Did you know that there is a difference between an hourly rate and regular rate of pay? The difference is not always calculated properly by software and the consequences can be costly to employers. Under the Fair Labor Standards Act (FLSA), any employer who violates unpaid overtime compensation laws may be liable for both the shortfall and liquidated damages, meaning double the expense to the employer.
When calculating overtime, the most commonly misunderstood and miscalculated variable is the regular rate of pay. Regular rate of pay includes all payments made by the employer to the employee. The regular rate of pay is determined by totaling all weekly compensation and dividing that total by the number of hours worked in that week. For example, if an employee worked 50 hours one week at $8.50 per hour and earned a $100 bonus that week, the regular rate of pay would be calculated as follows: 50 hours times $8.50/hr.=$425, $425 plus $100 bonus=$525, $525 total compensation divided by 50 total hours=$10.50. The overtime pay rate is one-half of the regular rate of pay. Therefore, the overtime pay would be calculated as follows: 10 hours (amount of hours above 40) x $5.25 ($10.50 x ½) =$52.50. Total gross income for the week would be $577.50, which is $525.00 plus overtime pay of $52.50.
Since the regular rate of pay needs to be calculated on a weekly basis, this means that an employee’s regular rate of pay can change from week to week. It is important to perform this calculation to ensure the overtime pay is correct. Examples of these types of compensation that need to be included in the regular rate of pay calculation include: shift differentials, paid travel time, on-call pay, call-back pay, waiting time, training time, and performance based bonuses and commissions.
There are some important exceptions and guidelines as to what is included in the total compensation amount when calculating the regular rate of pay. Paid vacation time does not need to be included in the calculation since the hours were not actually worked. Payment that cannot be measured by hours worked, production, or efficiency is excluded in the total compensation amount. Examples of these types of payments include gifts, holiday pay, sick pay, travel expenses, per diem expenses, and employee expense reimbursements. Any discretionary bonus that is paid is not included in the calculation, either. A bonus is defined as discretionary if there is no defined benefit documentation, the employee does not have a legal expectation to receive it, or if the amount to be paid is at the voluntary discretion of the employer, i.e. a holiday bonus.
Another important aspect to consider when calculating the regular rate of pay is employees who perform multiple job functions within any workweek at different rates per hour. A weighted average rate must be calculated to determine the correct overtime pay. For example, if an employee works 30 hours at $8.50 per hour and 30 hours at $9.50 per hour in the same week, the regular rate of pay would be calculated as follows: 30 hours at $8.50/hr = $255.00 and 30 hours at $9.50/hr = $285.00, $255.00 plus $285.00 equals total compensation of $540.00. To find the weighted average rate, take the total compensation divided by the total number of hours worked in the week. $540.00 divided by 60 total hours equals $9.00, which is the regular rate of pay. In this example the overtime pay would be $40.00, which is 20 hours (60 total hours less 40) x $4.50 ($9.00 regular rate of pay x ½). The total gross amount of pay for the week would be $580.00 ($540.00 total compensation plus $40.00 overtime pay).
Although this may seem complicated, if broken down into steps it is much easier to calculate. Just think about regular rate of pay as a calculated amount, not just the normal hourly wage an employee earns. It is also important to think of the overtime pay rate as half of the regular rate of pay, instead of 1.5 times the normal pay rate.
Ketel Thorstenson, LLP is your full service bookkeeping resource. Call us with questions or if you need assistance with these calculations. We are here to assit. Call 605-342-5630 and request Jani Zweber, Jeanne Schneider or myself, Amanda Dennis.