The time is growing short before the new overtime threshold takes effect on December 1. The updated regulation will potentially make millions of employees who were formerly classified as “exempt” eligible for overtime — which means employers may now have to start calculating overtime for many more workers.

Of course, the easiest thing would be to pay all overtime-eligible employees on an hourly basis. But from an employee-relations standpoint, this might not always be the best choice. If you have workers who have been paid for years on a salary basis, and who consider being paid a salary to be an indicator of status, converting them to hourly could be interpreted by them as tantamount to a demotion. It could be a real morale-killer.

Fortunately, it isn’t necessary to convert salaried workers to hourly in order to pay them overtime. While some business owners mistakenly think that only hourly workers can be paid overtime, the law allows for the computation of overtime for salaried workers as well.

Computing Their “Regular Rate” of Pay

You may think computing overtime for salaried employees is fairly straightforward. Take their annual salary and divide by 52 to determine their weekly salary. Then you simply take their weekly salary and divide by 40 to get an “equivalent hourly rate.” And you pay 1.5 times that rate for any hours over 40, right?

While that might be true for some overtime-eligible salaried employees, it doesn’t tell the full story.

In fact, the law doesn’t say to pay one and a half times their “equivalent hourly rate.” It says overtime is paid at 1.5 times the “regular rate of pay.” (Note: the “regular rate of pay” standard applies to all overtime-eligible employees, salaried and hourly.) While the two might sound similar, in fact they can be very different.

The “regular rate” includes additional payments and costs. For instance, if you furnish or subsidize lodging, meals or other facilities for your employees, you have to include the reasonable cost of those when calculating the worker’s “regular rate.” So, as an example, if an employee is traveling and you cover the cost of her hotel room and give her a per-diem allowance to cover meals, you must include those amounts in her compensation when calculating her “regular rate.”

Let’s take a closer look at these other payments and costs that might need to be included when you calculate overtime.

What Must You Include, and What Can You Leave Out?

As I mentioned above, if you furnish lodging or meals, or provide a per-diem or stipend toward these expenses, you must include the actual expenditure or the reasonable cost of these when you calculate the employee’s overtime rate. You must also include on-call pay, shift differentials, and nondiscretionary bonus payments.

Nondiscretionary bonuses are amounts the company is obligated to pay if the employees meet certain goals or production standards. Examples of nondiscretionary bonuses include:

  • A bonus paid to everyone in a department when the department meets certain agreed-upon production goals.
  • A retention bonus (promised in advance).
  • A perfect attendance bonus.

They’re called “nondiscretionary” because — as long as the employee meets the standard — the employer doesn’t have a choice about paying the promised bonus.

Discretionary bonuses are payments the company gives without being obligated to do so. An example might be a surprise year-end profit-sharing bonus management decides to award following a particularly prosperous year. A bona-fide discretionary bonus is one of the few payments the law allows you to exclude from the “regular rate of pay.”

In fact, unless a payment is specifically excluded by the FLSA, the law says you must include it in the “regular rate.” Other possible exclusions include things like:

  • Small gifts, as long as the amount is not so great that employees would consider it part of their wages.
  • Vacation, holiday or sick leave pay, and other similar payments, which are not made as compensation for hours worked, production or efficiency.
  • Premiums paid for working on a holiday or weekend.
  • Bona fide fringe benefits.
  • Extra non-overtime premium pay agreed on by employment contract or by collective bargaining agreement.

Check with your employment law attorney to make sure you’ve taken all necessary payments into account when calculating the regular rate of pay. One of the most common wage and hour violations — and an expensive mistake — is when companies don’t include everything they should when calculating their employees’ “regular rate.”

The Actual Computations

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So now that we have their “regular rate of pay,” it’s time to compute your salaried employees’ overtime.

Fixed 40-Hour Week Schedule

If your employee is scheduled to work a fixed 40-hour week, simply take their regular rate of pay for that week and divide it by 40. That will give you their equivalent hourly rate. If they actually worked more than 40 hours that week, they’re due overtime at 1.5 times the equivalent hourly rate.

Fixed Schedule, Less than 40 Hour Week

Some employees are regularly scheduled to work less than 40 hours a week. For instance, an employee who is scheduled for 7.5 hours per day, five days a week, would be scheduled for 37.5 hours a week.

For these employees, you must divide their regular rate of pay by the number of hours they are scheduled to work to arrive at their equivalent hourly rate. So in the example above, you would divide by 37.5 hours.

However, overtime is only due for hours worked over 40 — regardless of the employee’s scheduled work time. So as long as the employee worked fewer than 40 hours in a workweek, overtime computations would not apply. You would only pay them 1.5 times their equivalent hourly rate for any hours over 40 that they work in a week.

So, even if the employee worked two extra hours one week — for a total of 39.5 hours — they would not be due any overtime pay, because their total hours remains below 40 for the workweek. However, if they work three extra hours — for a total of 40.5 hours — they would be due time-and-a-half overtime pay for one half hour.

Irregular schedule

If they do not work a regular schedule, you may be eligible to use a special overtime computation method called the “fluctuating work week” (FWW). This is not allowed in all states, but if it’s an option for you, it can help reduce your labor costs. Check with your employment law attorney to find out if you can use the FWW method, and to get the details of how it works.

If you can’t use the fluctuating work week method, you should divide the regular rate of pay for that week by the hours worked that week, then pay 1.5 times the equivalent hourly rate for any hours worked over 40.

Bonuses: Don’t Forget to “True Up”

Nondiscretionary bonuses, which must be included in the regular rate of pay, can present a unique challenge when it comes to computing overtime. Remember, “nondiscretionary bonuses” are those that are based on the employee meeting some sort of agreed-upon performance or production standard.

The problem: it’s often impossible to tell whether an employee has qualified for the bonus until some time after the period covered by the bonus has ended. But the law says the bonus must be included in the overtime calculations for the period to which it applies.

Using a manufacturing assembly department as an example, let’s say they have been promised a bonus if they meet certain production and quality goals during the second quarter of the year. Two weeks after the end of the quarter, management determines the goals were met, so everyone in the department should receive the promised bonus, which is actually paid four weeks after quarter-end.

Under the law, those bonus payments must be added to their second quarter compensation to determine the regular rate of pay for all the weeks during the second quarter. As long as no one in the department worked any overtime during the second quarter, this isn’t a problem. But if anyone did work overtime, the employer will have to go back and recalculate their overtime pay for those pay periods. Those employees should receive additional overtime pay based on their (new) higher “regular rate of pay.”

This process is known as “truing up” their pay.

Summing Up

I can’t stress enough the importance of working closely with your labor law attorney to ensure you’re including everything you should when calculating the regular rate of pay.

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