Employers who ignore or miscalculate the “regular rate” make an easy, but costly, mistake. Here’s what the Fair Labor Standards Act’s (FLSA) requirement is and how to make the calculation.
What’s the Deal with the ‘Regular Rate’?
First of all, overtime, at the rate of at least time and one half, must be paid on all hours worked over 40 in a workweek. The catch is that the overtime must be calculated on the “regular rate,” not on the nominal hourly rate.
For purposes of calculating overtime pay, the FLSA requires that nondiscretionary bonuses must be included in the regular rate of pay. Non-discretionary bonuses include those that are announced to employees to encourage them to work more steadily, rapidly, or efficiently, and bonuses designed to encourage employees to remain with a facility.
The Department of Labor states that few bonuses are discretionary under the FLSA, and therefore few can be excluded from the regular rate.
So, to calculate the amount of the overtime premium, you must first adjust the pay to include the bonuses and then calculate the overtime premium. In practice, it’s often the case that you award bonuses after a paycheck has been issued, and in that situation, you must go back and recalculate the overtime and pay the difference. It’s usually a small amount, but it still must be paid.
Exception for Referral Bonuses
Referral bonuses paid for recruitment of new employees are not included in the regular rate of pay if all of the following conditions are met:
- Participation is strictly voluntary;
- Recruitment efforts do not involve significant time; and
- The activity is limited to after-hours solicitation done only among friends, relatives, neighbors, and acquaintances as part of the employees’ social affairs.
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Example #1—Bonus Paid and Earned During the Pay Period
An intermediate care facility for the disabled pays its employees on a biweekly basis. If employees work all the hours that they are scheduled to work in a pay period, they are given a $100 bonus. Employees are paid $12 per hour and work 56 hours a week.
In computing this employee’s regular rate under the 40-hour overtime standard, the employer must add half of the biweekly bonus ($50) to the employee’s earnings (hourly rate times the total hours worked) for that week.
The resulting total compensation would be divided by the total hours the employee worked during that week to determine the regular rate.
Convert the biweekly attendance bonus to a weekly amount:
$100 (biweekly attendance bonus) ÷ 2 (weeks) = $50 (weekly bonus equivalent)
Calculate total weekly compensation:
$672 (56 hours @ $12) + $50 weekly bonus equivalent = $722
Calculate the regular rate:
$722 total weekly compensation ÷ 56 hours worked = $12.89 (regular rate)
Calculate the overtime premium owed on the regular rate:
$12.89 (regular rate) x ½ = $6.45 (half-time premium)
Calculate the overtime rate based on the regular rate:
$12.89 (regular rate) + $6.45 (half-time premium) = $19.34 (overtime rate)
Calculate total earnings:
40 (straight time hours) x $12.89 (regular rate) = $515.60 (straight time earnings)
16 (overtime hours) x $19.34 (overtime rate) = $309.44 (overtime earnings)
Total earnings for week one = $825.04
Total earnings for week two = $825.04
Total earnings for biweekly period = $1,650.08
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Example #2—Bonus Earned Over a Series of Pay Periods
In an effort to attract more nursing personnel, a skilled nursing facility’s nursing department gives hourly paid LPNs and RNs a $2,000 bonus after being employed for 6 months. This bonus must be included in the regular rate calculation in any weeks during the period in which overtime was worked.
The retention bonus described above was earned over 6 months or 26 weeks. The weekly equivalent is $76.92 ($2,000 ÷ 26 weeks). If an employee works overtime during the 26-week period, the increase in the regular rate is calculated by dividing $76.92 by the total hours worked during the overtime week.
If the employee worked 10 hours of overtime in his or her 9th week of employment, the employee would be due an additional $7.70 in overtime earning as follows:
$76.92 ÷ 50 hours = $1.54 (increase in the regular rate)
$1.54 x ½ = $ .77 (increase in the additional half-time premium)
$ .77 x 10 hours of overtime worked = $7.70 (increase in overtime earnings due to the bonus)
In tomorrow’s Advisor, two more examples, plus an introduction to BLR’s HR Department of One, the guide specially written for smaller HR departments.