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. Some states, such as California, require overtime pay in additional circumstances and at different rates. Here are eight do's and don'ts to help you understand your responsibilities for calculating overtime under federal law.
KEY POINTSThe keys to calculating overtime in accordance with the law are:
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What are some guidelines for calculating overtime correctly?
1. Examine the hours worked in the ‘workweek.’
To calculate whether/how much overtime is due under federal law, an employer must examine the total hours worked by the employee during the workweek. A workweek is a period of 168 hours during 7 consecutive 24-hour periods. It may begin on any day of the week and at any hour of the day established by the employer. Once the beginning time of an employee’s workweek is established, it remains fixed regardless of the hours the employee is scheduled to work. However, the beginning of the workweek may be changed if the change is intended to be permanent and isn’t designed to evade the overtime requirements.
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What is daily overtime? A handful of states require employers to also pay overtime after working a certain number of hours in a workday. This is often called daily overtime. In these states, employers must also examine the number of hours worked in a workday to determine whether and to what extent overtime is due. |
2. Determine the employee’s ‘regular rate of pay.’
To accurately calculate overtime pay, you must first determine the employee's regular rate of pay. An employee's regular rate includes their hourly rate as well as the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. Therefore, if the employee receives these other types of compensation, you must factor them in when determining their regular rate of pay.
3. Understand what is considered a nondiscretionary bonus.
Under the FLSA, most bonuses are considered nondiscretionary and therefore must be included in the regular rate of pay calculation. Nondiscretionary bonuses include those:
- Based on a predetermined formula, such as individual or group production bonuses;
- Bonuses for quality and accuracy of work;
- Bonuses announced to employees to induce them to work more efficiently;
- Attendance bonuses; and
- Safety bonuses (i.e., number of days without safety incidents).
These bonuses are nondiscretionary because employees know about and expect the bonus. The fact that the employer has the option not to pay the bonus doesn't make the bonus discretionary.
4. Prorate nondiscretionary bonuses over the bonus period.
If the nondiscretionary bonus is earned over a single workweek, 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. If the calculation of the bonus is deferred over a period longer than a workweek, the employer may temporarily disregard the bonus in computing the regular rate until the amount of the bonus can be determined.
In other words, the employer would pay compensation for overtime at 1.5 times the hourly rate until the bonus can be determined. Once the amount of the bonus can be ascertained, it must be apportioned back over the workweeks of the bonus period. The employer must then recalculate the regular rate of pay for each overtime workweek in the bonus period and pay the overtime premium pay due on the bonus.
What practices should be avoided when calculating overtime?
5. Don’t average hours worked over two or more workweeks.
For purposes of overtime, each workweek stands alone; employers are prohibited from averaging two or more workweeks to determine whether overtime is due. 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.
6. Don’t forget to include travel, training and other compensable non-productive time in hours worked.
As mentioned above, the 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. The definition of hours worked includes both the time spent actually working and time spent on certain other non-productive activities, such as attending training sessions, going on rest breaks, and traveling for work. All this time must be included when determining whether/how much overtime is due.
For example, in most cases, the FLSA requires employers to pay non-exempt employees for the time they spend in training and count it when determining if/how much overtime is due. In order for training time to be considered unpaid and not count when determining whether/how much overtime is due, the training must meet all four of the following criteria:
- Attendance is outside of the employee's regular working hours;
- Attendance is voluntary;
- The course, lecture or meeting is not directly related to the employee's job; and
- The employee does not perform any productive work during such attendance.
Under FLSA regulations, training is considered directly related to the employee's job if it is designed to help the employee handle their current job more effectively as distinguished from training the employee for another job (such as a higher level position).
7. Don’t count paid holidays, vacations and sick days as hours worked unless you promised to do so.
Unless you promise otherwise, overtime laws don’t require you to count paid time off toward hours worked when determining whether/how much overtime is due.
For example, let’s say an employee’s workweek is Sunday through Saturday. If, in one workweek, the employee has a paid holiday on Monday and then works 40 hours the remainder of that workweek, the employee wouldn’t be entitled to overtime for the workweek under federal law, unless the employer promised otherwise.
Keep in mind that, in the handful of states with daily overtime requirements, the employee may be entitled to overtime under state law (e.g., they work more than the threshold for daily overtime in any workday). Check your state law to ensure compliance.
8. Don’t neglect to factor in multiple rates when applicable.
When the employee has two or more rates of pay during an overtime week, the regular rate for that workweek is generally the weighted average under federal law. For the purposes of determining the regular rate of pay, federal law also allows employers to use the hourly rate in effect when the overtime work is performed, as long as the employee agreed to this method in advance of performing the work and certain other conditions are met. These agreements should be in writing. Some states have different rules. Check your state law to ensure compliance.
Conclusion
Review your pay practices to ensure that you are calculating and paying overtime in accordance with all applicable laws.
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