In the past year there has been a lot of discussion concerning the Trump Administration’s overhaul of the Obama-era proposed overtime rules. Whether or not a new salary threshold for exempt employees ever goes into effect, there are many basic misunderstandings regarding how overtime operates that should be clarified. Below are five overtime principles that employers should know.
Overtime is Based on the Workweek.
First and foremost, hourly employees and nonexempt salary employees are owed overtime when their work exceeds 40 hours in a workweek. It does not matter if on a given day an employee works in excess of 8 hours, for overtime purposes it is the workweek that matters. If for example, your workweek is Sunday-Saturday, an employee could work 20 hours over a weekend without triggering overtime so long as in each workweek the total hours worked does not exceed 40 hours.
Pay Rate is Affected by Commissions.
Overtime is calculated at 1.5 times the employee’s regular hourly rate for that week. Regular rate includes “all remuneration for employment paid to, or on behalf of, the employee” (CFR §778.108) with the exception of eight specific types of payments. Excludable payments include, “discretionary bonuses, gifts and payments in the nature of gifts on special occasions, [and] contributions by the employer to certain welfare plans and payments made by the employer pursuant to certain profit-sharing, thrift and savings plans” (CFR §778.108).
Commissions affect the regular rate because they are not excludable remuneration.
- For employees who are paid a commission on a workweek basis, the commission is added to the other wages earned by the employee and that total is divided by the total number of hours worked that workweek.
- For deferred commission payments, additional overtime is apportioned back over the weekweeks covering the period during which it was earned.
- Finally, if the deferred commissions are not identifiable as earned in particular workweeks, federal regulations provide examples of calculation methods you can use to allocate the commission among workweeks.
The main takeaway is that if you are not including commissions in your overtime calculation, you are underpaying your employees.
Salaried Employees Can Be Owed Overtime.
A very popular misconception is that salaried employees are exempt from overtime. Only employees employed as bona fide executive, administrative, or professional, outside sales employees, and certain computer employees are exempt from overtime if they meet their respective exemption tests. For more details regarding exemptions click on this link: Minimum Wage and Overtime Exemptions.docx Salaried nonexempt employees are owed overtime at the 1.5 rate.
You Must Pay Unauthorized Overtime.
Overtime authorization policies are strongly recommended. Overtime usage can be costly and inefficient. However, an employer’s failure to authorize overtime does not excuse payment. “If the employer knows or has reason to believe that the work is being performed, he must count the time as hours worked” (CFR §785.12). Federal regulations mandate that employers who institute overtime authorization policies exercise control and ensure that overtime work is not performed if it does not want it to be performed. “It cannot sit back and accept the benefits without compensating for them. The mere promulgation of a rule against such work is not enough. Management has the power to enforce the rule and must make every effort to do so” (CFR §785.13).
With Few Exceptions, Compensatory Time Cannot Be Offered in Lieu of Overtime.
Compensatory Time or “comp time” is earned and accrued in lieu of overtime payments. It is only available to a public agency that is a state, a political subdivision of a state, or an interstate governmental agency. There are a number of conditions which a public agency must meet in order to require employees accept comp time instead of overtime payments. For the private sector there are no comp time options and employers and employees cannot enter into an agreement to waive overtime.
Violating overtime rules can be a very costly mistake. A business that is investigated for overtime violations could be liable for years of back pay at the 1.5 rate and liquidated damages. Correct any policy mistakes you may have made and conduct a wage and hour audit.
Do you want assistance with an audit or drafting overtime policies? Contact an MBA HR Consultant.