Most employers are well aware of their obligations under the Fair Labor Standards Act (FLSA)—primarily, the requirement to pay at least minimum wage and pay overtime for hours worked in excess of 40 in a given workweek. These apply to a large percentage of employees, unless they fall under one of the various exemptions.
That said, not all employers are well-versed in how to calculate overtime pay when the calculation goes beyond simply paying a base rate at time and a half. The complications can quickly become complex, and employers need to be sure they’re doing the calculations properly or risk running afoul of FLSA laws.
In fact, not all employers are aware that the requirement to include things in the overtime calculation beyond base pay exists. This can get especially cumbersome when an employee’s pay changes every week due to things like commissions, which are earned after specific criteria are met.
Examples of Calculations
Let’s take a look at an example of an employee making $15/hour who works 45 hours. For a regular hourly employee, the calculation is simple:
$15 x 45 hours worked = $675 base pay
$7.50 x 5 hours = overtime pay at half rate (to create time and one-half) = $37.50 overtime pay
$712.50 total pay owed
Another way some people calculate it, which is the same in the end, is this:
$15 x 40 base hours = $600 for regular pay for the first 40 hours
$22.50 x 5 overtime hours (time and one-half) = $112.50
$712.50 total pay
As you see, both are correct ways of looking at the calculation.
But what if that same employee works 45 hours that week and had a commission payment of $200 added to his or her pay for the week? Do you pay the person the overtime pay previously calculated of $712.50 plus $200 = $912.50 total?
Those who are not yet well-versed in FLSA requirements may assume they’re meeting their overtime pay obligations by paying the time-and-a-half rate on the base pay. But the regulation actually requires the time and a half to be applied to regular pay, not base rate only. As such, if something like a commission is regularly earned and paid, it must be part of the overtime calculation.
But What If?
Let’s look at what the overtime pay calculation would look like in the example above if our employee makes $15/hour base plus $200 in commission for the week and works a 45-hour week.
The new base must be calculated using the total regular pay: $15/hour * 45 hours = $675 plus $200 commission = $875 base pay for the week.
$875/45 hours = $19.44-per-hour regular rate of pay
Our two overtime calculation examples from before now look like this:
$19.44 x 45 = 874.80 base
$9.72 x 5 = 48.60 extra half rate for overtime hours
$19.44 per hour x 40 hours = $777.60 for the first 40 hours
$29.16 x 5 = $145.80 total for the overtime hours
Total pay owed: $923.40
This example may seem trivial because the difference (between calculating the overtime correctly or not) here is only around $11. But remember, this would be an FLSA violation, which can lead to damages and penalties. And in this example, it’s just 1 employee in 1 week with a modest amount of overtime.
What if there were 30 employees and they each had 10 hours of overtime or higher commissions to factor into the base rate? It’s easy to see how the issues and pay discrepancies add up very quickly, which tells us why it’s so important to get this right in the first place.
For employees who receive commissions and are not exempt from overtime pay, this is a critical component for employers to get right. This will apply to any type of commission, regardless of whether it is calculated as a flat amount or percentage of a given sale or some other calculation.
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.