The federal 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. However, the calculations can sometimes be complicated when non-exempt employees are paid on a salary basis or receive a bonus or other incentive pay. Below, we identify some of the most common overtime mistakes made by employers.
Mistake #1: Averaging hours over multiple workweeks.
If a non-exempt employee works more than 40 hours in any workweek, they are entitled to overtime pay under the FLSA, regardless of whether you pay employees on a weekly, biweekly, or other basis. Employers are prohibited from averaging hours worked over two or more workweeks to determine whether overtime is due.
Mistake #2: Refusing to pay overtime if the time was worked without prior authorization.
If a non-exempt employee has worked more than 40 hours, they must be paid overtime, regardless of whether the overtime was pre-authorized. A policy that no overtime work is permitted unless authorized in advance doesn't relieve the employer of this requirement. You may subject the employee to disciplinary measures for working unauthorized overtime, but in no case may you withhold overtime pay.
Mistake #3: Undercounting "hours worked."
Under the FLSA, hours worked includes not only productive time (time actually spent working) but also certain nonproductive time, such as rest breaks, travel time, and training time. All this time must be included when determining whether overtime is due.
Mistake #4: Calculating overtime based on the employee's hourly rate only.
To accurately calculate overtime pay, you must first determine the employee's regular rate of pay. Their regular rate includes not only their hourly rate but also the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. Failing to include this additional compensation will result in underpaying employees for overtime.
How to correctly calculate overtime when an employee receives a nondiscretionary bonus:
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.
If the employer failed to include the bonus when determining the regular rate of pay, the employee would have been underpaid by $10 for overtime.
Step 4: Calculate total compensation.
$70 overtime pay + $700 straight-time pay = $770
Note: If the nondiscretionary bonus is earned over a single workweek, as is the case above, 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.
Mistake #5: Failing to count missed meal periods.
In general, bona fide meal periods may be unpaid and don't count as hours worked when determining whether overtime is due. Under the FLSA, an unpaid bona fide meal period must generally be at least 30 minutes without interruption, and the employee must be fully relieved of all duties for the purpose of eating a regular meal. If the meal period doesn't meet these requirements, it must generally be considered hours worked, which could result in overtime being owed.
Mistake #6: Neglecting state law.
Some states require overtime pay in additional circumstances and at different rates than federal law does. For instance, Alaska requires overtime for any workweek longer than 40 hours or for more than eight hours in a day. Additionally, your state law may require a different formula for calculating overtime pay. California, for example, requires a different methodology for calculating overtime when an employee receives a flat-sum bonus.
Mistake #7: Thinking an employee can waive their right to overtime.
Under the FLSA, non-exempt employees are entitled to overtime whenever they work more than 40 hours in a workweek. Employees cannot waive this right even if they were to do so voluntarily.
Mistake #8: Giving employees paid time off instead of overtime pay.
Employers in the private sector are prohibited from giving employees time off instead of overtime pay, a practice referred to as "comp time."
Mistake #9: Requiring or allowing off-the-clock work.
Non-exempt employees must be paid for all the time they spend working. Employers can't ask or allow these employees to work "off-the-clock." Have a policy that expressly prohibits off-the-clock work and have controls in place to prevent it.
Mistake #10: Improperly applying the fluctuating workweek method.
To use the fluctuating workweek method of calculating overtime 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 how 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 meet the applicable minimum wage for each hour worked in the workweeks in which the number of hours worked is greatest; and
- The employee must receive extra pay for overtime hours worked at a rate of no less than one-half times their regular rate of pay. To obtain an employee's regular rate for a particular workweek, divide the number of hours they worked into their salary.
An employee receives a weekly salary of $600 with the understanding that the salary is compensation for all hours worked in the workweek (apart from overtime, bonuses, and other incentive pay). The employee's work hours never exceed 50 hours per week.
The employee works 37.5 hours during week one, and 48 hours during week two. During weeks one and two, the employee works four night-shift hours per week, which are compensated at the premium rate of $5 per hour.
Straight Time Earnings
$600 (Fixed salary) + $20 (4 nightshift hours x $5 premium pay = $620
Regular Rate of Pay
$620/37.5 hours = $16.53 per hour
$620/48 hours = $12.92 per hour
$600 (salary) + $20 (4 night-shift hours x $5 in premium pay) = $620
Calculate overtime pay by multiplying the hours of overtime worked by one-half the regular rate of pay:
8 hours of overtime x ($12.92 regular rate of pay x .5) = $51.68
Then, add the overtime pay to straight-time earnings (in this case, $600 salary plus $20 night-shift pay) to determine total pay.
$620 straight-time earnings and $51.68 overtime pay = $671.68
It's important to keep in mind that the fixed salary may not vary with the number of hours worked in the workweek, such as when the employee was absent from work. However, employers using the fluctuating workweek method may take occasional disciplinary deductions from the employee's salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions don't cut into the minimum wage or overtime pay required by the FLSA.
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 things to consider. For example, some states, including California, expressly prohibit employers from using the fluctuating workweek method for paying overtime. Additionally, this method is a common source of employee lawsuits. Check your state (and local) law and consult legal counsel as necessary before using it.
Review your pay practices to ensure that you are calculating and paying overtime in accordance with all applicable laws.