Calculating Overtime Based on Multiple Employee Pay Rates
It is common knowledge that nonexempt employees earn one-and-a-half times their regular pay rate for overtime work, but calculating overtime pay is not always easy. When an employee is paid an hourly rate on top of a weekly commission or bonus, calculating overtime pay becomes more challenging.
Understanding exactly how to make these calculations will help you ensure you are paying your employees fairly and in accordance with applicable laws and regulations.
Breaking down overtime calculations
Your employee’s regular rate of pay, which is used to calculate overtime pay, is not necessarily the same as his or her hourly rate. If you have an employee making $15 per hour, but you offer a weekly commission of $200, you have to take that commission into account to calculate the employee’s regular rate of pay. While many employers make the mistake of calculating overtime based on the hourly rate, you must include an employee’s bonus or commission when you make this calculation.
Imagine you have an employee with an hourly rate of $15 and a $200 weekly commission. She works 50 hours in one week. The first thing you should do is calculate the employee’s regular rate of pay, which is equal to her total hourly earnings plus her weekly commission, and divided by the number of hours worked. Here’s how that looks:
Hourly pay: $15 x 50 hours = $750
Weekly pay, including commission: $750 + $200 = $950
Regular rate of pay: $950 ÷ 50 hours = $19
Based on this calculation, we have determined that your employee’s regular rate of pay is $19 an hour. Now that you have this figure, you can calculate overtime pay by multiplying it by half and then multiplying it by the number of overtime hours worked, and finally adding it to the total weekly pay of $950 that we calculated above.
$19 x 0.5 = $9.50
$9.5 x 10 hours = $95
Total pay, including overtime: $950 + $95 = $1,045
To demonstrate how important it is to calculate the regular rate of pay instead of using hourly pay alone, let’s look at the figure we would have come up with if we had used the hourly rate of $15 to calculate overtime and then added the commission after the fact.
Hourly pay excluding overtime: $15 x 40 hours = $600
Pay for overtime hours:
$15 x 1.5 hours = $22.50
$22.50 x 10 hours = $225
Total pay including overtime hours and bonus: $600 + $225 + $200 = $1,025
As you can see, the difference in these calculations results in a discrepancy of $20 between the two overtime pay rates. This may seem like a small error. But multiply it by several employees over the course of months (or even years), and you could have substantial backpay to make up in the case of a DOL audit.
This difference matters when it comes to compliance with overtime pay rules for nonexempt employees. It’s important to get it right. By taking the time to calculate your employee’s regular rate of pay, you can be confident that you are properly paying for overtime work.