Calculating overtime pay is an issue that almost every employer will encounter. The complexity of it deepens when you pay employees commissions, piecework, shift differentials or other bonus pay.
These factors make it more time-consuming to pay attention to every detail and to be accurate with payroll when calculating overtime pay.
Fair Labor Standards Act (FLSA)
The FLSA established the “workweek” at 40 hours. Any non-exempt employee who works more than 40 hours/week must be paid one and a half times their regular rate of pay for hours exceeding 40.
While the FLSA requires that overtime is computed on an hourly rate, earnings may be included on hourly or salary plus a piece-rate, commission, bonus, shift differential or other basis.
In calculating overtime pay for the employee who is paid with these added pay rates as well as an hourly wage or salary, the additional earnings must be worked into the overtime rate of pay. The “regular rate of pay” is defined as “all remuneration for employment paid to, or on behalf of, the employee.”
Determining the “regular rate of pay” is accomplished by adding the salary (or hourly rate x hours worked) to commission or bonuses and dividing that total by the number of hours worked. The new figure is the “regular rate of pay.”
This rate is used to compute the hourly wage that must be multiplied by time and a half, and then multiplied by the additional hours worked and added to the regular salary or regular hours worked times the hourly rate of pay.
The FLSA was established to institute a national minimum wage, a maximum work week of 40 hours, and an overtime rate of 1.5x the regular rate of pay when hours worked exceeds 40 hours, and to prevent “oppressive child labor” that was occurring at the time.
The FLSA protects employees from unfair trade practices by standardizing pay rates, yet allows higher earnings for industrious employees. Individual states, however, occasionally have different overtime rules that are legal but may differ slightly from FLSA standards.
Payments Included in Regular Rate
The FLSA requires that certain payments are included in an employee’s pay rate in addition to the salary or hourly rate; examples of types of payments included to determine the regular rate of pay:
- Shift differentials
- Bonuses and incentives for exceptional work
Retail and service establishments are examples of businesses that must pay overtime when an employee works over 40 hours per week. Commission earned is added to the regular rate of pay when overtime is figured.
A non-discretionary bonus added to an employee’s regular rate of pay works in the same way as the inclusion of a commission. This type of bonus is any type of contractual or agreed upon bonus or incentive related to production, efficiency or some other performance measurement.
A company will add the bonus or commission to the regular pay and divide the total pay by 40 hours to get the pay rate, and then multiply that pay rate by 1.5 times the additional hours to get the overtime pay. The regular pay plus bonus is added to the overtime pay to get the total amount due the employee.
In addition, employees paid by piece-rate can be paid at an overtime rate that includes the amount paid per hour for the number of items produced times one and a half. An employee paid by piece-rate is compensated for each item produced.
The piece rate for producing widgets may be $1 per widget, which is paid no matter how long it takes to do. Piece work employees are also guaranteed at least minimum wage.
It’s important, therefore, for supervisors to monitor progress to make sure that employees are producing enough to cover the minimum.
Certain payments may also be excluded from the “regular rate of pay” for calculating overtime rates. These include premium payments for work on days of rest or outside of regular hours, pay for vacation or other types of leave, idle time pay, gifts, discretionary bonuses, expense reimbursements, severance payments, employee referral bonuses and others.
An employee may be eligible for overtime pay even if it is not authorized by a supervisor but “suffered or permitted.”
If a supervisor knows or should have reason to know that an employee is working additional hours, and does not specifically intervene to stop the work, it can still be compensated at the one and a half time rate. If the supervisor, however, has given explicit instructions forbidding overtime, the employer may not be liable for paying overtime.
The bottom line is that employers that have hourly employees, and even employees paid a fixed amount salary or wage scale are subject to overtime.
If the employee earns a commission or bonus, differential rate or are paid by piece rate, they may earn more than the regular pay times 1.5 because the additional amount must be calculated in the overtime payment.