag time to the payment for the second week will be longer than the state allows.
The regulation also states that although this method of compensation is permissible, it does not alter any obligation the employer may have under an employment or union contract to pay a greater amount of overtime compensation for the overlap period.
Adjustments to overtime rates because of subsequent events, such as retroactive pay increases or nondiscretionary bonuses, also can have an impact on overtime worked during the change over period. Because of the complexities involved, many practitioners advocate scheduling a change in workweek with an eye to avoiding or restricting overtime work during the overlap period.
Additional pay for a past period
Additional pay for a past period, as calculated under 29 CFR 778.210, can involve an increase to an employee's regular rate of pay for a past period or a lump sum payment.
Example: John is an hourly employee at Baker Co. Under a recently negotiated collective bargaining agreement, he is entitled to an additional 20 cents an hour regular pay for all hours worked during the 98-day period starting with the expiration of the previous contract and the implementation of the pay rates under the new contract. Under the FLSA, he is owed a retroactive increase of 30 cents for each overtime hour, rather than 20 cents. If John had worked 560 regular hours and 48 overtime hours during the period, he would be entitled to an increase of 20 cents an hour for 560 hours and 30 cents an hour for 48 overtime hours.
Sam is a nonexempt salaried employee of Baker Co., but he is not a party to the collective bargaining agreement. Baker has a policy that grants a pay increase to its nonexempt salaried workforce that corresponds to the change in the collective bargaining agreement. Based on the change in his annual base salary, Sam is entitled to a $1,200 retroactive increase in his base salary for the period. This is a lump-sum payment for the period because it is not based on hours worked.
Sam is also entitled to an additional amount for any overtime hours that he worked. The amount must be determined following the usual rules for determining the regular hourly rate for a salaried employee. At this point, the regulation points to the rules for bonus payments outlined in part 29 CFR 778.209.
When there is a lump-sum payment, the amount must be included in the calculation of the worker's regularly hourly rate and overtime compensation. When the payment is for a single workweek, the amount of the lump sum is added to the employee's other earnings, except for statutory exclusions, to make up the employee's regular pay for the week. The regular hourly rate for the week is the regular pay for the week divided by the total hours the employee worked that week.
If the lump-sum payment covers more than one workweek, it must be apportioned over the workweeks in which the payment is considered to have been earned.
The increase in the regular hourly rate for a given week can then be calculated by dividing the amount of the payment allocated to that week by the number of hours the employee worked that week. The employee is entitled to additional compensation for any overtime worked during the week.
The additional amount for a given overtime week is equal to one half the increase in the regular hourly rate for that week times the number of statutory overtime hours the employee worked during the week
If the additional earnings cannot be identified as having been earned in particular workweeks, some other reasonable and equitable method of allocation must be adopted. Such a method might assume an equal amount was earned in each workweek or an equal amount for each hour the employee worked during the period to which the lump sum applies.
There is also a method that cannot be applied to the example because it requires an agreement or contract before the performance of the services. This method can be useful for bonus payments where the regular earnings are based on piece rates or multiple hourly rates.
Under this method, the agreement provides for a simultaneous payment of the overtime due on the bonus. For example, the bonus might be defined as 10 percent of the employee's straight time earnings plus 10 percent of the employee's overtime earnings. Such contracts satisfy the overtime provisions of the FLSA unless used as a device to evade the overtime requirements rather than provide actual overtime compensation.
In Sam's case, it would appear the appropriate method would be to allocate the retroactive pay equally to each of the 14 workweeks in the retroactive period. For each week that Sam worked overtime, the amount of the payment would be divided by the number of hours he worked that week to get the increase in the regular rate of pay. Sam would then be entitled to additional compensation for a given workweek equal to one-half the increase in the regular hourly rate times the number of statutory overtime hours he worked that week.
Example: Sam's $1,200 salary increase is allocated equally to each of the 14 workweeks covered by the period, or $85.71 for each workweek. Sam had two overtime weeks during the period, one he worked 44 hours and one in which he worked 48 hours. The hourly increase for the 44 hour week is $1.95, and with four hours of overtime, Sam is due an additional $7.80. The hourly increase for the 48-hour week is $1.79, and with eight hours of overtime, he is due an additional $14.32 for that week. His total additional compensation due for the retroactive salary increase is $22.12.
Deductions from cash wages
With regard to wages, the term “deduction” is often used loosely to refer to reductions in pay arising from several causes. Part 778.304 (29, CFR) lists examples of items often referred to as deductions:
• Deductions to cover the cost to the employer of furnishing “board, lodging or other facilities,” within the meaning of section 3(m) of the Act.
• Deductions for other items such as tools and uniforms, which are not regarded as “facilities.”
• Deductions authorized by the employee, such as union dues, or required by law, such as taxes and garnishments.
• Reductions in a fixed salary paid for a fixed workweek during weeks the employee fails to work the full schedule.
• Deductions for disciplinary reasons.
Generally, the employee's regular rate of pay will be the same as if the deductions had not occurred.
Deductions for the first three categories in the list do not reduce the employee's actual compensation even though the employee's net pay is reduced. The regular hourly rate of pay is determined by dividing the employee's total compensation for the workweek, except statutory exclusions, before those deductions are made by the number of hours the employee worked that week.
For the fourth category, a reduction in fixed salary for a short workweek, is not really a deduction when the nonexempt employee is paid a fixed salary for a fixed workweek. If the employee's salary is reduced by the average hourly earnings for each hour lost because of the short week, the employee is still being paid at the same regular hourly rate of pay.
Example: Cathy is employed at a salary of $350 for a fixed week of 35 hours. If Cathy only works 28 hours during a particular week and the employer deducts $70 dollars for the lost time, she is paid $280 for the time she worked and her regular hourly rate remains at $10 an hour.
Example: Sharon is paid $400 for a variable workweek. In her case, the presumption is that the salary is to cover short weeks as well as long weeks. A deduction for a short week would be conclusive evidence that the salary indeed covers a fixed workweek.
In the last category, disciplinary deductions, the regular rate of pay also is determined before the deduction from the employee's wages.
For example, for a piece-rate worker, the employee's piece-rate earnings are calculated and divided by the total hours worked to determine the regular hourly rate of pay before the disciplinary deduction is made. The deduction cannot cause the employee's average earnings to fall below the applicable minimum wage or cut into any part of the overtime compensation due the employee. This also is true for deductions for items such as tools and uniforms which are not regarded as “facilities.”
An employer can penalize an employee for lateness, subject to the limitations regarding minimum wage and impairment of overtime compensation. For example, an employer might penalize an employee half an hour of straight time pay for each half hour of lateness, but the employer must still count all the time the employee actually works as hours worked for purposes of determining overtime for the workweek.
This article was originally published in IOMA's monthly newsletter, 'Payroll Practitioner's Monthly', and is republished here with the express written permission of IOMA, Copyright(c) 2011.