Overtime pay
- The regular rate of pay, which cannot be less than minimum wage, must be determined first before calculating overtime.
- When an employee is performing two separate jobs for the same employer, all hours worked in both jobs must be credited toward overtime.
For covered, nonexempt employees, the Fair Labor Standards Act (FLSA) requires overtime pay to be at least 1.5 times an employee’s regular rate of pay after 40 hours of work in a workweek. Some exceptions apply under special circumstances to police and firefighters and to employees of hospitals and nursing homes.
Extra pay for working weekends or nights is a matter of agreement between the employer and employee (or the employee’s representative).
Some states have overtime laws. In cases where an employee is subject to both state and federal overtime laws, the employee is entitled to overtime according to the higher standard (i.e., the standard that will provide higher overtime pay).
Regular rate of pay
Before calculating overtime pay, an employer must first determine the regular rate of pay. The regular rate of pay cannot be less than minimum wage and includes all remuneration for employment except certain payments excluded by the FLSA.
When thinking of wages paid to employees, an employer probably thinks of the dollar amount listed on the paycheck. However, the FLSA recognizes non-cash items as wages if the items are provided as consideration for employees’ efforts. Where non-cash payments are made (such as prizes and gifts), the reasonable cost to the employer or fair value of such goods must be included in the regular rate. For instance, if an employee receives a gift card as a reward for perfect attendance, this must be counted as wages and would affect the overtime rate.
In one case, employees of a beer bottling company sued for additional overtime pay, claiming that the free beer they received each month was part of their wages and therefore increased their average hourly rates of pay. Since overtime must be calculated using the regular hourly rate, an increase in the regular rate would also increase the overtime rate.
Certain gifts and payments are not wages and do not impact the overtime rate, although the value can still be taxable income. For example, holiday bonus gifts (if not de minimis) and vacation pay count as taxable income, but do not affect the amount of overtime owed. Payments that are not part of the regular rate include:
- Pay for expenses incurred on the employer’s behalf;
- Qualifying premium payments for overtime work;
- Qualifying premiums paid for work on Saturdays, Sundays, and holidays;
- Discretionary bonuses;
- Gifts and payments in the nature of special occasions; and
- Payments for occasional periods when no work is performed due to vacation, holidays, or illness.
Bonuses
The FLSA does not address nonproduction cash bonuses, payments that are not production-based. These bonuses are generally a matter of agreement between an employer and an employee (or the employee's representative).
Employers may exclude incentives or bonuses paid to hourly employees as a reward for service from the regular rate, provided the amounts of the payments are not measured by or dependent on hours worked, production, or efficiency. Examples include, but are not limited to, certain sign-on bonuses and certain longevity bonuses.
Much will depend on whether the bonus is discretionary or non-discretionary.
Discretionary bonuses are excludable from the regular rate of pay. A bonus is discretionary only if all the statutory requirements are met:
- The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus;
- The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
- The bonus payment is not made according to any prior contract, agreement, or promise, causing an employee to expect such payments regularly.
Examples of some common bonuses that may be excludable discretionary bonuses if they meet the statutory requirements include:
- Bonuses for overcoming a challenging or stressful situation,
- Bonuses to employees who made unique or extraordinary efforts not awarded according to pre-established criteria,
- Employee-of-the-month bonuses,
- Severance bonuses, and
- Referral bonuses to employees not primarily engaged in recruiting activities (subject to additional criteria).
The label assigned to the bonus and the reason for the bonus do not conclusively determine whether the bonus is discretionary. While a bonus may be labeled discretionary, if it does not comply with the FLSA, then the bonus is not an excludable discretionary bonus. The determination must be made on a case-by-case basis depending on the specific circumstances.
Employers may not credit a discretionary bonus towards overtime compensation due under the FLSA.
Nondiscretionary bonuses are included in the regular rate of pay, unless they qualify as excludable under another statutory provision.
Examples of nondiscretionary bonuses that must be included in the regular rate include:
- Bonuses based on a predetermined formula, such as individual or group production bonuses;
- Bonuses for quality and accuracy of work;
- Bonuses that are announced to employees to induce them to work more efficiently;
- Attendance bonuses; and
- Safety bonuses (i.e., number of days without safety incidents).
Such bonuses are nondiscretionary because employees know about and expect them. Understanding how an employee earns one might lead to an expectation of receiving the bonus regularly. The fact that the employer has the option not to pay the promised bonus does not make the bonus discretionary.
Regular rate includes non-cash payments
The FLSA allows an employer to pay a portion of wages in forms other than cash. For example, the wages of a food service employee may include the reasonable cost of meals furnished by the employer. An apartment complex employee may be given an apartment and utilities in addition to an hourly wage or salary. In such cases, the employer is allowed to count the reasonable cost of meals, lodging, or other facilities toward the minimum wage that would normally be required.
If the compensation includes such non-cash payments (also called “wages in kind”), the reasonable cost of the non-cash items must be included in the employee’s regular rate for overtime purposes. The employee’s straight-time hourly earnings or salary would be added to the reasonable cost of the non-cash payments, and that total would be divided by the number of hours worked for the workweek in order to calculate the regular rate.
Employees working at two or more rates
In some cases, an employee who already works for an employer will accept a second job with the same company (perhaps working two part-time jobs that pay different rates). This is acceptable, but since there is only one employment relationship, all hours worked in both jobs must be credited toward overtime.
In other cases, an employer will assign additional duties and choose to pay a different rate, or perhaps define certain duties such as travel or training to be paid at a lower rate.
If an employee works two different jobs at two different rates of pay, the FLSA allows two different methods of computing the regular rate for overtime calculation purposes: