When it comes to payroll, one of the most common compliance issues is the incorrect calculation of Regular Rate of Pay.
FLSA guidance goes beyond simply looking at an employee’s base hourly rate and paying “time and a half” for overtime hours worked. It provides very detailed and specific instructions as to how to appropriately calculate the Regular Rate of Pay for non-exempt employees.
To ensure that you are paying your non-exempt employees correctly for the overtime that they work, consider the following:
FLSA requires that all covered employees (non-exempt) be paid at least 1.5 times their Regular Rate of Pay for hours physically worked over 40 in a workweek. Note that the Regular Rate of Pay is not just the employee’s hourly pay rate. The Regular Rate of Pay is equal to the average hourly rate (calculated by dividing the total wages by the number of hours worked for the period.)
If you're unsure about your organization's capabilities for calculating Regular Rate of Pay, keep reading! Or you can have Willory help you figure out your payroll compliance. Contact us or schedule a meeting to get started!
What you need to know to calculate an employee’s Regular Rate of Pay:
- Definition of the workweek (for example, Monday – Sunday).
- Number of hours that were physically worked by the employee.
- Total payments made to the employee that are considered wages for purposes of calculating Regular Rate of Pay.
Keep in mind that:
- If a salary, bonus, or other wage payment covers a period longer than the workweek, it must be reduced to its weekly equivalent. For example, if an employee is paid a $400 production bonus for a two-week period, the bonus amount used in the Regular Rate of Pay calculation will be $200.
- If the employee is paid more than one hourly rate, all rates must be considered in the Regular Rate of Pay calculation.
- Wages included in the Regular Rate of Pay calculation (list is not all-inclusive; consultation with the DOL or the organization’s attorney is recommended if there are questions):
- Shift differentials
- Non-discretionary bonuses
- Payments made in the form of goods or services (ex. employer-paid rent)
- Retroactive pay
- On-call pay
- Call-back pay
- Supplemental disability payments
- Sick leave buy-back
- Cash in lieu of benefits
- Per diem pay
- Wages not included in the Regular Rate of Pay calculation (list is not all-inclusive; consultation with the DOL or the organization’s attorney is recommended if there are questions):
- Paid time off
- Reimbursed expenses
- Benefit plan contributions
- Stock options
- Overtime compensation
- Premium pay for extra days worked
- Discretionary bonuses (a bonus made at the discretion of the employer, not based on any type of performance measurement. Please not that a discretionary bonus is different than a nondiscretionary bonus, which is based on pre-established standards that must be met to receive the payment and is paid routinely (on a set schedule). Examples of nondiscretionary bonuses included attendance bonuses, bonuses based on quantity or quality of work, bonuses paid on profitability.)
Note that some state laws require Regular Rate of Pay to be used to calculate other types of wages as well. For example, California requires sick time and meal premium hours to be paid at the Regular Rate of Pay.
Organizations should check with their payroll vendor to ensure that Regular Rate of Pay is set up to calculate on the appropriate hours; you should NEVER assume that it is set up, as vendors rely individual organizations to provide them with the setup requirements. The setup of the Regular Rate of Pay calculation will be different in various systems, but the outcome should be the same.
For assistance in calculating the Regular Rate of Pay, this DOL provided calculator is a helpful tool (used in the example below) https://webapps.dol.gov/elaws/otcalculator.htm
- Employee works 49 hours in a workweek
- Employee’s hourly rate of pay is $15.00
- Employee receives a $250 production bonus for the week
- Employee receives $125 shift pay for the week
step 1: calculate total straight-time earnings
Where a payment, such as a salary or bonus, or a commission covers a period longer than a workweek, it must be reduced to its weekly equivalent. A monthly payment can be converted to its weekly equivalent by multiplying 12 and dividings by 52. A semi-monthly payment can be converted to its weekly equivalent by multiplying by 24 and dividing by 52. A quarterly payment can be can be converted to its weekly equivalent by dividing by 13.
- $735.00 from $15.00 per hour for 49 hours
- $250.00 in a bonus payment
- $125.00 in shift differential pay
- $1,110.00 in total straight-time earnings
step 2: calculate the regular rate of pay
Generally, the regular rate includes all payments made by the employer to or on behalf of the employee (except certain statutory exclusions). The regular rate is determined by adding together the employee's pay for the workweek and all other earnings and dividing the total number of hours the employee worked in that week.
- $1,110.00 straight-time earnings divided by 49 hours worked = $22.65 per hour
step 3: calculate the overtime premium pay
Remember the straight-time earnings have already been calculated for all hours worked, so the additional amount to be calculated for each overtime hour worked (i.e., the overtime premium pay) is one-half the regular rate of pay.
- $22.65 regular rate x 0.5 x 9 overtime hour(s) = $101.92 additional half-time pay
step 4: add straight-time earnings and the additional half-time pay
- $1,110.00 straight-time earnings + $101.92 additional half-time earnings + $1,211.92 total straight-time earnings and overtime pay
We don't like to scare people with lack of compliance fears, but remember that knowing/understanding the laws isn't an excuse for lack of compliance. If you're looking for someone to partner with to ensure compliance, the Willory team is here for you!