To properly pay your employees, you must determine their hourly regular rate. An employee's regular rate of pay is basically straight-time earnings converted to an hourly figure. Calculating the rate can be quite complex if an employee is not paid on an hourly basis for a 40-hour workweek. You'll want to make sure your calculations are accurate so that you're in compliance with minimum wage and overtime laws.
Paying your employees may require some calculations on your part to figure out each employee's hourly rate. In basic terms, an employee's regular rate is his or her straight-time earnings converted to an hourly figure. Technically speaking, the regular rate is the employee's total weekly remuneration for employment, less statutory exclusions, divided by the total weekly hours worked for which such remuneration was paid. The regular rate is computed before any kind of payroll deduction is made.
Regular rate computations
If your employees are subject to the federal wage and hour laws (nonexempt employees), you must first determine how many hours the employee has worked. Once you've done that, if your employees are paid by the hour, you know how much to pay: the employee's hourly rate multiplied by the number of hours up to 40, plus one and one-half times the hourly rate for the number of hours over 40.
However, what if your employees are paid on some other basis, but are still entitled to overtime under wage and hour laws because they worked more than 40 hours? In these cases you will have to figure out what their "regular rate" is, unless they fall under one of the narrow exceptions to the overtime pay rules.
For employees who are paid hourly and work a 40-hour workweek, the calculation is simple and corresponds to the hourly rate of pay that you agree to pay them. However, when employees are not paid on an hourly basis, but instead are salaried or work on a piece rate basis, calculating the regular rate becomes more involved.
To figure out an employee's regular rate, use this formula:
amount of pay for a workweek divided by number of hours worked (not including overtime)
Keep in mind that regular rates are not based on take-home pay and that regardless of how you pay employees — hourly, by piece, monthly — the rate must not fall below the minimum wage hourly rate.
Before you calculate your employee's regular rate, make sure you know what payments you've made to your employee count and which should not be counted in calculating the regular rate.
Pay excluded from the regular rate
Determining the regular rate is not always as easy as dividing weekly earnings by weekly hours worked. Why? Because some types of pay shouldn't be counted toward weekly earnings.
That's both good news and bad news for you. The bad news is that reducing the weekly earnings will drive the hourly rate down, thus potentially making it more difficult to meet the minimum wage requirements. On the other hand, reducing the hours worked will possibly reduce the overtime you have to pay.
For better or worse, there isn't much you can do about it. Federal wage and hour law requires you to omit the following items from calculations of an employee's regular rate:
- gifts, including Christmas bonuses
- idle-time payments, as for holidays and absences
- reimbursements for expenses
- payments similar to idle-time payments and reimbursement for expenses
- discretionary bonuses
- profit-sharing and savings-plan payments by employers
- welfare-plan contributions by employers
- premium pay of any amount for hours worked in excess of eight in a day or in excess of the statutory straight-time workweek
- premium pay of any amount for hours worked in excess of normal or regular daily or weekly standards
- premium pay resulting from time and one-half rates paid for outside of a contractual daily period not exceeding eight hours or outside of a contractual weekly period not exceeding the statutory straight-time workweek
So, in the process of determining what amount of pay you're going to divide the employees number of hours worked into, be sure to exclude any of the payments above.
Calculating the regular rate is complicated and time-consuming. We recommend that unless it is unavoidable for a good business reason you avoid the hassle by paying all your nonexempt employees on an hourly wage basis.
Our step-by-by step case study of how the regular rate calculation works should be helpful in illustrating the computations you may need to perform.
Whatever you decide regarding the best way for you to pay employees, you must be certain that the hourly rate of pay is not less than the minimum wage hourly rate.
The relationship between regular pay rates and the minimum wage
Employees must be paid an hourly rate that meets or exceeds the federal or state minimum wage, whichever is higher. The federal minimum wage rate is the minimum rate that must be paid to nonexempt employees for each hour worked up to and including 40 in a calendar workweek. In some states, a higher minimum rate applies and you must pay your employee at least that higher rate.
The law doesn't require you to pay an employee on an hourly basis — it merely requires you to pay a covered employee for a workweek an amount at least equal to the minimum. Wages may be paid on an hourly, salary, monthly, piecework, or any other basis as long as the statutory minimum requirement is satisfied.
What if the regular rate falls below the minimum wage? If an employee's regular rate is less than the minimum rate, then the employee's straight-time earnings will have to be adjusted to conform with the minimum wage requirement and the employee must be paid overtime on the basis of one and one-half times the minimum.
So, if the employee's regular rate falls below $7.25 per hour, you will have to adjust the employee's pay upward so that the regular rate is at least $7.25 per hour, and you will have to pay the employee time and a half based on the minimum wage rate of $7.25 (in other words, at least $10.88 per overtime hour).
Time-off pay not counted toward minimum wage. Can you credit holiday and vacation pay toward meeting the minimum-wage obligation? In other words, when you're adding up the hours an employee worked in a week, can you include a paid day off? No. The reason is that the federal law requires you to use compensation for "hours worked" and holiday or vacation pay is not paid as compensation for hours worked.
You're trying to figure out whether you met the minimum wage obligations for the week that included Memorial Day, on which you gave your employees the day off as a paid holiday. Even though you paid your employees for that day, you can still use only the pay and hours from Tuesday through Friday of that week to determine whether you met your minimum-wage obligations because the hours on Monday, Memorial Day, are not hours worked.
Wage credits count toward minimum wage. Federal wage and hour law allows you to count board, lodging, and other facilities as part of wages for purposes of meeting the minimum wage requirements. A common example is meals provided by a restaurant to its employees. To take advantage of the rule, however, you have to meet the following criteria:
- You can count only the reasonable or fair value of the facilities (as opposed to the retail value).
- The facilities must be furnished for the benefit of the employees, not just your own convenience.
- The employees must be aware that the value of the facilities are being deducted from their cash wages. The employees must voluntarily accept the items. For example, in the case of free meals provided by a restaurant, employees must be allowed to opt out of the meal plan.
- The facilities must be of a type customarily furnished by the employer or by other employers engaged in similar activities.
Some states also make provisions for wage credits in their minimum wage laws. Be sure to check your state's law to see if wage credits are covered by your state's minimum wage law.