Overtime: Getting it Right
If nothing is certain in life except death and taxes, overtime is a pretty close third. You may not encourage it, you hate paying it, but it can and does happen, and it’s in your best interest to get it right.
Unfortunately, paying employees properly for overtime is trickier than it seems, and despite your best intentions, it’s easy to get the rules wrong. This results in many doctors and managers making dangerous errors without even knowing it, and incurring far greater costs than time and a half. With that warning in mind, it’s time to double-check your overtime facts.
You Probably Know These Basics …
When a non-exempt employee works more than 40 hours within a workweek, employers are required by the Fair Labor Standards Act (FLSA) to pay 1½ times their “regular rate of pay.” Depending on the state you’re in (e.g. California), the overtime regulations can be even stricter. (Need to double-check the rules for your state? Doctors and managers are welcome to call CEDR at 866-414-6056.)
… And You May or May Not Know These
Moving beyond the obvious, here are some overtime facts and requirements you may or may not yet be aware of:
- Definition of a “workweek.” A workweek must consist of 7 consecutive 24 hour periods – but those 7 days do not need to coincide with the calendar week. We often recommend that practices adapt a Sunday through Saturday workweek, which breaks the weekend neatly in half and may help busy practices prevent and manage overtime.
- Your employees cannot waive overtime pay. Furthermore, you cannot enforce a policy that says unauthorized overtime will not be paid. If they work it, you have to pay it.
- Bonuses and commission payments are included in overtime calculations. Whenever you pay out performance or outcome-based employee bonuses, or when employees work on commission, those payments always affect the amount (if any) of overtime pay due.
- The “regular rate of pay” may not be quite what you think…read on.
Here’s What Many Employers Get Wrong
Getting any of these next points wrong can also be expensive down the line.
- What the regular rate of pay includes. The DOL definition of the “regular rate of pay” comes as a surprise to many employers. An employee’s regular rate of pay actually includes all forms of compensation (not expressly exempted) divided by total hours worked. This includes base hourly wage, non-discretionary bonuses, commissions, on-call pay, shift differentials and a few less common forms of remuneration.
- What the regular rate of pay does not include. The regular rate of pay does not include gifts, such as purely discretionary Christmas bonuses or turkeys, paid holidays if not actually worked, vacation or sick pay. But be careful: you can’t call all bonuses ‘discretionary.’ Discretionary bonuses are based on no particular criteria and are of an undetermined amount. They are not the same as the outcome-based bonuses you may use to incentivize employees – those are considered wages.
- Which employees may legally be classified as exempt. Another confusing topic for employers is the criteria by which certain employees may be considered “exempt” from overtime. While “exempt” employees are paid on a salary basis and not subject to overtime, you cannot classify an employee as “exempt” merely to avoid overtime (even if the employee agrees). Specific FLSA criteria as to the employee’s duties and salary level must be met. Click here to learn more about exempt vs. non-exempt status – and keep in mind that getting this wrong puts you at risk for both IRS and DOL audits!
- You must pay overtime once it’s worked. To learn what option you do have for limiting overtime, see the end of this article.
Doing the Math: Bonus and Commission Plans
Many employers are surprised to find that bonuses and commissions must be factored into overtime pay. If you’ve been getting this wrong, don’t wait to correct your calculations!
Here’s the math to determine an employee’s Regular Rate of Pay when a bonus is included:
Step 1: Total weekly pay = Base hourly wages + additional compensation
Step 2: Regular rate of pay = Total weekly pay ÷ hours worked
Step 3: Overtime premium = Regular rate of pay x 0.5 x total overtime hours (You have already calculated the “time” part of “time-and-a-half,” so this is where you are figuring out the extra pay due)
Step 4: Total weekly compensation = Total weekly pay + overtime premium
NOTE: The Regular Rate of Pay is only used to calculate the correct Overtime Rate. It does not replace the employee’s Base Hourly Wage.
Overtime is Terrible! Can’t I Just Forbid It?
Overtime is expensive, and many employers would rather not permit it. That’s fine, as long as your efforts to prevent it are legally enforceable. So what can you do? Simple: just make sure your employee policies require prior authorization before working overtime. Then, if an employee repeatedly works overtime without prior approval, you are within your rights to follow normal disciplinary procedures, up to and including termination.
Remember, once overtime is worked, you can discipline employees for working unauthorized overtime, but you DO have to pay it.
Questions about your OT policy or a specific scenario? Dental employers and their managers are welcome to contact CEDR for assistance (866-414-6056).
It’s Up to You
And remember…it’s up to you! Accountant, bookkeepers and payroll companies have all been known to get these rules wrong. The ultimate responsibility falls on you.