Making Cents: How to Properly Calculate Overtime Under the FLSA

Calculating overtime pay properly under the federal Fair Labor Standards Act is not as simple as many employers believe, a payroll expert said May 18.

Many employers calculate overtime pay by multiplying an employee’s hourly rate of pay by 1.5 for all overtime hours worked, said Marie Esposito, director of enterprise payroll for The Heritage Group. However, this is not how the federal Labor Department’s Wage and Hour Division does its computations.

“Normally, when we are trying to calculate normal overtime, you think in your mind because you’ve been doing payroll for so long that for anything over 40, the hourly rate times 1.5 is going to give you a rate that you use for all hours over 40,” Esposito said. “And that’s the way we’ve probably been doing it since we started doing payroll. But, if you ever get audited by the Wage and Hour Division, they have a special formula where they break out 0.5 from the 1.5. They will not use the 1.5 for calculations.”

Employers should use the WHD’s method to properly calculate overtime under the FLSA, Esposito advised.

The first step involves determining an employee’s regular rate of pay, which is different from regular pay, she said at PayrollOrg’s 41st Payroll Congress.

Regular pay is the amount paid on a specific basis, such as hourly or weekly. The regular rate of pay, however, includes the regular rate as well as additional amounts, such as nondiscretionary bonuses, shift differentials, and on-call pay. Some monetary amounts, like discretionary bonuses, gifts, and vacation pay, are not included when determining the regular rate of pay, Esposito added.

“Under the FLSA, the regular rate of pay equals the total compensation in the workweek divided by the total hours worked in the workweek,” she said.

If an employee’s pay for a workweek consists only of regular pay, the regular rate of pay will equal the regular pay, Esposito said. However, if the pay contains any additional amounts that must be included in regular rate of pay calculations, those amounts must be part of the employee’s total compensation.

Employers are only able to determine an employee’s overtime premium rate once they calculate an employee’s regular rate of pay, she said. The overtime premium rate is the rate of pay that is multiplied by the number of overtime hours worked to determine the overtime premium owed to the employee.

To calculate the overtime premium rate, employers must multiply the regular rate of pay by 0.5, she said.

For example, an employee works 50 hours in the workweek at $10 per hour and also receives a $400 bonus for that work. The employee’s regular pay for that workweek is $500 ($10 × 50 hours), while the total compensation is $900 ($500 + $400 bonus). Because the regular rate of pay is total compensation divided by all hours worked in the workweek, the regular rate of pay is $18 per hour ($900 ÷ 50 hours), she explained.

With an $18 per hour regular rate of pay, the overtime premium rate is $9 ($18 × 0.5), Esposito said. Therefore, the overtime premium owed to the employee is $90 ($9 × 10 overtime hours), and the employee’s total wages for the workweek are $990 ($900 + $90 overtime premium).

Unfortunately, these calculations can become must more complex if other forms of pay are involved, such as retroactive nondiscretionary bonuses, Esposito said.

“If we have a nondiscretionary bonus that’s retroactive and goes over multiple pay periods, we have to look at the regular rate of pay through that entire period and adjust for any overtime premiums that an employee has to be paid,” she explained.

If an employer provides a year-end production bonus to an employee who worked overtime during the year, for example, the employer must divide the bonus amount by the total number of hours worked, including both normal hours and overtime hours, Esposito said. The employer must then multiply the quotient by 0.5. The resulting amount is then multiplied by the number of overtime hours worked to determine the additional overtime premium owed because of the impact the bonus had on the employee’s regular rate of pay for the year.

By calculating overtime pay using these same methods as the WHD, employers can avoid penalties and back wages, she said.

“You want to make sure your payroll system is calculating correctly,” Esposito said. “It’s important to get used to understanding how these calculations are broken out so you can ensure that your payroll system is in compliance.”