Are You Paying the Correct Amount of Overtime?

By: MARY M. KRAKOW

March 2005

If asked, most employers will say that non-exempt employees must receive overtime for all hours worked over 40 in a workweek. Most employers also will say that the amount of overtime due is one- and-one-half times the employee’s hourly rate. But wait, is this second statement correct?

In fact, if a non-exempt employee receives any one of at least five fairly common types of additional compensation, his or her overtime rate will not equal one and one-half times the hourly rate. This is because the federal Fair Labor Standards Act (FLSA) defines overtime to include one and one-half times the employee’s “regular rate,” not just the “hourly rate.” The difference between an employee’s “regular rate” and the “hourly rate” may result in employers owing non-exempt employees more overtime than they originally thought.

Some General Rules

First, some general rules regarding overtime pay.

Employers must treat all employees as “non-exempt” unless they fit within one of the FLSA’s narrow “exempt” categories. The most common are the white collar exemptions—those employees who are paid on a salary basis and perform the required duties for what the FLSA designates as exempt executive, administrative, professional or outside sales employees. The FLSA also excludes certain other jobs from its minimum wage and/or overtime requirements; for example, certain car sales people, taxicab drivers, motion picture theater employees, and radio and TV announcers.

All non-exempt employees – those that do not meet the requirements for “exempt” status - must be paid not less than minimum wage (currently $5.15 an hour under both federal and Minnesota law), keep a daily and weekly record of all time worked, and receive overtime for all time worked in excess of 40 hours per workweek. The workweek is the 7-day period designated by the employer.

A non exempt employee’s overtime rate must equal one and one half times the employee’s “regular rate.” If a non-exempt employee only receives hourly wages for an overtime week, the formula for determining the overtime rate for that week is as follows:

Total Hourly Wages ÷ Number of Hours Worked = Regular Rate

Regular Rate x 1.5 = Overtime Rate

If a non-exempt employee receives any covered compensation in addition to hourly wages for an overtime week, the above formula does not apply. Some of the other types of compensation that must be included in the “regular rate” include:

Bonus Payments

Non-exempt employees from time to time earn a bonus for their work. Typically, the bonus is paid on a monthly, quarterly or annual basis. If the bonus payment is covered by the overtime rules, payment of the bonus after the period during which some or all of it was earned does not eliminate the overtime obligation. Instead, when the bonus is paid, the employer must retroactively pay any additional overtime due because of the resulting increase to the employee’s regular rate.

One type of bonus to non-exempt employees on which employers are not required to pay overtime is a “discretionary” bonus. To be discretionary, both the fact and amount of the bonus must be fully within the employer’s discretion until at or near the end of the period the bonus covers. If either of these requirements is not met, then the bonus is not discretionary and extra overtime pay must be paid for any overtime weeks covered by the bonus.

Another type of bonus to which overtime does not apply is one that meets the FLSA’s definition of a bona fide profit-sharing bonus. To meet this requirement, the employer must publish a written plan to employees that includes all of the requirements and none of the prohibitions set by the Department of Labor for this type of bonus plan.

A third type of bonus on which no additional overtime will be due is one that, per contract or other prior agreement with the employee, provides for simultaneous payment of overtime due on the bonus. This requirement is met, for example, if the bonus plan or agreement sets the bonus as a percentage of an employee’s total earnings for the covered period, including all straight time earnings and overtime pay.

Premium Payments

Some non-exempt employees receive both their hourly rate and a small, extra hourly premium for each hour worked depending on the time of day worked (often referred to as a shift differential), or for particularly hazardous or dirty work. Most such premium payments must be included when determining the employee’s overtime rate for the applicable week.

Commission Payments

Commissions, however earned and regardless of how often paid, usually must be included when calculating overtime for a non-exempt employee.

When a commission is paid on a weekly basis, it is added to the employee’s other earnings for that workweek and the total is divided by the total number of hours worked in the workweek to obtain the employee’s regular hourly rate and applicable overtime rate.

When payment of a commission is delayed until after the regular payday for the period during which the commission was earned, additional overtime compensation, due by reason of including the commission in the employee’s regular rate, must also be paid. If possible, the employer must allocate the commissions among the covered workweeks in proportion to the amount of commissions actually earned or reasonably presumed to have been earned each workweek.

On-Call Pay

Some non-exempt employees must be on-call from time to time; for example, computer technicians, emergency medical technicians and paramedics. Whether these non-exempt employees must receive at least minimum wage for their on-call time depends on whether the time qualifies as “working time” as defined by the FLSA.

Even if minimum wage is not required, many employers pay non-exempt employees some amount for on-call time and must pay minimum wage or higher for all time the employees spend responding to calls. If the employee works overtime in a week during which the employees receives this extra pay, it must be included in the his or her regular rate when determining the overtime rate for that week.

Employees Paid at Two Different Wage Rates

When employees work at two different jobs for the same employer and are paid at different wage rates for each job, the employer has at least two choices on how to pay overtime.

The first method is the “weighted average.” Under this method, the employee is paid overtime based on the weighted average of his or her non-overtime wage rates. If the number of hours worked at each pay rate varies from week to week, the employee’s “weighted average” and overtime rate will be different and must be calculated for each workweek.

To do this, first calculate the employee’s “weighted average” hourly rate for the workweek. For example, if the employee worked 30 hours at $15.00/hour (30 x $15 = $450) and another 25 hours at $21.00/hour (25 x $21 = $525), the employee’s weighted average hourly rate would be $17.73 ($450 + $525) ÷ (30 + 25).

Next, determine the “overtime rate” for that week by multiplying $17.73 times one-half. In this case, the employer does not multiply by 1.5 (the usual overtime multiplier) because the employee already has received the regular rate (one times the applicable hourly rate) for each hour worked. The employee is only due the extra one-half of the weighted average for each overtime hour worked. In this example, the overtime rate is $8.87 ($17.73 x .5).

Finally, multiply the overtime rate times the number of overtime hours worked to determine the amount of overtime due for that week ($8.87 x 15 = $133.05). Under this method, employees must carefully track the type of work they are performing during each hour worked.

The second method is for the employee and employer to agree, preferably in writing, in advance of the employee performing any work, that he or she will receive overtime at a rate not less than one and one-half times the hourly non-overtime rate applicable for the type of work performed during each overtime hour. So, overtime for work paid regularly at $15.00/hour will equal $22.50. Overtime for work paid regularly at $21.00/hour will equal $31.50. Under this method, employees must carefully track the type of work they are performing during each overtime hour worked.

Some Very Limited Exclusions from Overtime

A very limited number of payments to non-exempt employees may be excluded from the overtime calculation. This includes, for example, the value of a gift to the employee, such as at Christmas or another special occasion, but only if the amount is not paid per any prior agreement with the employee or based on hours worked, production, or efficiency. Another excluded amount is payment for vacation, holiday or sick time.

Employers with questions regarding overtime pay are encouraged to contact their employment attorney.