Ask Addi P.: How Do I Calculate Overtime Pay?
Dear Addi P.,
I have teams putting in extra hours to complete a major company project. Can you explain the rules about how to calculate overtime pay and when it applies?
-Working Hard in Winchester
Dear Working Hard,
You bet. I'd be happy to address some of the most frequently asked questions on this issue.
What Laws Govern Overtime Pay?
The Fair Labor Standards Act (FLSA) covers who is eligible for minimum wage and overtime at the federal level, however some states may have their own rules. In places where both federal and state overtime laws are in effect, the law providing for the highest overtime pay rate will apply, according to the U.S. Department of Labor (DOL).
While most employees are generally "non-exempt" from the FLSA, the law provides for certain exemptions from the overtime requirements for employees who are paid a salary that meets the law's minimum requirements, and perform certain job duties. For example, some administrative, professional, executive, outside sales, computer professional and highly compensated employees are exempt from FLSA overtime pay requirements.
Currently, the FLSA's overtime provisions apply to nearly every employee earning less than $23,660, or $455 per week — though that threshold will change on January 1, 2020*. To the extent you have employees in states with higher minimum salary thresholds, you would generally have to satisfy the states minimum requirements to exempt employees from overtime at the state level.
How Do I Calculate Overtime Pay?
The FLSA requires covered employers to pay eligible employees no less than one-and-a-half times their regular pay rate and at least minimum wage for each hour over 40 in a workweek. Note that you define the workweek according to your organization's practices: Under the FLSA, a workweek may begin on any day and at any hour, but it must consist of seven consecutive 24-hour periods.
Although the FLSA may not require employers to compensate employees on an hourly basis, the "regular rate" is a rate per hour and can be determined by dividing total compensation for employment (subject to certain exclusions) in any work week by the total number of hours actually worked in that work week for which such compensation was paid. Note: Some states may have different requirements for calculating the regular rate.
How Do Vacation and Sick Days, Holidays, Bonuses and Commissions Impact Overtime Calculations?
Vacation days, sick days, holidays and failure by the employer to provide sufficient work are not included in the calculation of their overtime for that workweek.
It is important to note the examples of the types of pay which are not part of the regular pay rate: pay for expenses incurred on the employer's behalf, premium payments for overtime work or the true premiums paid for work on Saturdays, Sundays, and holidays, discretionary bonuses*, and payments for times when no work is performed due to vacation, holidays, or illness. Refer to this fact sheet for complete information.
Can Employers Classify Workers as Independent Contractors to avoid FLSA requirements?
Even salaried employees may be entitled to overtime, unless their salary meets the federal or state minimum threshold, and they perform certain job duties. And while independent contractors are not subject to federal or state overtime rules, tread carefully if you're considering hiring contractors in order to minimize overtime obligations. Many federal and state laws and agencies impose rules on businesses that hire independent contractors, such as, they must refrain from exercising control over that worker. Unless the independent contractors meet all of the necessary criteria that exempt them from employment status, you could find yourself facing various costs and penalties resulting from misclassification.
Can You Discipline an Employee by Denying Overtime Pay?
Generally, any permissible deductions may not cause an employee to be paid less than minimum wage and overtime. A related issue to consider is that improperly docking an exempt employee's pay could potentially cause a loss of the exemption status and they would otherwise be entitled to overtime.
Employers are facing complaints relating to non-compliance with overtime laws and regulations, so you'd be wise to want to educate yourself on this matter. As your employees continue to work overtime, the DOL's FLSA Overtime Calculator Advisor is one useful resource to keep handy.
The applications of the law can quickly become complicated, so always consult with an attorney who's familiar with wage and hour law if you're not sure what to do in a particular case at your company.
Take care,
Addi P.
Want to learn more?
Be sure to read this alert about the 2020 overtime rules and subscribe to ADP's Eye on Washington to keep up-to-date on legislative updates.
Replay ADP's 30-minute webinar on-demand anytime: "Understanding and Preparing for the New OT Rule Changes"
*On September 24, 2019, the United States Department of Labor (DOL) released its final rules for establishing the amounts required to be earned by an employee in order for that employee to be exempt from the Fair Labor Standards Act (FLSA) overtime requirements.
Under the final rule to be effective January 1, 2020, the amounts required to be earned by an employee for that employee to be exempt from the FLSA overtime requirements will be $684 per week ($35,568 annually). And up to 10% of the salary can be satisfied with discretionary bonuses.
The new salary level for a Highly Compensated Employee (HCE) will be increased to $107,432 from the current level of $100,000. Read the Eye on Washington to learn more.
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