Overtime Premiums vs. Overtime Pay:What Is the Difference?
by Robert W. Ditmer, CPP*
In today’s workplace, especially in the manufacturing fields, many workers are paid different rates of pay for working different shifts or days outside of the normal Monday to Friday workweek. These different rates are often stated as shift differentials, double-time pay, or as different rates of pay for different categories of work. All of us are aware of the fact that if a non-exempt employee works more than 40 hours in a workweek, he is entitled to overtime pay based on his regular rate of pay. But there is one situation in which an employer may actually credit part of an employee’s pay against any overtime pay that may be due. That is the area of overtime premiums.
Before I define overtime premiums and describe how they work, let’s briefly review the concept of how overtime should be paid when multiple rates are involved. To do so I wish to define some terms that often don’t have standard definitions, but I wish to use these terms consistently throughout this article.
The Code of Federal Regulations (CFR) states: “Where an employee in a single workweek works at two or more different types of work for which different nonovertime rates of pay (of not less than the applicable minimum wage) have been established, his regular rate for that week is the weighted average of such rates.” [29 CFR 778.115] Suppose that an employee works at the rate of $11 per hour for 28 hours, receives a 20% differential pay rate (or $13.20 per hour) for 14 hours at night, and is paid double-time (or $22 per hour) for working 8 hours on Sunday. So the employee has worked a total of 50 hours.
Calculate the employee’s overtime pay and gross wages as follows:
Now let’s introduce the concept of overtime premiums. The CFR defines overtime premiums as follows: “Certain premium payments made by employers for work in excess of or outside of specified daily or weekly standard work periods or on certain special days are regarded as overtime premiums. In such case, the extra compensation provided by the premium rates need not be included in the employee’s regular rate of pay for the purpose of computing overtime compensation due under section 7(a) of the [Fair Labor Standards] Act. Moreover, under section 7(h) this extra compensation may be credited toward the overtime payments required by the Act.” [29 CFR 778.201(a)]
To be classified as an overtime premium, there must be a contract between the employer and the employees (such as a union contract), and the payment must meet one of the following criteria:
So what effect would this have on the calculation we made above? Double-time pay for work on a Sunday may be classified as an overtime premium. In fact, many overtime premiums can be stated as pay at a differential pay rate with the differential rate being 50% or more. With that in mind, we could recalculate the employee’s wages as follows:
Clearly, in this example there is a cost savings. That is because the overtime premium has not been included in the calculation of the regular rate of pay (so the regular rate of pay is only $11.62 per hour instead of $13.38 per hour), and in this case the overtime premium is greater than any overtime pay that would have been due.
In some cases, there may be a portion of overtime pay due even where overtime premiums are paid. For instance, suppose the employee works a total of 56 hours during the workweek including 8 hours at the premium rate on Sunday, and the employer pays a premium of 75% for Sunday work.
So in this case the employee actually receives part of his overtime pay because the calculated overtime pay is more than the overtime premium.
So the payment of overtime premiums can not only reward employees for working beyond standard working hours or days, but it can also help to keep overtime payroll costs from becoming excessive in certain situations. But employers must be aware of the fact that without a contract with employees that clearly defines overtime premiums, all wages must be included in the calculation of the employee’s regular rate of pay. And where employers pay employees at differential rates or different rates of pay without a contract for overtime premiums, overtime costs can become excessive.
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