February 23, 2016

Reliable Answers to Top Overtime Payroll FAQs

Reliable Answers to Top Overtime Payroll FAQs

By Kit Dickinson on February 23, 2016

Reliable Answers to Top Overtime Payroll FAQs

With new overtime regulations coming later this year, employers are asking a lot of questions about how they’ll be impacted.

And with good reason. Overtime rules are often trickier than they seem on the surface, and project-based companies that offer incentives and commissions must be continually on the alert for potential violations. Banks, especially, are finding themselves in the government’s crosshairs for audits and fines because of their recent financial successes.

Need clarity on overtime payroll regulations? Here are reliable answers to your frequently asked questions about overtime.

Do I need to pay overtime to salaried employees?

Generally, no. However, many salaried employees have the right to overtime pay, even though they are not paid on an hourly basis. The Department of Labor lists the qualifications for jobs that are exempt from overtime pay. Any employee who does not fulfill the requirements must be compensated for overtime, according to the FLSA.

What if an employee doesn’t request overtime or notify their employer that they worked overtime?

You will still be required to pay the overtime rate to that employee. Under FLSA, employers are responsible to know how much time their employees are working and to get that information if it isn’t readily available. The legal standard is whether an employer could get the hours worked by making reasonable effort to obtain the information.

How do I apply overtime to bonuses, commissions, and non-discretionary pay?

This is a simple question with a complex answer—and it’s no wonder organizations are constantly running into trouble with this issue.

Basic overtime calculation for commission/bonus pay

In general, if your salaried employee is eligible for overtime pay, you add the additional pay to the regular pay rate, then divide that total by the normal work time for the pay period (e.g., 40 hours in a workweek). Apply overtime to that pay rate.

So for example, Joe is paid a salary of $1000 on a weekly basis, and he earns a $250 commission in a week when he worked 50 hours. His regular rate for that week is 1000 + 250 / 40 = $31.25 per hour. The overtime pay for that period would be 10 hours x 31.25 x 1.5 = $468.75. Joe’s total pay for the week would be $1718.75.

Other companies use a “fluctuating workweek” method, where overtime is paid at a diluted or reduced average hourly rate for overtime worked on top of their normal salary. Using the example above, Joe’s $1250 weekly earnings would be divided by 50 hours to pay the overtime at a diluted average rate of $25/hr on top of the $1000 salary and $250 commission.

What if the salary covers overtime as well?

In rare cases, you may have an understanding with your employees that their salary covers up to 50 hours of work in a workweek. In that case, Joe would still be entitled to overtime pay, but at one-half of the regular pay—not at time-and-a-half—because you are already paying Joe for that 10 hours. So the regular rate for the week would be calculated as 1000 + 250 / 50 = $25 per hour. The overtime pay for the week would then be 10 hours x 25 x .5 = $125.00, and Joe’s total pay for the week would equal $1375.

What if bonus/commission is determined after payday?

Many companies calculate their non-discretionary bonuses and commission payments based on meeting sales goals or other incentives from the prior month, quarter, or year. According to the Fair Labor Standards Act (FLSA), these non-discretionary payments need to be applied to the period when the overtime was earned. This means going back to the prior month, quarter, or year to adjust the employee’s overtime earnings as if the bonus/payment was paid in that prior period.

In this situation, you have two options:

  1. Allocating equal amounts to each prior week. This option assumes Joe earned an equal amount of commission for each week of the pay period and overtime compensation is based on that amount. For monthly look-back adjustments, multiply the commission by 12 and divide by 52 to calculate the amount owed for each week of the month. Divide that number by the total overtime hours worked to determine the increase earnings owed to Joe.
  2. Creating a single overtime earnings adjustment for the bonus/commission amount across the entire prior period. If your employees’ work schedules vary widely, this option may make more sense. At a high level, you determine how many overtime hours were worked in the prior period that the non-discretionary payment applies to (e.g., a monthly commission applied to prior month or a quarterly bonus applied to the prior 90 days). Then, calculate the overtime earnings adjustment to pay in the current period by multiplying one half of increased rate by the total number of overtime hours worked throughout the pay period. This approach is the most common and can be the most complex to try and manage manually or in spreadsheets.

Can I pay overtime with “comp time” instead of money?

Government employers can pay non-exempt employees with compensatory time instead of cash, but they must do so at the time-and-a-half rate to comply with FLSA regulations.

Private sector employers may offer comp time to exempt employees, but not to non-exempt employees.

FLSA and overtime regulations will continue to change, even beyond 2016. But it’s our business to keep on top of changes even before they occur so that you don’t have to worry. You can always look to IDI for reliable answers and service.

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