Is Your Overtime Calculation Correct?

The US Department of Labor helped employees recover a record $220,613,703 in back wages for FLSA (Fair Labor Standards Act) violations in 2007. But while wage and hour investigations have focused on large employers, small employers are not immune to potential violations and hefty payments.

Wage and hour laws can be very complicated and confusing. When employers take a good look at their practices and policies they can spot potential problems. A good place to start is looking the way that you are currently paying overtime.

Many employers have a rule that requires employees to get permission before working overtime.It sounds logical to say that you need to know if work is going to take extra time and cost more in wages.Yes, you can have this policy, but if the employee works the overtime, whether or not they get authorization, you need to pay the overtime rate of 1.5 times their regular rate of pay.Federal law says that overtime-eligible employees must be paid for working more than 40 hours in a workweek.

The workweek needs to start and end on an established schedule. You can’t change it each week to avoid overtime. Your state or municipality may also require overtime for working more than 8 hours in one work day. (Eligibility for overtime and classifications is a more complicated topic I’ll save for another post.)

The Formula for Calculating Overtime Correctly

Employers can also get tripped up by using the wrong rate to calculate the overtime payment. Let’s say an employee works for 40 hours at their regular job at $10an hour and then helps you out by working in another department for inventory at $8.00 an hour for the last 10 additional hours of the week. Too many employers think that the overtime rate, the time and one half, is based on the $8.00 -- so it would be paid at $12 an hour. That's not correct.

Overtime is paid based upon an employee’s regular hourly rate of pay. The regular rate of pay is calculated by adding up all the pay and dividing it by the total number of hours worked. If you pay any kind of commission or incentive, this needs to be added in when calculating the regular rate.

Using the example above the calculation looks like this;

Step 1- Multiply the hours worked by the appropriate hourly rate.

40 hours X $10.00 per hour = $400

10 hours X $8.00per hour = $80

Step 2- Add the totals from Step 1 to determine total base pay.

$480

Step 3- Determine the regular rate by dividing the total base pay by the number of hours worked.

$480 / 50 hours = $9.60 per hour

Step 4 – Determine the overtime rate by multiplying the regular rate by 1.5 and calculate the overtime.

$9.6 x 1.5 = $14.40 overtime rate

$14.4 x 10 = $144 overtime pay for the week

Step 5 – Add the forty hours at the regular rate plus the overtime.

$400 + $144 = $544

Sorry if the step by step seemed a bit like going back to school but I have seen too many employers complete this calculation incorrectly.Showing them step by step has helped. You can always skip these steps by automatically paying overtime based on the highest rate the employee earns during the workweek as long as you also include any bonuses or commissions.

One bit of good news in this confusion is that the Department of Labor can be really helpful by phone at 1-866-387-9243 (1-866 4US-WAGE). The web site www.dol.gov has so much information it can seem like too much. Your state department of labor can also be a good source of information. Find DOL services by location on the Department of Labor web site. The recently published Labor Standard Information for New and Small Business is also available.

Spending a bit of time sorting out all of this information can save headaches and the potential for big back pay awards