Calculating overtime is pretty simple…right? You pay nonexempt employees one-and-one-half times their hourly rate for any hours over 40 hours in a work week. But, did you know that you have to add to the regular hourly rate any non-discretionary bonuses or certain types of commissions that are paid during that work week?
A common error in calculating overtime pay by employers involves the failure to include bonuses, shift differentials and other types of compensation in the regular rate of pay. Nonexempt employees must be paid at least time-and-one-half their “regular rate” of pay for all hours worked over 40 in a work week. The “regular rate” includes an employee’s hourly rate plus the value of some other types of compensation such as bonuses and shift differentials. The only pay excluded from the regular rate under the FLSA are certain specified types of payments like discretionary bonuses, gifts, pay for holidays and vacations, etc.
All non-discretionary bonuses and other types of compensation, for example, a Referral Bonus, must be included in the regular rate of pay when calculating overtime.
Example: An employee making $12/hour worked 56 hours in a week and also received a $50 Referral bonus.
- Multiply the 56 hours worked by their hourly rate and then add any non-discretionary pay. (56 hours x $12/hour + $50 bonus = $722)
- Then divide the total amount by the total number of hours worked to get that week’s regular rate of pay. ($722 / 56 hours = $12.89 (regular rate of pay for the week))
- Use the new regular rate of pay and multiply by 40 hours. (40 hours x $12.89 = $515.60)
- Use the new regular rate of pay to calculate the overtime pay and then multiply by the number of overtime hours worked. (16 overtime hours x $19.34 (1-1/2 times hourly rate) = $304.44)
- Add the 40-hour total with the overtime total to get their weekly gross pay. ($515.60 + 304.44 = $820.04)
Next time you pay a bonus ask yourself this question: “Is this a non-discretionary bonus?” If the answer is yes, be sure to include it in a nonexempt employee’s hourly rate for that week when calculating overtime.
Preparing payroll for your company is a huge responsibility. Be sure you are paying your employees according to the Department of Labor Wage and Hour Division’s Regulations. You never know when they will come knocking on your door! If you need help in preparing payroll, contact B2 Management & Consulting as we provide the full range of back office support, including payroll and human resources services.