Regular rate for salaried non-exempt employees

General rule for salaried employees

Under 29 C.F.R. 778.113(a), to arrive at the regular rate for a non-exempt salaried employee, take the salary and divide it by the number of hours the salary is intended to compensate. If the salary is for a 40-hour workweek, overtime is simple: divide the salary by 40 to get the regular rate, and then pay any overtime hours by multiplying 1.5 times the regular rate.

However, if the salary is for a lesser workweek, such as a part-time employee who works 32 hours, divide the salary by 32 to get the regular rate. If the employee works additional hours, the total pay would be the salary for the 32 hours plus wages for each additional hour at the regular rate. For example, if the employee works 42 hours, the total pay would be the salary for the first 32 hours, plus 8 hours times the regular rate, plus two hours at 1.5 times the regular rate.

Finally, if the salary is intended to compensate for 45 hours per week, the regular rate would be the salary divided by 45. The hours past 40 would be compensated at one-half of the regular rate up to 45, and hours past 45 would be paid at time and a half.

Regular rate for semimonthly salaries

For non-exempt salaried employees who are paid either twice per month (semimonthly) or monthly, the payments must be reduced to their workweek equivalents in order to arrive at the regular rate of pay. Once the workweek equivalent is known, then the general rule for weekly salaries is applied. 29 C.F.R. 778.113(b) provides two main ways for an employer to compute overtime pay for salaried employees paid once or twice per month. The first method involves figuring out the workweek equivalents:

Semimonthly salary - multiply the salary times 24 to get the annual equivalent, then divide that figure by 52 to get the workweek equivalent. Then apply the general rule of 29 C.F.R. 778.113(a) to arrive at the regular rate.

Monthly salary - multiply the salary by 12 for the annual equivalent, then divide that figure by 52 to get the workweek equivalent. Then apply the general rule of 29 C.F.R. 778.113(a) to arrive at the regular rate.

The other main way to pay overtime based on semimonthly or monthly salaries is to figure it on the basis of an established basic rate as provided in section 207(g)(3) of the Fair Labor Standards Act and Part 548 of the regulations. 29 C.F.R. 548.3(a) provides that the employer and employee may agree that the regular rate shall be determined by dividing the monthly salary (or semimonthly salary times 2) by the number of regular working days in the month and then by the number of hours of the normal or regular workday. Of course, the resultant rate in such a situation may not be below the statutory minimum wage. Further requirements for such an established regular rate are found in 29 C.F.R. 548.2.

Regular rate for salaried employees with irregular hours

If an employee is paid a fixed salary each workweek for hours that vary from week to week, the employer may use an overtime calculation method authorized in 29 C.F.R. 778.114. This method is called the "fixed salary for fluctuating workweeks" form of computing overtime. It is the most favorable method for employers when computing overtime, but certain requirements have to be met. Many employers favor it because it results in a diminishing regular rate, and thus diminishing overtime pay, the more overtime hours there are in a workweek. For the same reason, many employees do not like this method. Moreover, the regular rate varies under this method from week to week, so some employers and employees do not like the unpredictability of this way of computing overtime pay.

For an employer to qualify for using this method, the employee must have a work schedule with fluctuating hours, i.e., not be on a fixed schedule, and must be paid a fixed salary that is meant to be straight-time compensation for all hours worked in a workweek, whether few or many. In addition, the fixed salary must be paid "pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many." The "understanding" does not require a formal agreement or explanation beyond simple notice that the fixed salary will serve as straight-time compensation for all hours worked. With almost no exceptions, no reduction in the salary may be made for short workweeks. Although the full fixed salary must be paid during short workweeks resulting from a lack of work or authorized absences due to personal business or illness, an employer may make "occasional disciplinary deductions for willful absence or tardiness" if the employee, without authorization, fails to work the available schedule. However, such deductions may not affect either the minimum wage or the regular rate calculation for overtime pay purposes, i.e., the full salary is still divided by the actual hours worked that week to calculate the regular rate of pay.

Application of available paid leave to time missed during a short workweek is allowed, as noted in several DOL opinion letters, including FLSA2006-15 issued on May 12, 2006. Finally, the salary must be large enough to ensure that the regular rate will never drop below minimum wage. In using this method, the regular rate is determined by dividing the fixed salary by the number of hours actually worked that week (which does not include paid leave or paid holidays).

Now, here's where the importance of this overtime method comes in: since the fixed salary is already deemed to compensate the employee at straight time for all hours worked, any overtime hours only need to be paid at "half-time" instead of time and a half. Remember, the employee has already been paid straight time by virtue of the salary, and the straight time is only paid once, so the overtime hours will be paid at half the regular rate, thus bringing the employee up to time and a half. In workweeks in which the overtime is high, the regular rate will be low, and the employer will enjoy a lower per-hour overtime cost. The drawback is that if work is slow, and the employee is only working 25 or 30 hours per week, the fixed salary must still be paid. Useful examples of how to apply this method are found in 29 C.F.R. 778.114.

Note that the Department of Labor has clarified in regulations published April 5, 2011 (see the rule summary), that paying bonuses or commissions is incompatible with the fluctuating workweek salary method.