Payroll Tax News

Looking to learn a new aspect of payroll or wanting details on Symmetry Software product updates? Whatever you're looking for, you can find the answer here. 



Overtime Premiums vs. Overtime Pay

by Robert W. Ditmer, CPP | May 24, 2016
In today’s workplace, especially in the manufacturing fields, many workers are paid different rates of pay for working different shifts or days outside of the normal Monday to Friday workweek.
These different rates are often stated as shift differentials, double-time pay, or as different rates of pay for different categories of work. All of us are aware of the fact that if a non-exempt employee works more than 40 hours in a workweek, he or she is entitled to overtime pay based on the regular rate of pay. But there is one situation in which an employer may actually credit part of an employee’s pay against any overtime pay that may be due. That is the area of overtime premiums.
 
Before diving in, we need to define some terms: 

Differential pay rate- This would be any rate of pay based on a percentage of an employee’s stated rate of pay. For instance, an employee may receive a 10% shift differential for working the second shift and a 20% shift differential for working the third shift. If an employee receives double-time pay for working on a weekend or a holiday, he or she is actually receiving a 100% differential. Overtime pay at one-and-a-half times the employee’s rate of pay could be viewed as a 50% differential.
 
Different rate of pay- In some cases an employee may actually be paid different rates of pay for different kinds of work by the same employer. If an employee receives a differential rate of pay, he or she is actually receiving a different rate of pay based on the differential percentage. For instance, an employee who is paid a 10% differential and receives $11 per hour is actually being paid at the rate of $12.10 per hour.
 
The Code of Federal Regulations (CFR): If employee in a single workweek works at two or more different types of work for which different non-overtime rates of pay (not less than the applicable minimum wage) have been established, his or her regular rate for that week is the weighted average of such rates.[ Suppose an employee works at the rate of $11 per hour for 28 hours, receives a 20% differential pay rate (or $13.20 per hour) for 14 hours at night, and is paid double-time (or $22 per hour) for working eight hours on Sunday -- that employee has worked a total of 50 hours.
 
Considering the above situation, you can now calculate the employee’s overtime pay and gross wages as follows:
  • Calculate total remuneration. ($11/hr x 28 hr = $308.00; $13.20/hr x 14 hr = $184.80; $22/hr x 8 hr = $176.00; $308.00 + $184.80 + $176.00 = $668.80)
  • Calculate the regular rate of pay. ($668.80 / 50 hr = $13.38/hr)
  • Calculate the overtime pay. ($13.38/hr x 10 hr x 50% = $66.90)
  • Calculate total gross wages. ($668.80 + $66.90 = $735.70)
 
Now, to overtime premiums. The CFR defines overtime premiums as follows: Certain premium payments made by employers for work in excess of or outside of specified daily or weekly standard work periods or on certain special days are regarded as overtime premiums. In such case, the extra compensation provided by the premium rates need not be included in the employee’s regular rate of pay for the purpose of computing overtime compensation due under section 7(a) of the [Fair Labor Standards] Act. Moreover, under section 7(h) this extra compensation may be credited toward the overtime payments required by the Act. 
 
To be classified as an overtime premium, there must be a contract between the employer and the employees (such as a union contract), and the payment must meet one of the following criteria:
 
The hours worked in a single day or workweek are more than required by the employee's contract. For instance, if an employee works more than eight hours in a single day, the contract may require he or she be paid an overtime premium for the extra hours. A contract may also specify an employee who works more than 40 hours a week (or any other specific number), or who works more than five days in a single workweek, may receive an overtime premium for the extra hours worked. 
 
An employee may be paid an overtime premium for working special days, such as Saturday, Sundays, or holidays. To qualify as an overtime premium the rate of pay must be at least one-and-a-half times the rate established in good faith for like work performed in non-overtime hours on other days. 
 
So, what effect would this have on the calculation above? Double-time pay for work on a Sunday may be classified as an overtime premium. In fact, many overtime premiums can be stated as pay at a differential pay rate with the differential rate being 50% or more. With that in mind, you could recalculate the employee’s wages as follows:
  • Calculate total remuneration without the overtime premium. ($11/hr x 28 hr = $308.00; $13.20/hr x 14 hr = $184.80; $11/hr x 8 hr = $88.00; $308.00 + $184.80 + $88.00 = $580.80) Please note the 20% shift differential does not qualify as an overtime premium so it must still be calculated as a different rate of pay.
  • Calculate the regular rate of pay. ($580.80 / 50 hr = $11.62/hr)
  • Calculate the overtime pay. ($11.62/hr x 10 hr x 50% = $58.10)
  • Calculate the overtime premium. ($11/hr x 8 hr x 100% = $88.00)
  • Subtract the overtime premium from the calculated overtime pay to determine the actual amount of overtime pay due, but the result cannot be less than zero. ($58.10 - $88.00 = $0.00)
  • Add the employee’s total remuneration, overtime premium, and overtime pay together to calculate the gross wages. ($580.80 + $88.00 + $0.00 = $668.80)
 
Clearly, in this example there is a cost savings. That’s because the overtime premium has not been included in the calculation of the regular rate of pay (so the regular rate of pay is only $11.62 per hour instead of $13.38 per hour), and in this case the overtime premium is greater than any overtime pay that would have been due.
 
In some cases, there may be a portion of overtime pay due even where overtime premiums are paid. Imagine the employee works a total of 56 hours during the workweek including eight hours at the premium rate on Sunday, and the employer pays a premium of 75% for Sunday work.
 
  • Calculate the total remuneration without the overtime premium. ($11/hr x 56 hr = $616.00)
  • Calculate the regular rate of pay. ($616.00 / 56 hr = $11/hr)
  • Calculate the overtime pay. ($11/hr x 16 hr x 50% = $88.00)
  • Calculate the overtime premium. ($11/hr x 8 hr x 75% = $66.00)
  • Subtract the overtime premium from the overtime pay. ($88.00 - $66.00 = $22.00)
  • Calculate gross wages. ($616.00 + $66.00 + $22.00 = $704.00)
 
In this case the employee actually receives part of his or her overtime pay because the calculated overtime pay is more than the overtime premium.
 
The payment of overtime premiums can not only reward employees for working beyond standard working hours or days, but it can also help to keep overtime payroll costs from becoming excessive in certain situations. But employers must be aware of the fact that without a contract that clearly defines overtime premiums, all wages must be included in the calculation of the employee’s regular rate of pay. And where employers pay employees at differential rates or different rates of pay without a contract for overtime premiums, overtime costs can become excessive.

Robert W. Ditmer, CPP, is the owner of RWD Financial Support Service, located in Raleigh, North Carolina. Ditmer provides support and consulting services in the areas of bookkeeping, accounting, payroll and human resources. With over 25 years of experience Ditmer has worked in a wide variety of industries, and he worked as a Controller in four different businesses including a land planning/landscape architecture firm in Philadelphia, PA, a private dining and catering facility in Wilmington, DE, an IT support company in Glastonbury, CT, and a commercial construction management firm in Columbia, MD. Ditmer has also spoken at conferences and provided training on various issues, and he has written a number of articles in the field of payroll and payroll taxation. He is a member of the American Institute of Professional Bookkeepers and the American Payroll Association, and qualified as a Certified Payroll Professional in 2000. He can be reached at rwdfinancial@yahoo.com.