The American Payroll Association's (APA) 29th Annual Congress included a virtual workshop called “Regular Rate of Pay – Are You Paying Your Nonexempt Employees Correctly?” The workshop was conducted by Larry White, CPP, APA Director of Payroll Training.
Under 29 USC 207(a) of the Fair Labor Standards Act (FLSA), “covered employees” must be paid at least 1 1/2 times their regular rate of pay for all time physically worked over 40 hours in a workweek. “Covered employees” are nonexempt employees (i.e., they are not exempt from overtime under some provision in the FLSA).
White pointed out that the regular rate of pay is computed based on a 7-day workweek (168 hours). An employee who works 35 hours in one week and 45 hours in the second week for an employer who computes pay on a bi-weekly basis must be paid overtime for the hours worked over 40 in the second week even though the employee only worked an average of 40 hours in the two weeks. Part of a $33 million settlement that Wal-Mart Stores, Inc. agreed to pay the Department of Labor (DOL) in 2007 was due to the fact that Wal-Mart violated this rule.
Regular rate of pay calculation. White reviewed the regular rate of pay (RRP) calculation with attendees. The formula is as follows:
Total hours worked × pay rate = Total pay.
Total pay ÷ total hours worked = RRP.
RRP × .5 = Overtime premium.
Overtime premium × overtime hours worked = Overtime pay.
Total pay + Overtime pay = Gross pay.
White noted that many employers are computing the regular rate of pay incorrectly for employees who received a production bonus. He used the example of an employee who worked 46 hours at an hourly rate of $16 per hour, and who also received a production bonus of $200. Many employers would pay this employee $984, computed as follows:
40 hours × $16 = $640.
6 hours × $24 = $144.
$640 + $144 + $200 = $984.
Using the regular rate of pay calculation; however, the employee must be paid $997.08, computed as follows:
46 hours × $16 + $200 = $936 (Total pay).
$936 ÷ 46 hours = $20.35 (Regular rate of pay).
$20.35 × .5 = $10.18 (Overtime premium).
$10.18 × 6 overtime hours = $61.08 (Overtime pay).
$936 + $61.08 = $997.08 (Gross pay).
The production bonus must be included in the regular rate of pay calculation because it is a nondiscretionary bonus (i.e., employees receive the bonus if they reach a certain goal). Discretionary bonuses on the other hand (i.e., the employer decides who gets the bonus and when) do not have to be included in the regular rate of pay calculation. Gifts, paid time off, reimbursed expenses, benefit plan contributions, and some employer-provided stock options also do not have to be included in the regular rate of pay computation. Tips must be included in the regular rate of pay computation.
White mentioned that annual production bonuses for a set dollar amount can be an administrative nightmare to employers because they may have to go back to all 52 weeks of the year to determine if overtime was computed correctly. He recommended that employers instead pay the bonus based on a percentage of the employees's total earnings for the year. Total earnings includes the regular rate of pay and overtime, so a bonus paid based on a percentage of the employee's total earnings is not a violation of the FLSA.