How to Compute Overtime Pay

[bantar]

Started a new thread based on a comment from:  Are you paying your employees what they deserve?

17 hours ago, CTC said:

I understand everyone has a different pay plan, I also understand bonuses, I am saying that federal labor laws are easily violated by pay plans. Flat rate is cut & dry & shouldn’t be a problem, however I was specifically told that bonus plans are a problem & I paid heavily for having one. The easiest way to explain it is to say that if you are paying flat rate, don’t deviate without speaking with someone with the federal labor board. They will answer your questions if you ask.  If you pay hourly, or any thing close, you better make sure your people punch a clock & you better pay them for every hour they punch including time & a half over 40. Bonuses change the overtime rate you owe, that’s why if you have a specific plan, you have to account for it while factoring overtime.

Thanks to CTC who warned that we need to be Compliant in our pay plans, I called the Dallas Office of the Dept of Labor Wage and Hour Division to check on my compliance.   Very friendly and knowledgeable.  Didn't even ask who I was.  I encourage you to call.  However, what she said was super-complicated if it's the first time that you've heard it.  It still hurt my head on today's call.   The goal of this message is to explain OT calculations and then to explain the flat rate pay as related to OT.   I'm only presenting this to give you background before you call W&H yourself.    I'm not an expert on W&H.

This focuses on non-salaried employees who are eligible for OT payments.  

Background:

In general, OT pay is more complicated if you have variable pay plans (bonuses or extra payments).   Regular hourly folks working OT get 1.5 times their "regular rate" (which is the same as their hourly rate).    If they don't get any extra pay, this is easily computed.  

When variable pay is involved, we need to know how much the employee is really making this week.   That is, we must calculate their "Regular Rate" because the variable pay (bonuses) increases their normal hourly rate.   When we pay OT, we must pay 1.5 times their "Regular Rate".    This is a protection for the employees to ensure that they are being fairly paid even though their pay rate varies week to week.

Regular Rate Computation:

1. Figure out the employee's total compensation for this week (we are ignoring OT for this calculation). 
2. Divide this by the total hours worked this week.
3. This is their regular rate for THIS week.

For example:   Joe makes $10/hr and earned $100 bonus this week while working 50 hours.   His total pay for the week is $10 * 50 hours + $100 bonus = $500 + $100 = $600.   His Regular Rate is $600/50 hours = $12/hr.   When you pay him OT, you will be paying him 10 hours * 12 Regular Rate/hr * 1.5 = $180.   This is added to his base rate of 40 hours * $10/hr, so this week, he makes $400 + 180 = $580 + $100 bonus = $680 total pay.

There is a shortcut to computing regular rate that I find faster to compute.   Just take the variable pay (bonus) and divide it by the hours worked.   $100 bonus/50 hours = $2/hr   Joe's Regular Rate is $10+$2=$12/hr.   His overtime rate is $12 * 1.5 = $18 (instead of $15). 

Using ADP (and other payroll systems):

For employees that are getting OT with variable pay, I create a separate pay line in my payroll.   Line 1 is 40 hours at their normal hourly rate.  Line 2 is OT hours at Regular rate.   The payroll software multiplies the regular rate * 1.5 to calculate their OT pay.

1. Regular Pay Line:  40 Hours @ $10/hr
2. OT Pay Line: 10 Hours @ $12/hr

Flat Rate:

Per W&H, Flat Rate still requires OT pay if more than 40 hours are worked.  Therefore, we are required to compute a "Regular Rate" to pay OT.    This means we need time clock records.   W&H suggested a few different ways of computing it for Flat Rate employees (one was a weighted average, but I didn't dig into this).   Also, minimum wage must be adhered to as well.

I threw a few examples of pay (flag bonuses, incentives, make-up hours, etc) at W&H and in the end, it didn't matter what the mix of payments were.   All payments are combined to compute a Regular Rate.  This can be bonuses for flagged hours or bonuses for sales or it could be 20 hours of flag and 20 hours of guaranteed pay (to equal 40 hours).   What mattered was how many hours did the non-salaried worker work?   What is their regular rate?   Pay OT using the Regular Rate.

 

 

 

Edited September 29, 2021 by bantar
fixed math

[rpllib]

This entire reply is generally applicable if you have employees that work more than 40 hours per week. Most, if not all, of the trouble owners get into is caused by calculating overtime incorrectly. If your folks work more than 40 hours and you pay some form of pay based on "do this, get that", then their is a high likelihood you will owe additional "premium overtime" on your employees wages. If your folks always work less than 40 hours(actually "clocked" in, assuming you meet the FLSA definition for calculating actual hours worked), there are still other considerations. Contact your local wage and hour division or labor law attorney. 

We had our awakening in 2016. We have been a "productivity/profit based pay" company for the last few decades, and did it wrong for most of those years. Once we were awakened(without the expense of fines/ DOL audit, Thank You), my head was spinning and it hurt for the better part of a year.

I was unwilling to move away from productivity/profit based pay, so instead we made some changes to our tech flat rate pay plan(went to modified flat rate), and implemented a "regular rate/premium overtime" calculation for all employees. Our hourly techs get a monthly bonus with overtime, based on labor dollars produced. Our entire staff receives monthly bonus based on a percentage of "new gross profit dollars generated" above same month, previous year.  Our entire staff receives yearly bonus, based on a percentage of "new gross profit dollars generated" above the previous year. 

The key to all of this, Imo,  is understanding the effect(the "load") that meeting the FLSA requirements places on labor margins. Once you have that worked out, and the the plan(s) are delivering the desired margin, the overall results have been very positive in our store. Sales, gross and net profit have been coming into line with what our coaches have been telling us is possible for decades. And I always thought they were nuts!

I will admit that this is not for the faint of heart. There is a fair amount of setup, and in our case, a fair amount of Excel worksheets. Monthly and yearly bonus plan overtime are calculated using the weighted average method.

Managers, Service advisors and service techs all have "daily trackers" to complete, which they should probably be doing regardless of pay plan. 

A few of the most important points I have learned:

(1) If you have a payroll company, they accept the data you input. They do not keep you out of trouble with the DOL and most of their EULA'a speak directly to this. They are not responsible for  correctly calculating overtime on bonus pay plans. Almost every pay period in my store involves a "overtime" field be filled in and a "premium o/t" field be filled in. 

(2) We still run under the presumption quoted from above: "Per W&H, Flat Rate still requires OT pay if more than 40 hours are worked."

(3) Always, always always know exactly what your total wage cost is per billable hour. If you want to know how much you pay "flat rate" or "per billed hour", regardless of how you actually pay, take all the wages (all "paid in cash" wages including regular pay, o/t pay, flat rate pay, vacation pay, holiday pay, bonus, spiffs, ect, not including benefits) that you pay them for a specific period, and divide by the number of billable hours they produced. My service techs cost $33-$38 per billable hour and my tire/lube techs cost an average of $92.16 per billable hour. 

 

We have a staff of 10, not including owners, and all of them are on a pay program that rewards for productivity/profit and provides for FLSA compliance.

Not impossible, and the value of the "buy in" from staff is what lets us work at the shop 8 hours a week( one day), with no phone calls in between. 

Just one, of many ways to skin the cat

 

 

[bantar]

On 10/3/2021 at 3:13 PM, rpllib said:

<snip>

I will admit that this is not for the faint of heart. There is a fair amount of setup, and in our case, a fair amount of Excel worksheets. Monthly and yearly bonus plan overtime are calculated using the weighted average method.

<snip>

Question...   When you pay your Monthly and yearly bonuses, you recompute the effect that these payments had on OT hours worked during the covered period (month, year)?   So, you'd pay Bonus + OT makeup wages as a result of this bonus?  Is this correct?

[rpllib]

That is exactly correct. The inverse of that, is being sure you know what the effect of those "overtime makeup wages" are when you establish the bonus amount. The way we calculate the bonus is completely up to us. We make sure that when we put a bonus plan is place, the total amount bonused is the what we would have bonused anyway, if we did not understand the process necessary to make non-discretionary bonus's legal. We label the "overtime makeup wage" as "premium overtime" and it is listed as such on all pay reports, checks, and ADP data entry forms. 

Where we get in trouble is when we create bonus plans that deliver all the dollars we intended to give, and then find out we owe additional dollars for overtime consideration, on the bonused amount. 

[bantar]

Interesting.  It took me a long time to wrap my head around premium OT when it was in the same pay period... the easy kind of figuring.   I did not even consider the longer term problem, (but then again, I don't have such bonuses currently).    I may change my payroll label to Premium OT as well.   Right now, it's just a different pay rate that the employees don't really understand, but also don't complain about.

Thank you.  This was very helpful and insightful.  

On 10/3/2021 at 3:13 PM, rpllib said:

A few of the most important points I have learned:

(1) If you have a payroll company, they accept the data you input. They do not keep you out of trouble with the DOL and most of their EULA'a speak directly to this. They are not responsible for  correctly calculating overtime on bonus pay plans. Almost every pay period in my store involves a "overtime" field be filled in and a "premium o/t" field be filled in. 

 

And I'll admit that at first, I assumed that my payroll company was taking my input and generating the correct output.   Once I understood the issue, I could then see that they did nothing to help.   Garbage in, Garbage out.   I quit feeding it garbage.

[rpllib]

Your Welcome. It is a tough concept to get your head around. I can only imagine what took place in the past, that caused these complications to become law.