When ‘Regular Rate’ Isn’t So Regular: 4 Common Mistakes in Calculating Overtime Pay

February 11, 2020

Many employers make the mistake of assuming an employee’s overtime pay rate is simply the person’s hourly rate multiplied by 1.5—paying “time and a half” the hourly pay rate for overtime hours. In reality, the correct overtime rate is determined by dividing the employee’s “total remuneration” for employment in a workweek (subject to a few specific exclusions) by the total number of hours actually worked by the individual in that time period. To compensate overtime-eligible (nonexempt) employees properly and dodge costly wage and hour lawsuits, you should avoid the following common mistakes when it comes to calculating the regular rate for overtime pay.

Failure to Include Earned Bonuses

All nondiscretionary bonuses must be included in the regular rate. Nondiscretionary bonuses include those that are announced or promised to employees to encourage them to work more steadily, rapidly, or efficiently or to remain employed. Some examples of nondiscretionary bonuses, which must be included in the regular rate, include attendance bonuses, monthly or quarterly performance bonuses, and retention bonuses.

Only truly discretionary bonuses—i.e., the employer retains full discretion on whether to award them and, if so, how much to give—may be excluded from the regular rate of pay. In practice, very few bonuses qualify as discretionary under the law.

Generally, here is how to calculate the overtime owed on a bonus:

  • The bonus must be apportioned back over the work-weeks of the period during which it was earned; and
  • The employee must be paid an additional one-half of the increase in the hourly rate of pay attributable to the bonus multiplied by the number of hours worked in excess of the overtime threshold for each work-week during the period when overtime was worked.

It’s the same method you use when an employee earns commissions, which also must be included in the regular rate.

Failure to Include Differentials or Other ‘Extras’

Payments like shift differentials, weekend differentials, and hazard pay must be included in the regular rate of pay. For example, if a nurse is paid an hourly rate of $20 and earns $5 per hour for working the night shift, the overtime pay rate is ($20 + $5) x 1.5 = $37.50.

Failure to Have OT Rate Agreement with Employee Working Two Jobs

If an employee works two different jobs during a single workweek, each with a different rate of pay, you may use a blended rate, or weighted average, to compute the person’s regular rate of pay. The alternative is to use a rate that isn’t less than 1½ times the hourly rate established for the type of work the employee is performing during the overtime hours.

To use the alternative, however, there must be an agreement between the employer and the employees in advance of the work being performed. Also, the agreement must provide for payment of overtime based on the rate paid during nonovertime hours for the type of work being performed. It cannot be an agreement for payment based on the lowest hourly rate being paid during the workweek.

Failure to Include Retroactive Pay Increases

When an employee receives a retroactive pay hike, e.g., as a result of collective bargaining, the increase also operates to raise the regular rate of pay for the person during the period of retroactivity. For example, an increase of $1 per hour would mean the employee is owed a retroactive increase of $1.50 for each overtime hour she worked during the retroactive period.

A retroactive increase paid in the form of a lump sum for a particular period must be apportioned back over the hours of the period to which it is allocable to determine the resulting increase in the regular rate. It’s the same way a bonus or commission must be apportioned back and overtime paid based on the increase to the regular rate of pay.

Bottom Line

Calculating the regular rate correctly can be tricky, but it’s of paramount importance in paying employees correctly under federal and state wage laws and avoiding costly lawsuits. Audit your practices to ensure compliance with the regular rate rules. Also, be aware the U.S. Department of Labor (DOL) has proposed to clarify and update the rules in a way that better reflects today’s workplace practices.

This article, slightly modified to note recent updates, was featured in the January issue of the Great Lakes Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

Leslie Sammon
Leslie Sammon