This post was written by Emily Martin, Owner of Ally HR Partners LLC
At a time when the DOL has explicitly stated that they will be pursuing wage and hour related violations across a spectrum of topics, overtime is likely one of the most ubiquitous, but unsuspecting areas of your payroll that violations could be lurking.
On its face, overtime is a very simple topic- but as usual, the DOL has nuanced and ever-evolving definitions of things like “regular rate” and “hours worked”, which is where violations are being investigated and found at an increasing rate.
Below we’ve broken down five of the most common misunderstood and inadvertently flawed ways that employers inaccurately calculate and pay overtime. If you think you may be in violation, we encourage you to reach out for guidance on an action plan to make things right, and avoid audit fines and penalties moving forward.
1) You aren’t using a weighted average method to calculate the “regular rate” of pay
One of the fewest-known facts about overtime, specific to NYS and others, is that employers are required to calculate overtime on a “weighted average” basis. This requires employers to take a weighted average of all wages and hours worked to calculate an employee’s “regular rate of pay”, which is then what is used to calculate the overtime rate (1.5x this regular rate). This specifically comes into play for situations where employees may work at multiple pay rates in one workweek, including if there are any special shift premiums, differentials, etc. involved in their compensation for working certain shifts, etc.
As an example, let’s use an employee who makes multiple pay rates. The weighted average calculation examples is below:
- Total Hours Worked: 48
- Total Earnings at Pay Rate #1 ($15.00/hr) worked 32 hours: $480
- Total Earnings at Pay Rate #2 ($13.20/hr) worked 16 hours: $211.20
- Total Regular Earnings: $691.20 ($480 + $211.20)
- Regular Rate of Pay: ($691.20/48 hours worked): $14.40/hr
- Additional “Half Time” for overtime: $7.20/hr ($14.40/hr X .5)
- Total Additional Overtime Earnings: $57.60 ($7.20/hr X 8 hours of overtime)
- Total Earnings with Overtime: $748.80 ($691.20 Regular Earnings + $57.60 Overtime Earnings)
A common way this requirement is violated is when employers pay overtime just at the rate in which the employee is working the actual overtime hours. But this could potentially underpay the employee in the eyes of the DOL, because it they are only receiving overtime based on the lower rate, it would be a lesser rate than the weighted average rate which includes the higher wage earnings.
For example, in the case above, if the employee hit 40 hours in the workweek and then proceeded to work the 8 overtime hours while in their position that pays only $13.20/hr, their additional half time rate would be only $6.60/hr, instead of the $7.20/hr weighted average OT rate using the wages earned at $15/hr. This may not seem like a big difference, but over multiple employees
and years (the DOL will go up to 3 years back), this can add up quick, and with a fine slapped on top it can be business-ending money owed.
The good news? Most payroll systems can setup an automatic weighted overtime calculation if you just ask- but you usually have to ask.
2) You aren’t including all “Regular Wage” qualifying items in the “regular rate” calculation
Somewhat like the mistake above, employers often don’t fully understand all the components that must be included in “regular earnings” which needs to be used to calculate the overtime rate. This goes above and beyond just the employee’s hourly rate earnings, and includes things like commissions, non-discretionary bonuses (which is most bonuses), most stipends, benefit opt-out payments, etc.
For more information on the details of what must be and does not need to be included, you can find a comprehensive list straight from the horse’s mouth here.
If your hourly (non-exempt) employees have these supplemental components to their pay, these items should be included in the regular earnings calculation, and also be thrown into the weighted average calculation, which obviously could have a huge impact on the overtime rate. To illustrate a simple example of how this works, see below:
- Number of hours worked: 45 hours
- Hourly Pay Rate: $15/hr
- Total Regular Earnings Before Supplemental Pay: $675 ($15 X 45 hours)
- Bonus Pay For the period: $200
- Stipend Pay: $50
- Total Earnings After Supplemental Pay: $925 ($675+$200+$50)
- Adjusted Regular Rate of Pay for all Earnings: $20.56/hr ($925/45 hours)
- Overtime (half time) rate: $10.28/hr ($20.56/hr X .5)
- Total overtime earnings: $51.40 ($10.28/hr X 5 hours of overtime worked)
- Total Earnings: $976.40($51.40+925)
You can see in the above example how the additional $250 in supplemental pay earnings greatly influenced the employees overall “regular pay rate”, which then impacted the overtime or half time rate. Without these earnings included, many employers make the mistake of just paying the half time rate at .5 times the hourly rate, which in this case would have been $7.50/hr, instead of the correct $10.28/hr using the correct method here. Again, over a couple hours this may not seem like a big difference, but over multiple pay periods and employees this can add up big, and the DOL will require a calculation and back payment of these wages in an audit if you are found to be miscalculating in this area.
3) You are deducting time for breaks that are not actually taken or are partially worked
When paying non-exempt employees, they must be paid for all hours worked, and that means you must be accurately recording all hours (and therefore minutes) worked in order to know what that amount is, and, just as important, when the overtime threshold is reached in order to pay the OT rate.
A common area where mistakes are made in this area is meal periods. In general, employees are required by law to take a 30 minute meal period break when working shifts 6 or more hours in length. This meal period does not need to be paid, which is no issue if the meal period is taken and not worked, but problems can arise when the tracking and management of these breaks is not done well.
One of the most potentially violation-prone practices is auto-deducting breaks. In this case, the employer may have their payroll system automatically deduct 30 minutes each workday, but if the breaks are not taken, this is time that should be paid and also should be counting as hours worked toward overtime eligibility. This also assumes a full 30 minutes is taken, which may not be the
case since the employee is not recording their live break time. Even if the employee is not working for 25 instead of 30 minutes, that is time that you may be responsible for paying back later. This is also a risk if employees do record their break times but are asked to work in some capacity during that time. Breaks must be taken, must be uninterrupted, and must not be worked in order not be paid time.
The take-aways here? Don’t auto-deduct breaks. Make sure employees are recording any meal periods themselves, including start and stop time, but also that you and your Managers are enforcing that the breaks are fully taken. Employees should take breaks away from their work areas, and should not engage with co-workers or customers in any way during this time, or be asked to do anything by management. All of these practices can help create more bulletproof records for defense in the case of claims or audits, and avoid ambiguity that usually goes in favor of the employee. The other option? Pay employees for their meal period breaks and avoid claims or audits motivated by financial gain altogether.
4) You’re treating a Non-Exempt (hourly) employee as Exempt (salaried) incorrectly
Overtime is a requirement to be paid for Non-exempt employees only- but make sure you know who those employees are or should be. Misclassifying employees as exempt, or salaried, and believing there is no need to track hours worked or pay overtime, is a very common mistake that can have huge implications later in an audit or in the case of a claim. Remember, if employees do not meet both the minimum salary AND job duties test components required to be exempt, then they MUST be non-exempt and they MUST be paid overtime for hours worked over 40 in a workweek. More details on those minimum salary and test requirements can be found here.
5) You aren’t tracking and paying for all time worked
The simplest mistake to make and not pay overtime correctly? Simply not tracking all time worked, and risking missing time that could push someone into overtime hours. If employees are non-exempt, best practice is that they should always be tracking their hours worked themselves, and this data should be used to pay the employee through payroll. If live tracking and punching is not an option for some reason, the next best option is to at least have employees self-report all hours worked each week. This is not best because it does not provide a actual time stamped record, but at least is a record of the employee self-reporting their time worked. These records will mean the difference between having any ability to defend yourself in an audit or after a claim, and being forced to settle or be at the mercy of the DOL’s employee-sympathetic findings or assumptions.
The point of all of this information is that, despite what many employers believe, wage and hour law is often not as simple as it seems, and that includes the presumably simple concept of calculating and paying overtime. We highly encourage you to reach out with any questions or concerns you have about your business in reference to the above information, and we will be more than happy to help you adjust your practices to put you in a better place.
This post was written by Emily Martin, Owner of Ally HR Partners LLC, a Buffalo-based HR consulting firm that helps small businesses identify and implement custom solutions to their people problems and opportunities. Often a business’ #1 expense, Ally HR Partners believes your people should be your #1 asset. Through an integrative partnership approach, Ally becomes your internal expert on all things HR including compliance assurance, performance management, and strategic HR initiatives designed to make the most out of your Human Capital. For more information about how Ally can work for you, visit AllyHRPartners.com