Overtime Premiums vs. Overtime Pay

Overtime Pay Under the FLSA

Compensation for overtime is an important incentive, and most of us know that if non-exempt employees work more than 40 hours per workweek, employers must give them overtime payments at a rate of not less than one-half their regular rate of pay. Under the Fair Labor Standards Act (FLSA), a workweek is considered seven consecutive 24-hour periods (168 hours).

Employers must not only comply with the FLSA but also with state and local wage and hour laws. For example, California law requires employers to pay overtime in additional circumstances and at different rates. If federal law differs from state and local law, then the employer must apply the most favorable overtime pay rates.

However, there is more to paying nonexempt employees than just the 40-hour overtime standard. In some situations where an employer has a contract with employees, the employer may credit part of an employee’s pay against any overtime pay that may be due. An understanding of this area of overtime premiums can help employers have more control over the cost of employee overtime. 

Before we get into calculating an employee's pay, we must understand how overtime premiums differ from simple overtime.

Key Concepts

Differential Pay Rate 

Differential pay rate is any rate of pay based on a percentage of an employee’s stated rate of pay. For instance, an employee may receive a 10% shift differential for working the second shift and a 20% shift differential for working the third shift. If an employee receives double-time pay for working on a weekend or a holiday, he or she is actually receiving a 100% differential. Overtime pay at one-and-a-half times the employee’s rate of pay could be viewed as a 50% differential.

Different Rate of Pay 

In some cases, an employee may actually be paid different rates of pay for different kinds of work by the same employer. If an employee receives a differential rate of pay, he or she is actually receiving a different rate of pay based on the differential percentage. For instance, an employee who is paid a 10% differential and receives $11 per hour is actually being paid at the rate of $12.10 per hour.

Regular Rate of Pay

Understanding the term “regular rate of pay” under the FLSA is critical to understanding how to calculate payment to your non-exempt employees. The regular rate of pay is based on all non-discretionary payments to the employee. This is not just hourly wages. Most bonuses are nondiscretionary, such as non-discretionary productivity bonuses, unless they fall under the specific statutory requirement for a discretionary bonus.

Here’s the basic calculation for the regular rate: 

Regular rate for the workweek = Total pay in the workweek (exclusive of statutory exclusions) ÷ Total hours worked in the workweek

What is the pay rate if the employee performs different types of work at different rates of pay?

If an employee in a single workweek works at two or more different types of work for which different non-overtime rates of pay (not less than the applicable minimum wage) have been established, his or her regular rate for that week is the weighted average of such rates. Hours of overtime are paid according to the hours spent in each distinct type of work.

Suppose an employee works at the rate of $11 per hour for 28 hours, receives a 20% differential pay rate (or $13.20 per hour) for 14 hours at night, and is paid double-time (or $22 per hour) for working eight hours on Sunday—that employee has worked a total of 50 hours.

Considering the above situation, you can now calculate the employee’s overtime pay and gross wages as follows, where the employee has an hourly rate of $11/hr (not including differentials or overtime).

• Calculate total remuneration. ($11/hr x 28 hr = $308.00; $13.20/hr x 14 hr = $184.80; $22/hr x 8 hr = $176.00; $308.00 + $184.80 + $176.00 = $668.80)
• Calculate the regular rate of pay. ($668.80 / 50 hr = $13.38/hr)
• Calculate the overtime pay. ($13.38/hr x 10 hr x 50% = $66.90)
• Calculate total gross wages. ($668.80 + $66.90 = $735.70)

But payment calculations can be more complicated…

Premium Payments May Be Excluded from the Regular Rate

The FLSA and some state laws enable employers to exclude certain compensation from the regular rate. When a payment can be excluded from the regular rate, the payment may be credited toward any FLSA overtime compensation the employee is owed.

Section 7 of the FLSA provides for various categories of excludable payments, including three types of premium pay:

• Premium Pay for Hours Worked in Excess of the Standard Work Period on an Hourly Basis or Weekly Basis: One type of premium is for hours worked in a single day or workweek that are more than required by the employee's contract. For instance, if an employee works more than eight hours in a single day, the contract may require them to be paid an overtime premium for the extra hours. A contract may also specify that an employee who works more than 40 hours a week (or any other specific number) or who works more than five days in a single workweek may receive an overtime premium for the extra hours worked.
• Special Day and Holiday Premium: An employee may be paid an overtime premium for working special days, such as Saturdays, Sundays, or holidays. To qualify as an overtime premium, the rate of pay must be at least one-and-a-half times the rate established in good faith for like work performed in non-overtime hours on other days
• Premium Pay for Hours Worked Outside of Normal Starting and Ending Times: Adjustments to shift start and end times can directly impact an employee’s entitlement to overtime, night differential, Sunday and Saturday pay, and holiday premium pay. Employers must ensure compliance with FLSA and agency-specific regulations when making schedule changes.

There Must Be a Contract Containing Overtime Provisions: We’ve already mentioned this, but it’s important for employers to realize that for pay to be classified as premium, in addition to meeting the criteria outlined, a contract between the employer and the covered employees must be in place (such as a union contract).

Examples of Differences in Pay Due to Premiums

By excluding payment from regular rate calculations as allowed by law, the employer can save on costs. Double-time pay for work on a Sunday may be classified as an overtime premium if the parties agree to it. In fact, many overtime premiums can be stated as pay at a differential pay rate, with the differential rate being 50% or more. With that in mind, you could recalculate the employee’s wages as follows:

• Calculate total remuneration without the overtime premium: ($11/hr x 28 hr = $308.00; $13.20/hr x 14 hr = $184.80; $11/hr x 8 hr = $88.00; $308.00 + $184.80 + $88.00 = $580.80) Please note the 20% shift differential does not qualify as an overtime premium so it must still be calculated as a different rate of pay.
• Calculate the regular rate of pay: ($580.80 / 50 hr = $11.62/hr)
• Calculate the overtime pay: ($11.62/hr x 10 hr x 50% = $58.10)
• Calculate the overtime premium: ($11/hr x 8 hr x 100% = $88.00)
• Subtract the overtime premium from the calculated overtime pay to determine the actual amount of overtime pay due, but the result cannot be less than zero. ($58.10 - $88.00 = $0.00)
• Add the employee’s total remuneration, overtime premium, and overtime pay together to calculate the gross wages: ($580.80 + $88.00 + $0.00 = $668.80)

Clearly, in this example, the employer enjoys cost savings due to the overtime premium rate. That’s because the overtime premium has not been included in the calculation of the regular rate of pay. This results in the regular rate of pay being only $11.62 per hour instead of $13.38 per hour. In this case, the overtime premium is greater than any overtime pay that would have been due.

What if there is some amount of overtime pay due even when the employer pays overtime premiums?

Imagine the employee works a total of 56 hours during the workweek, including eight hours at the premium rate on Sunday, and the employer pays a premium of 75% for Sunday work.

• Calculate the total remuneration without the overtime premium. ($11/hr x 56 hr = $616.00)
• Calculate the regular rate of pay. ($616.00 / 56 hr = $11/hr)
• Calculate the overtime pay. ($11/hr x 16 hr x 50% = $88.00)
• Calculate the overtime premium. ($11/hr x 8 hr x 75% = $66.00)
• Subtract the overtime premium from the overtime pay. ($88.00 - $66.00 = $22.00)
• Calculate gross wages. ($616.00 + $66.00 + $22.00 = $704.00)

In this case, the employee actually receives part of his or her overtime pay because the calculated overtime pay is more than the overtime premium.

No employer wants uncontrollable overtime costs. The payment of overtime premiums can not only reward nonexempt employees for working beyond standard working hours or days, but it can also often help employers keep overtime payroll costs from becoming excessive. Once again, employers must be aware that without a contract that clearly defines overtime premiums and overtime requirements, all wages must be included in the calculation of the employee’s regular rate of pay.