ComplianceFebruary 05, 2021

Case study: How to calculate an employee's regular hourly pay rate

A case study of how to calculate an hourly regular rate for a salaried nonexempt employee to pay overtime accurately under federal wage and hour law.

Employees who are paid by salary rather than by the hour but are considered nonexempt under federal wage and hour law and therefore, entitled overtime pay, require you to calculate an hourly regular rate in order to pay them the correct amount of overtime.

The calculation can be 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.

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 the method. The method of calculating overtime described here has been permitted by the Department of Labor and has been approved by the federal courts.

Because paying an employee hourly rather than by salary can have other implications under wage and hour laws, 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. 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 $380 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.

Weekly Salary (same each week)        $380.00    $380.00
Hours Worked     45     50
Regular Rate (weekly salary ÷ hours)    $ 8.44    $ 7.60
Overtime Hours (hours worked - 40)     5    10
Overtime Pay (regular rate ÷ 2 x overtime hours)     $ 21.10   $ 38.00
Total (weekly salary + overtime pay)     $401.10   $418.00

The regular rate (pay divided by hours worked) for the Week 1 would be $8.44 per hour ($380/45). You don't need to figure the employee's "straight time" wages because he is salaried, so his base wages are $380, 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 ($8.44) and divide it by 2 ($8.44/2 = $4.22). Then multiply the regular rate by the number of hours in excess of 40 worked for the workweek ($4.22 x 5 = $21.10). The amount of overtime pay for week 1 is $21.10.

The total amount of the employee's pay for Week 1 is $401.10 ($380 + $21.10).

The regular rate for the 50-hour week would be $7.60 ($380/50). The required additional payment for 10 hours of overtime would be $38 ($7.60/2 = $3.80 x 10 hours). Total pay for the week would be $418.

By comparison, suppose you paid the same employee $9 per hour. You would have paid that employee $427.50 for the 45-hour week and $495 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 $103.40 over a two-week period.

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