What is the Correct Way to Calculate Overtime Pay?
An employee’s overtime pay is based on his or her “regular rate of pay.” Under the FLSA, employees must be paid one and one-half times their “regular rate” of pay for all hours worked in excess of 40 during an individual work week. The regular rate of pay, however, is not always the same as the employee’s hourly rate of pay. This is because all work-related payments must be taken into account when calculating an employee’s correct regular rate of pay. As a result, an employee’s “regular rate” is always equal to or greater than his or her hourly rate of pay. There are various types of payments that employers are required to include when computing the regular rate of pay for all employees, both hourly and salaried. The following types of payments must be factored in when calculating an employee’s regular rate of pay for overtime purposes.
- Commissions and Bonuses: When an employee receives commissions or a bonus, those payments must be included as part of his or her total compensation in calculating employee’s regular rate of pay for overtime pay purposes. Commissions and non-discretionary bonuses, or other additional payments that are directly tied to hours worked or to the achievement of specific results, must be taken into account when determining the regular rate of pay. Only “non-discretionary” bonuses, like certain types of gifts, may be exempt under FLSA overtime laws.
- Incentive Pay: Many employees will receive extra compensation for special achievements, such as if they are involved in the training or educating of another employee. Such incentive payments also must be included as part of the employee’s regular rate of pay.
- Shift Differentials: Employees who work nights, weekends, or holidays are often paid a “shift differential.” Shift differential are often improperly excluded from the regular rate of pay in the healthcare industry. The FLSA requires employers to include in the regular rate of pay such types of payments, provided that the “differential” is less than 50% of the employee’s regular rate of pay.
- Longevity Pay: Extra payments related to the length of time an employee has worked at a company must be added to the employee’s total wages to determine the correct regular rate of pay.
There are certain types of payments that an employer may exclude under the FLSA when computing an employee’s regular rate of pay. For example, gifts, discretionary bonuses, profit-sharing plans, thrift-saving plans, and pension benefit plans may be excluded from computing an employee’s regular rate of pay. Also, employers may exclude all “premium” payments if the payment equals or exceeds one and one half times the employee’s pay rate for the hours worked during that time period.
Special rules apply to calculating overtime pay owed to salaried employees and tipped employees. Follow the links below to learn more:
- Overtime Pay for Salaried Employees
- Overtime Pay for Tipped Employees
- Examples of Illegal Compensation Methods
Questions? Contact an overtime lawyer at Werman Salas P.C.