Such a happy time. Who doesn’t love getting a bonus, and what employer doesn’t like rewarding good performance with some extra monetary recognition? Bonuses are great, but keep in mind that they also carry some legal obligations. In the case of non-exempt employees, that might include paying additional overtime based on your bonus payment. The FLSA requires employers to pay overtime based upon an employee’s “regular rate” of pay. The regular rate is not simply the employee’s base hourly pay rate. Rather, it is the rate calculated by adding up all of an employee’s non-overtime compensation for each workweek, then dividing by the total hours worked during the workweek. Non-discretionary bonuses are part of an employee’s total compensation, so must be included in this calculation even if the bonus is not calculated or paid out until after the employee’s regular pay.

“Ha!”, you might be thinking to yourself as you read this, “we don’t have to do that because our bonus policy says right in the title that bonuses are discretionary.” You might be right, but it’s not quite that simple. The FLSA regulations (specifically 29 C.F.R. § 778.211), discuss which bonuses can be considered “discretionary”:

In order for a bonus to qualify for exclusion as a discretionary bonus under section 7(e)(3)(a) the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount. If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it. Thus, if an employer announces to his employees in January that he intends to pay them a bonus in June, he has thereby abandoned his discretion regarding the fact of payment by promising a bonus to his employees. Such a bonus would not be excluded from the regular rate under section 7(e)(3)(a). Similarly, an employer who promises to sales employees that they will receive a monthly bonus computed on the basis of allocating 1 cent for each item sold whenever, is his discretion, the financial condition of the firm warrants such payments, has abandoned discretion with regard to the amount of the bonus though not with regard to the fact of payment. Such a bonus would not be excluded from the regular rate. On the other hand, if a bonus such as the one just described were paid without prior contract, promise or announcement and the decision as to the fact and amount of payment lay in the employer’s sole discretion, the bonus would be properly excluded from the regular rate. (Underlining added.)

In sum, a bonus is not “discretionary” under this rule if an employer either commits in advance to paying a bonus or states the amount of the bonus or method of calculation in advance. Merely sticking a disclaimer at the end of your bonus policy or calling your bonuses “discretionary” doesn’t necessarily make it so.

So what if your bonus plan is non-discretionary – how do you calculate any overtime due? Look for a later post with the answer to that question, including a method of calculating bonuses that might allow you to skip the extra math altogether.

]]>*Note – This post has been updated to correct a calculation error noted below.*

The impending increase in the minimum salary for the executive, administrative and professional exemptions under the FLSA has many employers looking for ways to manage overtime costs for newly-reclassified employees. As part of that search, you might have heard of this idea called the “fluctuating workweek method” for calculating overtime as one alternative that can yield major savings. So what is this method, and how does it work?

**Fixed vs. Fluctuating Workweek Methods for Calculating Overtime**

The basic idea is pretty simple. Under the FLSA, employers are free to pay non-exempt employees a flat salary, as long as that salary is sufficient to provide employees at least the minimum wage for all hours worked every workweek, and so long as employers pay overtime at 1.5 times the employee’s “regular rate” of pay for all hours worked in excess of 40 in a single workweek.

In order to pay overtime for a salaried employee, an employer has to convert the salary to an hourly rate, and then pay the employee 1.5 times that rate for any overtime hours. Say an employee is paid $1000 per week. If that salary is intended to cover a fixed number of hours each week – say, 35, the math is simple. Divide the salary by 35, and there’s your hourly rate – $28.57 per hour. The overtime rate is $42.86. If the employee works 42 hours, you pay $1000 (for the first 35 hours), plus five hours at $28.57 per hour ($142.85), plus two hours at $42.86 ($85.72), for a total of $1228.57.

But what if, instead of a fixed number of hours, you reach a clear mutual understanding with your employee that the salary covers straight-time pay for *all *hours that the employee works during each workweek, no matter how many or how few? If the employee works 20 hours, they get $1000. If they work 50 hours, they get $1000. Because the number of hours covered by the salary varies from week to week, the employee’s regular rate also varies from week to week. In a 42-hour week, the regular rate is $1000÷42, or $23.81. In a 50-hour week, the regular rate is $1000÷10, or $20.00. The more hours worked, the lower the rate. That sounds pretty good from the employer perspective, but it gets better. Because the salary is deemed to cover the employee’s straight-time wages for all hours worked, no additional pay is due for the “time” part of the “time and a half” overtime premium. The employer only pays the “half.” So, for our 42-hour workweek example, the employee would get the $1000 salary, plus a half-time overtime premium for 2 overtime hours at a rate of ~~$23.81 ~~ $11.91 per hour, totaling ~~$47.62 ~~$23.81. The total due for the week would thus be ~~$1047.62~~ $1023.81 – a savings of ~~$180.95~~ $204.76.

Sounds pretty great, right? So why don’t all employers do this for all non-exempt employees? Naturally, there’s no such thing as a free lunch.

**Catch No. 1 – Fixed Salary Means Fixed Salary**

If you want to pay employees a fixed salary for working a fluctuating workweek, the salary actually has to be *fixed*. You know how, with exempt employees, you can dock their salary if they are absent after they’ve exhausted vacation or sick leave? Not allowed for non-exempt employees paid on a fluctuating workweek basis. If you want to use this method, it means paying employees their full salary for every workweek in which they perform any work, even if it’s just one day or even one hour.

You also can’t get around this requirement by creating attendance bonuses or creating other time-based incentives for employees to show up for work. Indeed, the Department of Labor’s commentary in final rules issued on April 5, 2011 suggests that paying *any* compensation to an employee in addition to the flat weekly salary can preclude use of the fluctuating workweek method. The DOL’s commentary does not carry the force of law, and there is some debate in the courts as to whether incentives based on factors other than additional work hours – such as bonuses based on financial performance or sales commissions – prevent use of this method. However, employers who don’t want to take their chances in litigation with the DOL on this issue should think carefully before mixing the fluctuating workweek method for calculating overtime with any other form of compensation.

**Catch No. 2 – Fluctuating Means Fluctuating**

Notice that the method is called the “fluctuating workweek” method. If you have an employee who always works a fixed 42-hour schedule, with no variation in hours from week to week, this method can’t be used. According to the U.S. Department of Labor, not only do hours have to fluctuate, but they have to fluctuate both above and below 40 hours per week. So if the employee’s schedule bounces between 41 and 45 hours per week, but they never have a week below 40 hours, you’re playing with fire if you use this method.

Note that the regulation does not say how frequently or to what degree an employee’s schedule needs to fluctuate. Taking a day off here and there probably isn’t enough. To be safe, employers should use this method only with employees whose actual *work *schedules vary. The variance need not be daily or every week- for example, an employee might work longer hours during a regular “busy” season, and shorter hours the rest of the year.

**Catch No. 3 – The DOL Doesn’t Like It**

The DOL makes it clear in its commentary in the 2011 final rules that it views the fluctuating workweek method with some suspicion, because the method “results in a regular rate that diminishes as the workweek increases, which may create an incentive to require employees to work long hours.” Consequently, employers who use this method should not expect the DOL to cut them any breaks in the way it applies the rules. While the proper construction of the FLSA is ultimately up to the courts, it is still usually wise for employers to avoid taking actions that put them at odds with the DOL’s views of the law.

**Catch No. 4 – Check Your State Law**

While federal law allows employers to use the fluctuating workweek method, the same may not be true in your state. California, for example, does not recognize this method for calculating overtime. Check with your employment counsel before adopting a fluctuating workweek calculation for overtime to make sure it is permitted in all states where you operate.

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A. The short answer is yes, but as we all know, there’s no such thing as a free lunch, particularly in the world of wage and hour law. To explore the right way to do this, it’s helpful to take a look at some common mistakes that employers make.

Suppose Jerry works at Bob’s Steak ‘N Beans as a line cook. Bob’s is located in Illinois, so the minimum wage for non-tipped employees is $8.25 per hour. Suppose Jerry works 45 hours over 5 work days in a week. For that week, he would be entitled to straight-time wages of $371.25. However, rather than paying that full amount in cash, Bob provides Jerry with a free Steak ‘N Beans Bonanza platter each day for lunch. The menu cost of the platter is $15, so Bob deducts $15 per day from Jerry’s pay, leaving him with $296.25 in straight-time pay. On Thursday, Jerry brought a salad from home, but Bob still charged him for the platter since it was available to Jerry even if he didn’t eat it. (Bob ended up serving it to a customer.) Bob didn’t just fall of the turnip truck, so he knows that he also has to pay Jerry overtime for 5 hours. So Bob takes Jerry’s total straight-time wages ($296.25), divides by 45, and divides by two to get an overtime premium rate of $3.29 per hour. Multiplied by five hours, he gets $16.46. Adding that amount to Jerry’s straight-time pay, Bob comes up with a total of $312.71.

Can anyone spot the problems here?

**Calculating the “Reasonable Cost” of Meals**

The FLSA does allow employers to count the reasonable cost of meals furnished to an employee as part of the employee’s wages for purposes of complying with the FLSA’s minimum wage requirements. (The same is true under Illinois law.) However, "reasonable cost" means just that – the employer’s *cost*, not the retail price of the meal. Here’s what Section 30c06 of the DOL’s Field Operations Handbook (.pdf) says on the subject:

(1) The “reasonable cost” of meals furnished by a food service establishment to its employees includes only the actual cost to the employer of the food, its preparation, and related supplies. Salary or wage costs, as distinguished from material or supply costs, may be claimed only to the extent that such salary or wage costs are shown to be directly attributable to the cost of providing meals to employees. If food preparation/serving employees of a food service establishment would be paid the same rate of pay even if meals were not provided to the employees of the establishment, their wage costs cannot be included in determining reasonable cost. Conversely, if it were necessary to hire extra personnel or pay higher wages to existing employee sin order for them to assist in furnishing meals to employees, such extra expense would be a legitimate cost which could be included in determining the “reasonable cost” of meals.

(2) Costs which a food service employer incurs regardless of whether the employees were furnished meals may not be included in determining “reasonable cost.” In a food service establishment, items such as employee insurance, payroll taxes, menus, decorations, other operating supplies, laundry, telephone, maintenance services, advertising and promotion, building and equipment rental, licenses and taxes, insurance and deprecation, franchise cost, and general administrative costs are a part of the overall cost of the operation and of the employer’s business establishment which may not be charged to the reasonable cost of employees’ meals.

Here, Bob can certainly take credit for the cost of the food that he serves to Jerry on the days that Jerry elects to eat his Steak ‘N Bean Bonanza. He cannot, however, charge Jerry the full menu price of $15, as that amount necessarily includes a mark-up for overhead and profit that cannot be charged to employees. As explained above, Bob might be able to tack on some additional amount for labor if he can demonstrate that he incurred increased labor costs as a result of providing employee meals. However, that’s going to be a tough case to make in case like this where Jerry is simply eating off the menu and the kitchen staff likely would be there on the clock whether or not Jerry chose to partake.

**Meals “Furnished” To Employees**

Bob also has an issue in that he charged Jerry for a meal even on Thursday, when Jerry decided to forgo his usual dose of beef and beans in favor of a healthful salad. To take credit for the cost of a meal “furnished to an employee,” not only must the employee receive the benefits of the facility for which he is charged, but it is essential that his acceptance of the facility be voluntary and uncoerced. Here, Jerry didn’t eat the meal provided for him on Thursday, and Bob simply re-sold the meal to a customer. Essentially, Bob is double-dipping from the bean pot – something the law does not allow.

**Meals and Overtime**

What about that overtime calculation? Bob had the right idea, sort of, when he used Jerry’s total straight-time compensation for the week, divided by the number of hours worked to determine a “regular rate,” divided by two to determine the overtime premium rate, and multiplied that rate by the number of overtime hours to determine the amount of overtime pay due. His mistake was in failing to consider the cost of the meals furnished to Jerry as part of Jerry’s compensation. Remember, Jerry is entitled to be paid at least the minimum wage for all hours worked, plus an additional 50% of the minimum wage for any overtime hours. That Bob elects to pay part of Jerry’s wages in meat and beans rather than cash doesn’t excuse him from factoring the value of the meal into the overtime calculation.

This would be an issue in the overtime calculation even if Jerry’s regular wages less the cost of meals exceeded the minimum wage. When an employer takes deductions from employee pay for the cost of meals, “the employee’s ‘regular rate’ is the same as it would have been if the occasion for the deduction had not arisen.” 29 CFR § 778.304(b). In other words, Bob can take credit for the cost of the meals furnished to Jerry (subject to the restrictions above), but doing so doesn’t reduce Jerry’s “regular rate” of pay for purposes of calculating overtime.

But what if Bob doesn’t deduct the cost of meals from Jerry’s pay? Does he still have to include that cost as part of Jerry’s “regular rate” when calculating overtime? In some places the FLSA regulations seem to say so, as compensation must include not only cash wages but food and lodging furnished to an employee. *See *29 CFR § 778.116. However, the regulations expressly permit an employer to reach an “agreement or understanding” with an employee to exclude the cost of a single meal per day from the employee’s regular rate of pay. 29 CFR §548.3(d), 29 CFR § 548.304. So as long as Bob and Jerry agree in advance that the cost of Jerry’s daily pile of beef and beans will not be included in his overtime pay, Bob can skip the paperwork and allow Jerry to chow down. However, if Bob is smart, he will make sure that this understanding is documented to head off any later disputes with Jerry about how his overtime is calculated. In the absence of such an agreement, or if Bob provides Jerry more than one free meal per day, Bob may have to pay Jerry additional overtime based upon the cost of the “free” meals.

**Insights for Employers**

- There is nothing illegal about providing meals to employees, but employers who do so need to pay attention to how those meals may factor into employee pay.
- Employers who wish to take credit for free meals furnished to employees need to calculate and keep accurate records of their costs.
- Conversely, employers who do not wish to factor regularly-provided free meals into overtime pay should reach an express understanding with their employees to that effect.

Let’s start with a simple example. Assume that your employee, Emma, earns $500 in hourly earnings this week, plus an additional $500 in commissions. She earns this compensation for working 50 hours in a single workweek. The formula is as follows:

- Regular rate = $1,000 (wages + commission) / 50 hours = $20/hour
- Total compensation = earnings from hourly wages and commissions + overtime
- Overtime = 10 hours at one-half the regular rate of pay
- Emma’s total pay = $1,000 + (10 hours x 0.5 x $20/hour) = $1,100

Now, let’s change it up. Emma still earns a total of $1,000 during the first week of June, as she makes the sale that leads to her commission during the same week. However, assume you paid Emma the $500 commission after the month ended on the next payroll cycle in the first week of July, a week when she worked fewer than 40 hours. Do you owe Emma any overtime? You might!

Under these circumstances, Emma would correctly argue that you must apportion the commission back to the workweek during which she earned it. Not knowing the amount of the apportioned commission during the first week of June when Emma’s wages were due, you paid her hourly wages of $550 for 50 hours of work ($10.00 x 50 hours + $5.00 x 10 hours).

However, when her commission is paid in July, you must go back and include the additional $500 earned and apportion it for the overtime she worked that first week of June. This means that you must pay Emma additional overtime compensation. You can go back and completely recalculate her regular rate using the formula above, or you can use a quicker mathematical shortcut. Using this easier way to determine the overtime owed, you calculate the increase in regular rate by dividing the commission payment ($500 in our example) by the total hours worked during that week (50 hours). In our example, this increases Emma’s regular rate by $10/hour for that workweek. Accordingly, her recalculated regular rate is now $20 for that overtime workweek—the same number you would get using the formula above. Since Emma worked 10 hours of overtime in the first week of June in our example, she would be due an additional $50 ($10 increase in regular rate x 0.5 x 10 overtime hours). Again, this is the same number you get by completely recalculating her earnings using the formula above. As long as you know the amount of the additional payment and the number of hours worked in the relevant week, you do not need to know what the original pay rate was at the time. Anytime your employee earns money later that can be apportioned to an earlier period, you must go back and run this calculation. You cannot simply apply the commission to the first week in July when you pay it, without doing more.

**Strategies for More Complex Commission Events**

What if Emma makes the sale in June, but the customer does not actually pay until July? What if the customer purchases and pays in the first week of June, but returns the product a few weeks later for a full refund? You could find yourself running adjustments in two directions and even going back and recalculating your calculations…unless your policy or commission plan make it clear when wages are “earned.” Specify exactly when commissions are considered “earned” by the employee: when a customer pays, when a product is delivered, when a return period expires, by a certain date (end of a following month, or simply the date on which you pay commissions), or at some other reasonable and equitable time. Developing a policy that more carefully controls when and how employees earn commissions can help you avoid confusing and unnecessary look-back calculations.

Of course, aside from the business and employee relations aspects of your decision, various state laws will impact what you can lawfully do with commission plans. Most state laws, like the FLSA, include commissions among the definition of “wages” subject to the statutory requirements. Some of these state and local laws specify when commissions must be paid and what, if any, obligation exists to pay commissions on termination, among other topics. When including commission or bonus clauses in employment agreements, policies, or commission plans, start with a logical business justification, consider employee relations/ expectations aspects, and then tweak the plan if necessary to ensure fewer calculation headaches and that you have complied with necessary state and local wage payments laws.

]]>On its face, the “regular rate” calculation would seem straightforward: the employee’s hourly wage or salary. However, the FLSA defines the regular rate more broadly to include “all remuneration for employment paid to, or on behalf of, the employee,” except for certain payments excluded by statute. Recently, a blog reader in the telecommunications industry asked whether the “regular rate” would include in-kind remuneration like free Internet access, meals, or other non-cash payments to employees given in lieu of commissions or even as fringe benefits. The answer is that it could, depending on the situation. Under the FLSA, remuneration that employers must add to the regular rate includes non-cash wages in the form of goods, boarding, or lodging; and non-overtime premium payments—such as shift differentials and hazard premiums and non-discretionary bonuses, commissions, and other incentive payments—based on hours worked, production, or efficiency.

Not every payment to an employee falls into the FLSA’s regular rate calculation, though. The FLSA specifically excludes, among other things, paid leave (vacation, PTO, sick leave, etc.); expenses incurred on the employer’s behalf; overtime premiums; Saturday/Sunday/holiday premiums; discretionary bonuses; and, more rarely, some gifts and payments on special occasions. Many of these categories have their own nuances. The difference between a “discretionary” and “non-discretionary” bonus is worth its own series of posts, for example, and have tackled some of those issues in prior posts as noted above. State laws differ, too, on what can be excluded from the regular rate. Accordingly, remember that this post is just a starting point. Your specific situation may vary, so if you are not sure whether to include a particular form of compensation or employee benefit in your calculations of the regular rate for employees, you should reach out to employment counsel to avoid an expensive mistake.

Once you have done the hard work of determining what to include and exclude, the calculation of the regular rate is relatively straightforward, with one caveat. Employers compute the regular rate for an employee by dividing the employee’s total remuneration for employment in the workweek by the total number of hours the employee actually worked in that workweek. An employee who received $400 in wages, $75 in commissions, and $25 in non-cash compensation in a week while working 50 hours has a regular rate of $10.00/hour ($500 / 50 hours). Assuming that the $500 in cash and non-cash compensation paid the employee for all 50 hours of work, and not just 40, you would owe the employee another $5.00/hour for the 10 overtime hours, or another $50. If the compensation only covers 40 hours, you would owe the full time and a half overtime premium, of course.

Simple? Sure, this part can be easier than determining what goes into the regular rate. What makes this calculation difficult, though, is when the employee earns cash or non-cash remuneration after the workweek ends. Often, employers do not pay commissions or bonuses in the same week as hours worked, but instead at some later date—at the end of a month, a quarter, or a year. Determining the impact of these later earnings on the regular rate may require a look-back calculation to apportion these earnings to their proper, earlier weeks. Commission plans, bonus rules, and pay policies that you have established may also impact the calculation of when subsequent remuneration was actually “earned.” We’ve discussed h**ow to do this calculation for bonuses** before. We’ll cover how this look-back calculation works with commissions in our next post.

On its face, the “regular rate” calculation would seem straightforward: the employee’s hourly wage or salary. However, the FLSA defines the regular rate more broadly to include “all remuneration for employment paid to, or on behalf of, the employee,” except for certain payments excluded by statute. Recently, a blog reader in the telecommunications industry asked whether the “regular rate” would include in-kind remuneration like free Internet access, meals, or other non-cash payments to employees given in lieu of commissions or even as fringe benefits. The answer is that it could, depending on the situation. Under the FLSA, remuneration that employers must add to the regular rate includes non-cash wages in the form of goods, boarding, or lodging; and non-overtime premium payments—such as shift differentials and hazard premiums and non-discretionary bonuses, commissions, and other incentive payments—based on hours worked, production, or efficiency.

Not every payment to an employee falls into the FLSA’s regular rate calculation, though. The FLSA specifically excludes, among other things, paid leave (vacation, PTO, sick leave, etc.); expenses incurred on the employer’s behalf; overtime premiums; Saturday/Sunday/holiday premiums; discretionary bonuses; and, more rarely, some gifts and payments on special occasions. Many of these categories have their own nuances. The difference between a “discretionary” and “non-discretionary” bonus is worth its own series of posts, for example, and have tackled some of those issues in prior posts as noted above. State laws differ, too, on what can be excluded from the regular rate. Accordingly, remember that this post is just a starting point. Your specific situation may vary, so if you are not sure whether to include a particular form of compensation or employee benefit in your calculations of the regular rate for employees, you should reach out to employment counsel to avoid an expensive mistake.

Once you have done the hard work of determining what to include and exclude, the calculation of the regular rate is relatively straightforward, with one caveat. Employers compute the regular rate for an employee by dividing the employee’s total remuneration for employment in the workweek by the total number of hours the employee actually worked in that workweek. An employee who received $400 in wages, $75 in commissions, and $25 in non-cash compensation in a week while working 50 hours has a regular rate of $10.00/hour ($500 / 50 hours). Assuming that the $500 in cash and non-cash compensation paid the employee for all 50 hours of work, and not just 40, you would owe the employee another $5.00/hour for the 10 overtime hours, or another $50. If the compensation only covers 40 hours, you would owe the full time and a half overtime premium, of course.

Simple? Sure, this part can be easier than determining what goes into the regular rate. What makes this calculation difficult, though, is when the employee earns cash or non-cash remuneration after the workweek ends. Often, employers do not pay commissions or bonuses in the same week as hours worked, but instead at some later date—at the end of a month, a quarter, or a year. Determining the impact of these later earnings on the regular rate may require a look-back calculation to apportion these earnings to their proper, earlier weeks. Commission plans, bonus rules, and pay policies that you have established may also impact the calculation of when subsequent remuneration was actually “earned.” We’ve discussed how to do this calculation for bonuses before. We’ll cover how this look-back calculation works with commissions in our next post.

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**A. **Yes. Under the FLSA and parallel state laws, overtime is due whenever a non-exempt employee works more than 40 hours for an employer in a single 7-day workweek. It makes no difference that some portion of those hours are spent performing different duties than other hours.

That leaves the question of how to calculate overtime given that the employee is paid at two different pay rates for the different jobs. The employee is due time and a half, but at what rate? Here there are basically two options.

First, absent some other agreement with the employee, overtime is generally calculated using the weighted average of the employee’s total pay. The math looks like this:

Job 1 – Straight Time

37.5 hours x $20/hour = $750

Job 2 – Straight Time

7.5 hours x $15/hour = $112.50

Overtime

Total hours: 45

Total Straight Time Pay: $$862.50

Weighted Average Rate = $862.50 ÷ 45 hours = $19.17/hour

Overtime rate = $19.17 ÷ 2 = $9.58/hour.

Overtime pay = 5 hours x $9.72/hour = $48.60

Total Pay

$875 + $48.60 = $923.60

The other option, available under Section 7(g)(2) of the FLSA, is to reach an agreement or understanding with the employee that overtime pay for any hours in excess of 40 will be calculated using the straight-time pay rate for the work the employee is performing during the overtime hours. While this agreement can be oral, it would be prudent to get it in writing. In the scenario above, assuming that the Saturday hours fall at the end of the employer’s established workweek, the calculation of overtime pay using this method would be as follows:

Straight Time: $862.50

Overtime Rate: $15.00/hour ÷ 2 = $7.50/hour

Overtime Pay: 5 hours x $7.50/hour = $37.50

Total Pay: $900

Obviously this results in a lower rate of pay in this situation, but that may not always be the case if the employee reaches 40 hours while performing work in the higher-paid position. For example, suppose that instead of a workweek beginning on Sunday or Monday, the employer’s workweek begins on Saturday and ends Friday. In that case, the employee would reach 40 total hours on Friday, while working the $20/hour job, and the overtime pay due would be $50 instead of $37.50.

Of course, if the goal is to avoid paying overtime altogether, the solution is to hire a second employee to perform the additional part-time job. While this may appear detrimental to the existing employee who simply wants to work some additional hours, remember that this is an intended consequence: part of the goal of the FLSA’s overtime requirements is to encourage employers to limit work hours for individual employees and instead spread available work around.

]]>**A. **The question above is a positive sign, because if you find yourself asking it you’ve passed the first hurdle of realizing that not all “salaried” employees are exempt from the overtime requirements of the Fair Labor Standards Act.

Generally speaking, calculating overtime is a simple affair. Employees must be compensated for hours worked in excess of forty hours in a single workweek at a rate of one and one-half times the employee’s regular hourly rate of pay. The “regular rate” is calculated by dividing an employee’s total non-overtime compensation for the week by the total number of hours worked. For employees who are paid a simple hourly rate, this calculation is simple, as the regular rate is simply the employee’s normally hourly rate of pay.

However, things get trickier when a non-exempt employee is paid a salary. Suppose Chuck is paid a salary of $1000 per week. He works 50 hours in a certain week – 40 hours of straight time, and 10 hours of overtime. To calculate Chuck’s overtime pay, you need one more crucial piece of information: how many hours is the $1000 salary intended to cover?

According to the courts, this issue is a matter of the agreement between Chuck and his employer. Suppose the company has an employee handbook that says that the normal workweek consists of 35 hours. If, based upon that statement, there is a general understanding that the base salary is intended to cover 35 hours of straight-time work, Chuck’s pay would be (assuming I have my math right) as follows:

Regular rate = $1000 / 35 hours = $28.57/hr

Total pay = Regular salary + 5 hrs additional straight time + 10 hrs at time and-a-half

Total pay = $1000 + (5hrs x $28.57/hr) + (10 hrs x $28.57/hr x 1.5) = $1,571.40

On the other hand, suppose Chuck and the company have an understanding that the $1,000 salary is intended to cover up to 50 hours of work per week. In that case, no additional straight-time pay would be due if Chuck works 50 hours. Chuck would still be entitled to an overtime premium for the 10 hours of overtime worked. However, because his salary covers straight-time for those hours, the additional overtime premium due is only one half of the regular rate of pay:

Regular rate = $1000 / 50 hours = $20/hr

Total pay = Regular salary + 10 hours at 1/2 the regular rate

Total pay = $1000 + (10hrs x $20/hr / 2) = $1,100

Now, a smart employer looking at the above calculation might say to itself, “Ah, let’s agree that the employee’s salary will cover up to 100 hours of work.” That would make the regular rate just $10 per hour, and save the company $50 in overtime expenses, right? If this looks too good to be true, it is. First, if Chuck is never actually scheduled to work 100 hours in a week, that agreement will likely be viewed as a sham by the Department of Labor. Second, the regulations say that if Chuck works less than agreed number of hours, then his regular rate is calculated by dividing his total non-overtime compensation by the total number of hours worked. In other words, regardless of how many hours the salary is meant to cover, if he only works 50 hours, his regular rate will still be $20 per hour.

Now, one last wrinkle: suppose it’s understood by all concerned that Chuck’s salary is intended to cover his straight-time compensation not for a specified number of hours, but for all hours that he happens to work in any given week, regardless of how many or how few. While paying a fixed salary for a fluctuating workweek is permissible and can in some cases reduce your overtime liability, there are also some strict limitations on this method, and some new uncertainty introduced by some regulations recently published by the Department of Labor. We’ll talk about those in another post.

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