Calculating Overtime: What is Included in the Rate?

It has been a busy few weeks, requiring your warehouse employees to work overtime. Given the demand, the warehouse employees were also paid a production bonus based on the amount of flooring processed. To calculate the wages owed for those extra hours of work, your payroll office took each employee’s hourly rate and multiplied it by 1 and a half and paid the overtime rate for the extra hours worked. Seems simple enough. But did you include the performance bonuses? If not, you underpaid these employees.

Under the regulation implementing the federal Fair Labor Standards Act, an employee must be paid one and half times their “regular rate of pay” for every hour worked over 40 hours a week. The regular rate of pay includes all compensation received by the employee in a work week. This means non-discretionary bonuses must be included when determining an employee’s regular rate of pay. Non-discretionary bonuses include those that are announced to employees to encourage them to work more steadily, rapidly or efficiently, and bonuses designed to encourage employees to remain with a facility.

For example, consider an employee who works 46 hours in a workweek, is paid $12 per hour, and receives a $46 bonus. To calculate the regular rate of pay the employer would multiply the 46 hours worked by the hourly rate of $12, for a total of $552. The $46 bonus would then be added for a weekly pay of $598. The $598 would be divided by 46 hours resulting in a regular rate of $13 per hour. The overtime rate would be $19.50 ($13 x 1.5). To complete the calculation, the employee would receive $520 in regular wages ($13 x 40 hours) and $117 in overtime wages ($19.50 x 6 hours) for a total of $637 for the work week.

A company in Michigan recently felt the impact of failing to include bonuses in calculating overtime. The Department of Labor’s Wage and Hour Division required the company to pay over $198,000 to its employees because they paid overtime based only on each employee’s hourly rates, excluding production bonuses.

What else besides bonuses must be included in calculating the regular rate of pay? What about employee discounts on retail goods and services, pay for unused leave or vacation time, paying or reimbursing for training, or similar benefits or reimbursement programs? The answer is not always clear. In addition, state laws may also impact what must be included. The issue also becomes more complicated if employees are paid a piecework rate—overtime is still due for hours worked beyond 40 a week. For more information on overtime for piecework, please see Piece-Rate Compensation: Get Ready for the Changing Rules, in WFCA’s Premier Flooring Retailer (November/December 2015), which explains how to calculate overtime for piece rate employees, including new California rule.

Department of Labor recognized that the regular rate of pay regulations have gone largely unchanged for 50 years, yet pay practices and employer perks have seen significant changes. Employers increasingly offer novel employee benefits such as wellness programs, gym benefits, and student loan repayment assistance programs. As a result, the Department has proposed a new rule to clarify which benefits should be and which should not be included in calculating an employee’s regular rate of pay. The proposed rule can be accessed at proposed rule regarding the calculation of the "regular rate".

Interested parties may submit comments on the Proposed Rule by May 28, 2019. The World Floor Covering (WFCA) is preparing comments on behalf of its members, commercial and retail flooring dealers. Please send an email to WFCA’s legal counsel ( to identify any alternative compensation or benefits that you believe should be excluded from the regular rate of pay.

Notice: The purpose of this blog is to review the latest developments that are of interest to clients of Mr. King. The information contained is abridged from legislation, court decisions, and administrative rulings. The information provided should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.

Friday, April 19, 2019