by Robert W. Ditmer, CPP*
Basic
Concepts
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
Overtime Premium
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)
So in addition to his commission, the employee would also have to be paid a $100
overtime premium for the workweek. How does this fit into the concept
of time and a half? Well, the employee has been paid at the equivalent
of $20/hr for the first 40 hours of work ($800). The other 10 hours
has been paid at the rate of $30 per hour ($20/hr x 1.5) for a total
of $300. So the total pay is $1,100.
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.
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**Robert W. Ditmer, CPP, is Controller of Parker, Cade & Large, Inc., a commercial real estate development and construction company located in Columbia, Maryland. Mr. Ditmer has worked in five different states and has experience dealing with multi-state taxation involving states with reciprocal agreements and those that do not. He can be reached at robertwditmer@yahoo.com.
