How to Avoid Mistakes When Calculating Overtime

The first step in making sure overtime (OT) pay calculations are fair and accurate is knowing what the Fair Labor Standards Act (FLSA) requires of your small and medium-sized business. The United States Department of Labor enforces the law and administers wage-related mandates through the Wage and Hour Division (WHD).

OT pay for eligible workers and precise recordkeeping of their hours are mandatory. And since errors and omissions can be costly, you’ll want to avoid OT miscalculations to comply with the law.

Preventing OT errors starts with understanding WHD rules. The FLSA defines the workweek as 168 hours, or 7 consecutive 24-hour periods. A workweek doesn’t have to coincide with a calendar week; employers can designate any day or any hour of the week as a week’s start time. Employers also may assign different workweeks to different workers or groups of workers.

Calculating overtime pay

The law requires employers to pay hourly, or nonexempt, workers a minimum of 1.5 times their regular pay rate for every hour they work beyond a 40-hour week. For example, if a worker is paid $10 an hour and works 42 hours in a particular week, the employee earned $30 in OT for that week.

The basic formula is:

$10 (per hour in regular pay) X 40 hours (one workweek) = $400

2 hours of OT = $15 ($10 x 1.5) + $15 ($10 x 1.5) = $30

Total pay for the workweek including OT = $430

The law requires employers to pay hourly, or nonexempt, workers a minimum of 1.5 times their regular pay rate for every hour they work beyond a 40-hour wee

Common OT calculation errors 

Routine errors must be avoided for accurate OT calculations. The most common mistakes employers make are:

• Not understanding the difference between “exempt” and “nonexempt” employees.
• Not calculating OT for hourly employees every week, as required by law.
• Calculating OT on only an employee’s hourly pay rate, excluding bonuses and other additional pay.
• Neglecting state laws.
• Averaging total work hours, regardless of the pay period (e.g., weekly, semi-weekly or monthly).
• Refusing to pay for OT unless authorized in advance.
• Undercounting the number of “nonproductive” hours worked, such as breaks, training time, downtime, and company travel.
• Undercounting or excluding missed meal periods.
• Believing that employers and workers may waive OT eligibility.
• Offering paid time off in place of OT pay.
• Allowing or requiring “off the clock” work.
• Classifying all exempt employees as ineligible for OT pay.

In an email interview for Workest, Mark Tabakman, a partner in the Fox Rothschild law firm’s Labor & Employment division, included among the list of common errors the misclassification of employees as independent contractors and failure to count early and late working hours as OT.

Considerations for OT calculations

Many OT errors are easy to avoid, such as:

• Waiving OT eligibility
• Failing to calculate OT weekly
• Swapping OT pay for paid time off
• Refusing to pay OT unless authorized in advance, and
• Allowing or requiring work to be performed “off the clock”

But avoiding other errors may be more complicated. These errors merit a deeper understanding of OT provisions and the circumstances that impact calculations, such as:

Minimum wage laws

The current federal minimum wage is $7.25 an hour. But several states have higher minimum-wage rates. For instance, the current rate in Connecticut is $13/hour; Illinois, $11/hour; and Nevada, $8.75. Employers must know the wage thresholds mandated by the states in which they operate to comply with these laws.

Multiple pay rates

Employees may be assigned multiple jobs at different pay rates. Employers must make sure multiple rates are factored into OT calculations.

Exemption rules for multiple roles 

SMB employees often have multiple functions that fall into the administrative or non-administrative category. But since the FLSA classifies workers as either exempt or nonexempt, employers must understand the law’s exemption rules to determine their employees’ proper classification.

Pay categories 

Premium pay, overtime premiums, shift differentials, and hazard pay are compensation categories to consider when calculating OT.

Raises 

Since OT is based on non-exempt employees’ regular pay rates, plus additional hours in a workweek, managers must keep track of employees’ pay increases and hours to make sure OT calculations are up to date and accurate.

Bonuses

Any nondiscretionary bonuses that non-exempt employees receive while working beyond a 40-hour workweek must be factored into OT calculations. These bonuses may include commissions, gainsharing, compensation for good-attendance, piece rates, and other monetary awards. Bonuses are typically given to employees to bolster performance, productivity, efficiency, accuracy, and safety on the job.

Fluctuating workweeks 

Employees whose hours change from week to week have fluctuating work schedules. The FLSA has formulas for calculating OT when work schedules fluctuate.

Meal breaks 

Under the FLSA, a bone fide unpaid meal break must be 30 minutes or more of uninterrupted time. Meal breaks that don’t meet this requirement are considered hours worked and therefore eligible for OT.

Lump-sum OT payments 

A blanket payment for an OT period, without regard to the exact number of regular hours worked, doesn’t automatically qualify as OT premium pay. The rule applies even if the lump-sum payment is greater than one based on the actual hours worked.

Fixed payments for a 40+ hour workweek 

Paying workers a fixed wage for a workweek that extends beyond 40 hours doesn’t satisfy the FLSA OT requirement. For example, employees who are paid a flat rate of, say, $405 for working a 45-hour week must be paid 1.5 times their regular rate for each of the 5extra hours they worked that week. Employers may not simply divide the $405 by the employees’ regular rate to satisfy the OT requirement.

Tips

The federal government officially designates workers who “customarily and regularly” receive more than $30 a month in tips as “tipped employees.” Tips belong solely to workers. However, under the FLSA, employers may be entitled to a tip credit, which allows them to apply employees’ tip earnings towards the minimum wage obligation. The credit is the difference between an employee’s cash wage of at least $2.13 an  hour and the federal minimum wage of $7.25.

Exempt workers’ OT eligibility 

Salaried employees who earn less than $684 a week now are eligible for OT pay. The DOL changed OT rules, effective Jan. 1, 2021, to make exempt workers in this wage category eligible for OT pay. Employers can no longer assume that exempt workers are ineligible for OT pay.

Penalties for OT errors

Omitting or undercounting hours worked can trigger wage-theft claims by employees, with monetary penalties totaling $1,000 per violation.

Like most law violations, OT errors can have steep penalties. “Under many state laws, penalties can be per employee and/or per week of [an] offense,” noted Tabakman. He added that these penalties initially can add up to astronomical sums that then have to be negotiated down by the employer’s legal counsel, if at all possible.

It’s not only penalties employers have to worry about. Tabakman pointed out that employers may face expensive class-action suits or owe back wages to aggrieved workers. He cited New Jersey and New York as states with double-damage provisions like the FLSA.

Omitting or undercounting hours worked can trigger wage-theft claims by employees, with monetary penalties totaling $1,000 per violation.

Preventive steps to take

OT provisions can be complicated, but this summary of action steps can help you comply with federal and state laws:

1. Include all hours worked in OT calculations.
2. Know the minimum wage rates that apply to your business.
3. Calculate OT on a weekly basis.
4. Double-check and, if necessary, triple-check calculations for possible errors.
5. Keep and update records on employees’ wages and OT.

Tabakman advised employers to:

• Be proactive about avoiding errors in OT calculations.
• Conduct an audit, through trained counsel, of all your company’s compensation practices to uncover compliance issues or problems.
• Know that all wage-hour matters are important, from employee and independent contractor classifications to bonus and commission policies.
• Get a baseline of your compliance shortfalls, if any, and fix what may be broken.