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Case Study: Calculating Regular Rates

April 13, 2006

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If your employees are nonexempt (which means they're subject to overtime) and you pay them a salary, as opposed to an hourly rate, you will still need to calculate a regular rate for them so you can determine how much to pay them for overtime.

But the calculation becomes tricky because hours for salaried employee can fluctuate from week to week, which is why you need to calculate the regular rate for employees each week, regardless of how often you pay them. We recommend that you avoid this problem by paying all your nonexempt employees a fixed hourly rate.

However, if you have a salaried nonexempt employee, here's an example of how you should consider computing overtime for that employee. You should be able to save yourself some money by using it. The method of calculating overtime described here has been permitted by the Department of Labor and has been approved by the federal courts.

Warning If you use this method, you should be sure that your employee understands that he or she is being paid on a salary basis rather than an hourly basis. You must avoid using terms such as "normal workweek" or "standard 40-hour workweek" so that you don't give the impression that the pay is hourly.

Suppose that you hire an employee for a weekly salary of $280 for all hours worked, and the employee works 45 hours in Week 1 and 50 hours in Week 2, as indicated in the chart below.

The regular rate (pay divided by hours worked) for the Week 1 would be $6.22 per hour ($280/45). You don't need to figure the employee's "straight time" wages because he is salaried, so his base wages are $280, every week.

To figure how much overtime pay to pay, you don't need to figure time and a half for the overtime hours. Why? Because by paying a salary, you're paying for the "time" in "time and a half" already. You only need to figure out what the "half" in "time and a half" would be.

To determine how much overtime the employee is entitled to in Week 1, you take the regular rate ($6.22) and divide it by 2 ($6.22/2 = $3.11). Then multiply the regular rate by the number of hours in excess of 40 worked for the workweek ($3.11 x 5 = $15.55). The amount of overtime pay for week 1 is $15.55.

The total amount of the employee's pay for Week 1 is $295.55 ($280 + $15.55).

The regular rate for the 50-hour week would be $5.60 ($280/50). The required additional payment for 10 hours of overtime would be $28 ($5.60/2 = $2.80 x 10 hours). Total pay for the week would be $308.00.

Save Money By comparison, suppose you paid the same employee $7 per hour. You would have paid that employee $332.50 for the 45-hour week and $385.00 for the 50-hour week, using the hourly rate and a straight "time and a half" calculation. If you paid the worker a salary instead, you could save $113.95 over a two-week period!

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