Calculating Overtime

When Employees Must Be Paid

Deductions from Exempt Employees Pay

Calculating Overtime

When calculating overtime, can you consider the average number of hours an employee works over several weeks?
Generally, no. The FLSA requires employers to pay overtime for all hours worked over 40 in a single workweek period; the hours may not be averaged over two or more weeks. A workweek is defined as a fixed period of 168 hours or seven consecutive 24-hour days. Thus, if an employee works 30 hours one week and 50 hours the next, he must receive overtime compensation for the hours over 40 that he worked in the second week (even though the average number of hours for the two weeks is 40). This is the case regardless of whether the employee is paid on a daily, weekly, biweekly, monthly, or other basis.

There are two exceptions to this rule: (1) hospitals and residential care facilities are permitted to establish a 14-day period in lieu of the seven-day workweek for purposes of computing overtime, if the affected employees agree; and (2) public agencies may elect to pay fire protection and law enforcement employees overtime after they have worked a set number of hours (212 hours for fire protection employees and 171 hours for law enforcement employees) per work period (defined as 28 consecutive days) instead of after 40 hours in a single workweek.

How do you calculate pay and overtime for a salaried, nonexempt employee?
For employees who are not paid a regular hourly rate (such as those whose compensation is determined on a salary, piece-rate, or commission basis), you must determine what their regular hourly rate would be based on their total compensation. The regular hourly rate is computed by dividing the salary by the number of hours the salary is intended to compensate. For example, if an employee is hired at a salary of $350 and this salary is compensation for a regular workweek of 35 hours, the employee’s regular rate of pay is $350 a week divided by 35 hours, or $10 an hour. If the employee works overtime, he is entitled to receive $10 for each of the first 40 hours and $15 (one and one-half times $10) for each hour thereafter.

How do you calculate overtime for a nonexempt employee who works two jobs with different pay rates?
There are two methods for determining an employee’s overtime rate when he works two jobs at different pay rates. The first way involves calculating the employee’s regular rate of pay by taking the weighted average of the two jobs. To find the weighted average, you compute the employee’s total earnings for the week and divide this by the total number of hours spent on both jobs. Once you have determined the weighted average, overtime will be calculated as one and one-half times this average. For example, the regular rate of an employee who works 35 hours per week at $15 per hour as a machine operator ($525) and works 10 hours that same week at $7 per hour cutting the grass outside the plant ($70) is $595 divided by 45 hours or $13.22 per hour. Thus, the overtime rate for this employee is one and one-half times $13.22, or $19.83 per hour, regardless of which job the employee performs during the extra hours. The employee’s regular and overtime rates will vary from week to week with the number of hours spent performing each job.

Alternatively, an employer and employee may agree (before the work is performed) that the overtime rate will be based on the regular rate that applies to the type of work performed during the hours in excess of forty. Therefore, if an employee spends 35 hours in a week working as a machine operator at $15 per hour, and five hours a week cutting the grass at $7 per hour, the overtime rate for any additional hours spent cutting the grass is $10.50 per hour (one and one-half times $7). Conversely, the overtime rate for any additional hours spent working as a machine operator is $22.50 (one and one-half times $15). This method of computation is available for hourly employees only and does not apply to nonexempt salaried employees.

How do bonuses and incentives affect a nonexempt employee’s overtime pay?
Bonuses and incentives that are dependent on hours worked, productivity, or efficiency must be included in determining an employee’s “regular rate” of pay, since the “regular rate” is the basis for determining the overtime rate. For example, an hourly employee who earns $7 per hour in a 40-hour workweek has a “regular rate” of pay of $7 per hour and an overtime rate of $10.50 (one and one-half times $7). If that same employee received a $50 production bonus for that week, the employee’s regular rate of pay would be $8.25 per hour ($50 plus the regular weekly rate of $280, divided by 40 hours) and the overtime rate is $12.38 per hour for that week.

Under some bonus plans, the bonus is paid less than weekly. In this case, the employer may disregard the bonus until the time when the bonus may be determined and may pay compensation for overtime at one and one-half times the employee’s hourly rate, exclusive of the bonus. When the amount of the bonus is known, it must be allocated over the period it covers, and a revised overtime rate must be applied to any hours in excess of 40 that were worked during that period. The employee then should receive additional compensation for each workweek that he worked overtime during the period equal to one-half of the hourly rate of pay allocable to the bonus for that week multiplied by the number of overtime hours worked during the week.

Other examples of bonuses or incentives that must be included in an employee’s regular rate of pay are nondiscretionary bonuses paid according to contract; efficiency bonuses for completing work in less than the allotted time; attendance bonuses; and bonuses paid to employees to work in undesirable locations. Bonuses that are not included in the regular rate of pay are those received on special occasions (such as Christmas) as a reward for service and which are not measured by, or dependent on, hours worked, productivity, or efficiency. In addition, premium pay for working on holidays, Saturdays, or Sundays does not have to be included in overtime calculations if it is at least one and one-half times the employee’s regular rate of pay.

Can you give nonexempt employees compensatory (comp) time-off in lieu of paying them overtime?
Private employers may not give comp time-off in lieu of overtime. However, state and local governments can give nonexempt employees compensatory time off at the rate of one and one-half hours for each hour of overtime worked, with certain defined limits.

When Employees Must Be Paid

Do employees have to be paid extra for working weekends, nights, or holidays?
Generally, no. Nonexempt employees must be paid the overtime rate only for each hour actually worked in excess of 40 hours during a workweek. Thus, employers are not required to pay the overtime rate for work performed on a holiday, weekend, or evening, as long as the employee’s total hours worked in that workweek are less than 40. Employers that voluntarily pay at least time and one-half for time worked on a holiday, weekend, or evening also may be able to credit the extra compensation towards overtime payments for the same week. A few states (such as Rhode Island), however, require payment of at least time and one-half for employees who work on certain holidays.

Do on-call employees have to be paid for the time spent waiting to work?
Generally, you have to pay employees who are on-call only for the time when they are called in to work. The FLSA requires waiting time to be paid only if the employees must remain on or so close to the employer’s premises, or are otherwise restricted, that they cannot use the time effectively for their own purposes. For example, if the employees only have to leave word about where they may be reached, they generally are not considered to be working while on-call since the time can be used for their own purposes.

In determining whether an employee must be paid for time spent on-call, courts look at how much control the employer has over the employee and whether the employee can effectively use the on-call time for personal purposes. The Ninth Circuit Court of Appeals, in Owens v. Local 169, 971 F.2d 347, amended by 30 WH Cases 1728 (9th Cir. 1992), provided an instructive list of seven factors that courts have looked at in deciding whether an employee has use of on-call time for personal purposes: (1) whether there was an on-premises living requirement; (2) whether there were excessive geographic restrictions on the employee’s movements; (3) whether the frequency of calls was unduly restrictive; (4) whether a fixed time limit for response was unduly restrictive; (5) whether the on-call employee could easily trade on-call responsibilities; (6) whether use of a pager could ease restrictions; and (7) whether the employee had actually engaged in personal activities during on-call time.

Do you have to pay employees when they work unauthorized hours?
According to Department of Labor (DOL) regulations, if you are aware that an employee is working more time than is required, you must compensate the employee, even if you did not specifically request the additional work. For example, an employee voluntarily may continue to work at the end of the shift to finish an assigned task. If the employer knows or has reason to believe that the employee is continuing to work, the time is considered working time that must be paid. It is management’s duty to prohibit employees, through discipline or other means, from working additional time if it does not want to pay for the work time. Merely having a rule against extra work is not enough. You also must make every effort to enforce the rule.

In addition, employers should not use misleading phrases such as “employees are not permitted to begin work more than 15 minutes before their scheduled starting times or to stop work more than 15 minutes after their scheduled quitting times.” This wording may imply that employees may work up to an extra 30 minutes each day without counting the time as working time. The Supreme Court recognized (in Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946)) the “de minimis” rule that an insignificant amount of time does not have to be counted as work time, such as when an employee spends a few extra seconds or minutes at work. However, according to the DOL, this rule applies only where “there are uncertain and indefinite periods of time involved of a few seconds or a few minutes duration and where the failure to count such time is because of considerations justified by industrial realities.”

Deductions from Exempt Employees Pay

What does “salary basis” mean in connection with an exempt employee?
In addition to meeting certain job duty requirements, the employee generally must be paid on a “salary basis” to be exempt from the overtime pay requirements. This means that he is paid a predetermined amount, which is all or part of his compensation, on a weekly or less frequent basis. Exempt employees generally must receive their full salary for any week in which they perform work, regardless of the number of days or hours worked that week.

Can deductions be made from an exempt employee’s salary for disciplinary reasons?
Generally, no. However, you may make deductions for infractions of “safety rules of major significance.” This includes rules relating to the prevention of serious danger to the worksite or other employees, such as no smoking rules in explosive plants, oil refineries, and coal mines.

Can deductions be made for full-day absences?
You can make a deduction when an employee is absent for a full day for personal reasons, for example if he takes an unpaid personal day. You can also make deductions for a day’s absence due to illness or injury if the employer has a bona fide plan, policy, or practice that provides compensation for loss of salary due to sickness or disability (such as a policy that allows employees to accrue paid sick leave). This is true even if the exempt employee has not yet qualified for the plan or has exhausted the plan’s sick leave allowance.

Can deductions be made from an exempt employee’s salary for partial-day absences?
Generally, if you make deductions from an exempt employee’s pay for absences of less than a day, you are considered to be treating the employee as an hourly employee. Therefore, by doing this, you may jeopardize the employee’s exempt status under the FLSA and become liable for any overtime worked by the employee. Many employers have attempted to avoid docking pay and jeopardizing the exemption by requiring exempt employees to use paid leave for partial day absences. The DOL traditionally has considered this type of arrangement to be permissible because the employee does not experience a reduction in compensation. In addition, there are special rules for exempt public employees allowing them to be considered exempt even if their pay is reduced for partial-day absences.

However, several courts have disagreed with the DOL’s position on partial-day use of paid leave and have determined that this practice does, in fact, treat an exempt employee like an hourly, nonexempt employee and, therefore, causes loss of the exemption. On the other hand, a number of courts have sided with the DOL’s position on this issue. Because of the split in the courts, you should consult legal counsel if as a private sector employer you require exempt employees to use paid leave for absences of less than a day. In addition, exempt employees may resent being required to use paid leave for partial-day absences, particularly if they regularly work long hours, i.e., more than 40 per week. In these cases, they are not entitled to overtime pay even though they put in long hours, yet they are required to use a few hours of vacation or sick leave to take care of personal business.