by Paul Edwards
Two things are certain about overtime.
- Overtime can and does happen.
- The rules governing overtime compensation are easy (and very expensive) to mess up.
Overtime violations rank among the highest number of complaints registered with the Department of Labor each year. In 2012 alone, the Wage and Hour Division "recovered" more than $280 million in back wages from employers. That was an increase of $6 million from the year before, and a staggering $149 million increase from 2001.
But there is good news. Understanding and paying overtime properly is not a moving target. Once you understand how all the rules apply, you will be able to calculate overtime correctly.
What You Probably Already Know
The Fair Labor Standards Act (FLSA) requires all employers to pay overtime of 1.5 times an employee's regular rate of pay for hours worked in excess of 40 hours in a workweek. Depending on the state you are in (e.g., California), the overtime rules can be even stricter. (Call CEDR at 866-414-6056 to find out about your state's laws.)
What You May or May Not Know
- A workweek must consist of seven consecutive 24-hour periods/days; however, these seven days do not need to coincide with the calendar week. We often recommend that companies adopt a Sunday through Saturday workweek. This breaks up the weekend in the event of mandatory weekend training events, and may also help you manage overtime.
- Employees cannot waive overtime, and you cannot enforce a policy that says unauthorized overtime will not be paid. If they work it, you have to pay it. You can discipline them for working unauthorized overtime, but you still have to pay it.
- When you pay employees bonus and commissions, those payments also affect the amount of overtime pay due to the employee during the bonus or commission period. And, no, you cannot call all bonuses "discretionary" in order to get around this rule.
The Part Most Employers Get Wrong
What the Department of Labor calls "the regular rate of pay" is probably not what you would think. An employee's regular rate of pay actually includes all forms of compensation (not expressly exempted), including base hourly wage, nondiscretionary bonuses, commissions, on-call pay, shift differentials, reasonable cost of meals, lodging, and cash benefit payments from Section 125 Cafeteria Plans.
It does not include gifts, such as purely discretionary Christmas bonuses or turkeys, vacation, or sick pay.
If you are multiplying the employee's base hourly wage by 1.5 to get the overtime rate, you may be getting the calculation wrong if you have a bonus or commission plan.
Here's the math to determine an employee's regular rate of pay for a bonus:
Step 1: Total weekly pay = Base hourly wages + additional compensation
Step 2: Regular rate of pay = Total weekly pay ÷ hours worked
Step 3: Overtime premium = Regular rate of pay x 0.5 x total overtime hours
Step 4: Total weekly compensation = Total weekly pay + overtime premium
NOTE: The regular rate of pay is only used to calculate the correct overtime premium. It does not replace the employee's base hourly wage.
Sally receives $15/hour. Last week she worked 45 hours, and received a $500 bonus.
Total weekly pay: ($15 x 45 hours) + $500 bonus = $1,175
Regular rate of pay: $1,175 ÷ 45 hours = $26.11
Overtime premium: $26.11 x 0.5 x 5 overtime hours = $65.28
Adjusted Total Weekly Compensation:
$1,175 + $65.28 = $1,240.28
If you have a commission plan, the equation to figure out the regular rate of pay is slightly different. Visit www.cedrsolutions.com/de to download an Employer's Overtime Cheat Sheet.
It's Up to You
One of the most common denials we hear when an employer is charged with an overtime violation is: "But my accountant/bookkeeper/payroll company should have been taking care of this for me!"
While some do, you shouldn't count on it. The ultimate responsibility for understanding, reporting, and paying overtime falls on you, not them. If the Department of Labor comes knocking, you are the one penalized – not them.
Paul Edwards is the CEO of CEDR Solutions and author of the blog, HR Basecamp. Since 2006, CEDR has been the nation's leading provider of customized employee handbooks and HR solutions, helping dentists successfully handle employee issues and navigate the complex employment law landscape. Call (866) 414-6056 or send an email to firstname.lastname@example.org.
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