The regular rate of pay for salaried non-exempt employees is always calculated by dividing the salary amount by an hours worked amount. However, the exact amounts and what is then done with the regular rate will vary according to the exact situation. Keep in mind that if a salaried employee is also given a productivity bonus or a commission, or some other type of compensation for work performed, the extra compensation must be added to the salary before dividing the total by the hours worked. As with any other pay method, the salary method may in no case result in less than minimum wage for all hours actually worked, plus time and a half for hours worked in excess of 40 in a workweek.
For detailed information on the various ways that overtime pay may be calculated for a salaried non-exempt employee, see the following topics.
H.1. General Rule for Salaried Employees
Under 29 C.F.R. 778.113(a), to arrive at the regular rate for a non-exempt salaried employee, take the salary and divide it by the number of hours the salary is intended to compensate. If the salary is for a 40-hour workweek, overtime is simple: divide the salary by 40 to get the regular rate, and then pay any overtime hours by multiplying 1.5 times the regular rate. However, if the salary is for a lesser workweek, such as 36 hours, divide the salary by 36 to get the regular rate. If the employee works 40 hours on such a basis, the total pay would be the salary for the 36 hours plus 4 hours times the regular rate. If the employee works 42 hours, the total pay would be the salary for the first 36 hours, plus 4 hours times the regular rate, plus two hours times 1.5 times the regular rate. Finally, if the salary is intended to compensate for 45 hours per week, the regular rate would be the salary divided by 45. The hours past 40 would be compensated at one-half of the regular rate up to 45, and hours past 45 would be paid at time and a half.
H.2. Regular Rate for Semimonthly Salaries
For non-exempt salaried employees who are paid either twice per month (semimonthly) or monthly, the payments must be reduced to their workweek equivalents in order to arrive at the regular rate of pay. Once the workweek equivalent is known, then the general rule for weekly salaries is applied. (Keep in mind that under the Texas Payday Law, non-exempt employees must be paid at least twice per month, i.e., biweekly or semimonthly, and so the provision about monthly salaries will not apply to non-exempt employees in Texas or any other state with a similar provision.) 29 C.F.R. 778.113(b) provides two main ways for an employer to compute overtime pay for salaried employees paid once or twice per month. The first method involves figuring out the workweek equivalents:
Semimonthly salary - multiply the salary times 24 to get the annual equivalent, then divide that figure by 52 to get the workweek equivalent. Then apply the general rule of 29 C.F.R. 778.113(a) to arrive at the regular rate.
Monthly salary - multiply the salary by 12 for the annual equivalent, then divide that figure by 52 to get the workweek equivalent. Then apply the general rule of 29 C.F.R. 778.113(a) to arrive at the regular rate.
The other main way to pay overtime based on semimonthly or monthly salaries is to figure it on the basis of an established basic rate as provided in section 207(g)(3) of the Act and Part 548 of the regulations. 29 C.F.R. 548.3(a) provides that the employer and employee may agree that the regular rate shall be determined by dividing the monthly salary (or semimonthly salary times 2) by the number of regular working days in the month and then by the number of hours of the normal or regular workday. Of course, the resultant rate in such a situation may not be below the statutory minimum wage. Further requirements for such an established regular rate are found in 29 C.F.R. 548.2.
Once again, Texas employers must pay their salaried non-exempt employees at least twice per month, i.e., either biweekly or semimonthly.
H.3. Regular Rate for Salaried Employees with Irregular Hours
If an employee is paid a fixed salary each workweek for hours that vary up and down from week to week, the employer may use an overtime calculation method authorized in 29 C.F.R. 778.114. This method is called the "fixed salary for fluctuating workweeks" form of computing overtime. It is easily the most favorable method for employers of computing overtime, but certain requirements have to be met. Many employers favor it because it results in a diminishing regular rate, and thus diminishing overtime pay, the more overtime hours there are in a workweek. For the same reason, many employees do not like this method. Moreover, the regular rate varies under this method from week to week, so some employers and employees do not like the unpredictability of this way of computing overtime pay. A final drawback of this method of pay is that DOL takes the position that it is incompatible with various forms of incentive pay, i.e., bonuses, shift premiums, and other types of incentives based on production or performance. Thus, it is restricted to those who are paid solely by means of a fixed salary (a commission on top of a fixed salary is not a problem, but it must be figured into the regular rate of pay before the overtime pay calculation is done).
For an employer to qualify for using this method, the employee must have a work schedule with fluctuating hours, i.e., not be on a fixed schedule, and must be paid a fixed salary that is meant to be straight-time compensation for all hours worked in a workweek, whether the employee works less than or more than 40 hours per week. In addition, the fixed salary must be paid "pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many." The "understanding" does not require a formal agreement or explanation beyond simple notice that the fixed salary will serve as straight-time compensation for all hours worked (see Samson v. Apollo Resources, Inc., 242 F.3d 629, 637 (5th Cir. 2001)). With almost no exceptions, no reduction in the salary may be made for short workweeks. Although the full fixed salary must be paid during short workweeks resulting from a lack of work or authorized absences due to personal business or illness, an employer may make "occasional disciplinary deductions for willful absence or tardiness" if the employee, without authorization, fails to work the available schedule. However, such deductions may not affect either the minimum wage or the regular rate calculation for overtime pay purposes, i.e., the full salary is still divided by the actual hours worked that week to calculate the regular rate of pay. See the DOL Field Operations Handbook § 32b04b(b); see also 29 C.F.R. § 778.304(a)(5), (b); 29 C.F.R. § 778.307; and Samson v. Apollo Resources, Inc., 242 F.3d at 639. Application of available paid leave to time missed during a short workweek is allowed, as noted in several DOL opinion letters, including FLSA2006-15 issued on May 12, 2006. Finally, the salary must be large enough to ensure that the regular rate will never drop below minimum wage. In using this method, the regular rate is determined by dividing the fixed salary by the number of hours actually worked that week (which does not include paid leave or paid holidays). Now, here's where the importance of this overtime method comes in: since the fixed salary is already deemed to compensate the employee at straight time for all hours worked, any overtime hours only need to be paid at "half-time", instead of time and a half. Remember, the employee has already been paid straight time by virtue of the salary, and the straight time is only paid once, so the overtime hours will be paid at half the regular rate, thus bringing the employee's pay up to time and a half for such hours. In workweeks in which the overtime is high, the regular rate will be low, and the employer will enjoy a lower per-hour overtime cost. The drawback is that if work is slow, and the employee is only working 25 or 30 hours per week, the fixed salary must still be paid. Useful examples of how to apply this method are found in 29 C.F.R. 778.114. You can also use the calculator below to see how the overtime pay is calculated using this method and how the regular rate of pay varies according to the number of overtime hours worked in a particular workweek (note: you must have JavaScript enabled in your browser to use the calculator below; this utililty is not intended to be a substitute for the advice or assistance of a payroll professional, nor is it an official pay calculator - it is here only to help illustrate the principles behind the overtime pay calculation when the fixed salary for fluctuating workweeks method applies):
Fixed Salary for Fluctuating Workweeks Overtime Calculator
(When entering figures into the blanks provided in the first set of fields (the salary and hours for a workweek), enter only numbers - no dollar signs or commas are needed. For fractions of hours, convert fractions to decimals first, then enter the decimal numbers, rounding to the nearest tenth or hundredth of an hour, depending upon how exact you would like the calculation to be.)
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