The Basics of Calculating Overtime Pay*
by Robert W. Ditmer, CPP*
The Code of Federal Regulations (CFR) contains the rules and regulations for applying the laws contained in the United States Code (USC). Title 29, Chapter 8, of the USC is usually referred to as the Fair Labor Standards Act (FLSA). The regulations covering overtime are found in Part 778 of Title 29 of the CFR. Part 785 of the Code addresses the issue of defining what is meant by the term “Hours Worked.” Most of the following definitions are contained in the USC or CFR, and they are basic to understanding the issues involving overtime pay.
- Workweek – The workweek is the basic unit of time used for determining whether or not an employee should be paid additional compensation for overtime. “An employee’s workweek is a fixed and regularly recurring period of 168 hours – seven consecutive 24-hour periods. It need not coincide with the calendar week but may begin on any day and at any hour of the day.” [29 CFR 778.105] It is not necessary that all employees of a company have the same workweek. But once the workweek has been established for an employee, it cannot be changed unless certain procedures are followed.
- Hours Worked – Under the FLSA an employee must be paid for all hours worked. The FLSA does not contain a definition of the term “work” but in the 1940s a number of court cases addressed the issue. In one court case the workweek was defined to include “all the time during which an employee is necessarily required to be on the employer’s premises, on duty or at a prescribed place of work.” (Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946)) The Portal-to-Portal Act [29 USC 251-262] extended that definition to include certain activities that take place before and after the employee may be deemed to be at his workplace. Under the regulations paid leave time is generally not included in time worked.
- Total Remuneration – The FLSA defines total remuneration as all payments “for employment paid to, or on behalf of, the employee” except for payments specifically excluded by the Act. [29 USC 207(e)] Payments that may be excluded include gifts, payments for time off (such as vacation, holidays, sick leave, etc.), business expenses reimbursed to employees, awards, retirement plan payments (such as matching amounts for a 401(k) plan), premium pay, and discretionary bonuses.
- Regular Rate of Pay – This term is the basis for all overtime pay. “The regular hourly rate of pay of an employee is determined by dividing his total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by him in that workweek for which such compensation was paid.” [29 CFR 778.109] It is an hourly rate of pay.
- Payroll Period – This term is not found in either the USC or the CFR, but it is actually the frequency at which wages are usually paid. The most common frequencies are weekly, biweekly, semi-monthly, and monthly. It is important to recognize that the payroll period actually has nothing to do with the calculation of overtime. It is the workweek that is the basis for all overtime calculations. [29 CFR 778.103] One of the biggest mistakes occurs when an employer has a biweekly payroll period, and the employer assumes that the maximum number of hours that can be worked is 80. Each workweek must stand alone. [29 CFR 778.104] Semi-monthly and monthly payrolls are especially problematic because they do not conform to any workweek.
- Exempt Employee – An exempt employee is simply an employee who by statute is not subject to the provisions of the Fair Labor Standards Act. For instance, the so-called White Collar Exemptions are covered under Part 541 of Title 29 of the Code of Federal Regulations. Any employee who is not classified as exempt is, therefore, said to be non-exempt.
Basic Computation of Overtime
So what is overtime pay? The CFR refers to Section 7(a) of the FLSA to define overtime pay. [29 USC 207(a)] “It [the FLSA] prescribes the maximum weekly hours of work permitted for the employment of such employees in any workweek without extra compensation for overtime, and a general overtime rate of pay not less than one and one-half times the employee’s regular rate which the employee must receive for all hours worked in any workweek in excess of the applicable maximum hours.” [29 CFR 778.100]
At first glance that would mean that the employer would pay the employee for the first 40 hours of work at the employee’s regular rate of pay, and overtime pay would be paid at the rate of time and a half for any hours worked over 40. Suppose the employee works 48 hours during the workweek at an hourly rate of $9 per hour.
- The first 40 hours would be paid at $9 per hour. (40 hr x $9/hr = $360.00)
- The other 8 hours would be paid at $13.50 per hour (1.5 x $9/hr). (8 hr x $13.50 = $108.00)
- Total pay for the workweek would be $468.00. ($360.00 + $108.00)
That is relatively straightforward, but suppose we introduce an additional element. Suppose the employee’s remuneration includes housing with a fair market value of $200 per month. The value of the housing has to be added to the employee’s total wages for the workweek to calculate the regular rate of pay.
Indirectly, the CFR provides a standard for allocating non-wage remuneration to the workweek. All values can be converted to an annual amount, and that amount is divided by 52. So if we multiply the monthly housing value by 12 ($200 x 12 = $2,400) and divide by 52 ($2,400 / 52 = $46.15), we can add that amount to the employee’s total remuneration. Then:
- Calculate the employee’s total wages. (48 hr x $9/hr = $432.00)
- Add the housing value to the employee’s total wages. ($432.00 + $46.15 = $478.15)
- Divide by the total number of hours worked to calculate the regular rate of pay. ($478.15 / 48 hr = $9.96/hr)
So now the employee’s wages have to be recalculated using the actual regular rate of pay of $9.96 per hour.
- The first 40 hours would be paid at $9.96 per hour. (40 hr x $9.96/hr = $398.40)
- The other 8 hours would be paid at $14.94 per hour (1.5 x $9.96/hr). (8 hr x $14.94 = $119.52)
- Total gross pay subject to taxes for the workweek would be $517.92. ($398.40 + $119.52) The actual cash gross wages from which taxes are deducted would be the gross pay minus the housing allowance. ($517.92 - $46.15 = $471.77
But now I wish to introduce the concept of the “Overtime Premium.” The overtime premium is the additional portion of the employee’s pay at the rate of 50% of the employee’s regular rate of pay. It’s the half portion of time and a half. In the above example we can recalculate the employee’s pay by calculating the overtime premium separately.
- Calculate the employee’s straight-time pay. (48 hr x $9.00/hr = $432.00)
- Calculate the overtime premium by multiplying the number of overtime hours by 50% of the regular rate of pay. (8 hr x .5 x $9.96/hr = $39.84)
- Calculate the employee’s total pay for the workweek. ($432.00 + $39.84 = $471.84) (Note: There is a 7 cents difference in cash wages because of rounding in calculating the regular rate of pay.)
- Add the housing allowance to calculate the taxable gross wages. ($471.84 + $46.15 = $517.99)
The employee’s total pay is almost the same, but the overtime premium of $39.84 has been calculated separately. Why do it this way? Because in most states overtime premiums are not included in total compensation for the purpose of calculating workers’ compensation insurance rates. (The states that don’t exclude the overtime premium are Pennsylvania, Delaware, Utah, and Nevada.) So right away we can see a cost savings.
Another important reason is the fact that the CFR contains some special methods of payment that only calculate the overtime premium as additional compensation. For instance, suppose an employee is paid only by commissions. If the employee works more than 40 hours, he is still entitled to compensation for the overtime. [29 CFR 778.117]
Suppose an employee is paid $1,000 commission during a workweek in which he works 50 hours.
- Calculate the regular rate of pay. ($1,000 / 50 hr = $20/hr)
- Calculate the overtime premium. (10 hr x .5 x $20/hr = $100)
If we can grasp this concept, then we can begin to explore salary alternatives for non-exempt employees.
*Originally published as "The Basics of Calculating Overtime Pay," PAYTECH, February 2003, pp. 36-38.