In my never-ending quest to show you how many different ways you can screw up paying your employees under the federal wage and hour laws, today I am going to talk about how to properly calculate overtime payments for salaried, nonexempt employees.
An employer has two choices in how to pay overtime to a salaried nonexempt employee: by a fixed work week or by a fluctuating work week.
For reasons that will be illustrated below, the latter is a much more cost-effective option, and is your best way to save money overtime payments for this class of employees.
Spoiler alert: there is some math involved.
By a Fixed Work Week
- If you pay an employee a weekly salary, you must calculate the regular hourly rate of pay by dividing the weekly salary by the number of hours worked in that particular week.
- For example, if you hire an employee at a weekly salary of $525, which is intended to compensate for a regular 40 hour work week, the employee’s regular rate of pay will be $13.13 per hour ($525 /40). If that employee works overtime (let’s say, 45 hours that week), you will have to pay that employee $19.70 for each overtime hour worked ($13.13 *1.5). Thus, in a 45-hour week, the employee would be paid $623.50—the $525 salary + $98.50 in overtime ($19.70 * 5).
On a Fluctuating Work Week
- Oftentimes the number of hours a salaried employee works will vary from week to week, depending on the given needs of the job. One might work 40 hours one week, 45 the next, and 38 the week after that. An employer and employee can agree that a salary will cover all straight time pay for all hours worked in a given week, no matter how few or how many. Payment for overtime hours at one-half such rate satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate as part of the salary. And, that overtime premium will vary from week to week depending on the number of hours worked.
- To use this method of overtime calculation, there has to be a clear mutual understanding of between the employer and employee that the fixed salary is compensation (apart from overtime premiums) for the hours worked each work week, whatever the number.
- This “fluctuating workweek” method of overtime payment may not be used unless the salary is sufficiently large to ensure that there will be no work weeks in which the employee’s average hourly earnings from the salary fall below the minimum wage.
- For example, taking our $525 salary from above, in a 45-hour work week, the hourly rate would be $11.66 ($525 / 45). But, for the extra 5 hours the employee would only be owed an additional $29.15 ($5.83 * 5), for a total weekly compensation of $554.15. The fluctuating work week saves this employer $69.35 in wages for the week. Thus, it is easy to see why the fluctuating work week is the preferred method for calculating overtime premiums for salaried non-exempt employees.
- the employee clearly understands that the straight-salary covers whatever hours he or she is required to work;
- the straight-salary is paid irrespective of whether the workweek is one in which a full schedule of hours are worked;
- the straight-salary is sufficient to provide a pay-rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours worked is greatest; and
- in addition to straight-salary, the employee is paid for all hours in excess of the statutory maximum at a rate not less than one-half the regular rate of pay.