Understanding Overtime: FLSA Requirements for Fair Compensation

The federal Fair Labor Standards Act (FLSA) requires that covered employers pay nonexempt employees overtime for hours that they work in excess of 40 per workweek and at a rate of no less than one and one-half times their regular rate of pay. Overtime compensation may also be referred to as premium pay. An employee’s regular rate is determined by dividing the employee’s total compensation for a workweek by the number of hours the employee worked during that week.

The FLSA mandates that employees receive overtime compensation, unless an employee is subject to a specific exemption from overtime pay eligibility. It cannot be waived by agreement between the employer and employee. Additionally, neither of the following dismiss the requirement that overtime be compensated:

• An agreement that working time is only eight hours a day or only 40 hours a week; or
• A declaration that no overtime work will be permitted or that overtime work will not be paid unless authorized in advance.

Of note, courts narrowly construe exemptions because they deprive employees of a statutory benefit. Consequently, it is the employer’s obligation to prove that each employee classified as “exempt” is actually covered by a statutory exemption, and an exemption does not apply unless all of the statutory prerequisites are met.

Calculating Overtime

Overtime must be calculated separately for each workweek. For example, if an employee works 30 hours one week and 50 the next, the employer must pay them overtime for the 10 hours worked during the second week (which exceed 40).

Holiday, sick pay, or any other type of pay for hours not actually worked are not counted toward the 40-hour workweek. Overtime pay is unnecessary until the hours worked exceed 40 hours. Except for hospitals using the 8/80 method, overtime pay is not necessary for hours worked over eight in a day unless it causes employees to work over 40 hours in a workweek.

Salaried Employees

Employers must pay overtime to salaried nonexempt employees as well as employees paid by the hour. To compute overtime due a salaried employee, the employee’s regular hourly rate must be determined. If the employee is paid salary by the week, the regular rate is computed by dividing the salary by the number of hours the salary is intended to compensate.

Example: If a nonexempt employee is paid a salary of $500 per week, and the salary is intended to compensate the employee for 40 hours, the hourly overtime rate is $18.75. If the employee works 45 hours, the employee will earn $593.75 as follows:

Regular Rate:=$500 ÷ 40 = $12.50Overtime Rate:=$12.50 x 1.5 = $18.75Overtime:=$18.75 x 5 hours = $93.75 overtimeTotal Earnings:=$500 salary + $93.75 overtime = $593.75

If the employee is paid a salary over a period longer than a workweek, the salary must be reduced to its workweek equivalent. For instance, a monthly salary is reduced to its weekly equivalent by multiplying the salary by 12 and dividing by 52. A semimonthly salary is reduced to its weekly equivalent by multiplying by 24 and dividing by 52.

Example 1: If a nonexempt employee is paid a salary of $2,166.67 monthly, and the salary is intended to compensate the employee for 40 hours per week, the hourly overtime rate is $18.75 as follows:

Weekly Equivalent:$2,166.67 x 12 ÷ 52 = $500Regular Rate:$500 ÷ 40 = $12.50Overtime Rate:$12.50 x 1.5 = $18.75

Example 2: If a nonexempt employee is paid a salary of $1,083.33 semimonthly, and the salary is intended to compensate the employee for 40 hours per week, hourly overtime rate is $18.75 as follows:

Weekly Equivalent:$1,083.33 x 24 ÷ 52 = $500Regular Rate:$500 ÷ 40 = $12.50Overtime Rate:$12.50 x 1.5 = $18.75

Starting Date of the Workweek

Employers are free to set the date and hour the seven-day workweek starts, but it must be a fixed and recurring period. A later change may be made, as long as it is intended to be permanent. The employer cannot minimize overtime payments by frequently juggling the workweek to respond to changes in the patterns of hours worked.

Daylight Savings Time

When daylight savings time ends in October and clocks are moved back one hour, shift workers on duty at this time will actually work an extra hour. This means employees who normally work an eight-hour shift will actually work a nine-hour shift on that day.

Note: Employees must be paid for all nine hours of work and are entitled to overtime for the extra hour if the extra hour causes them to work over 40 hours during the workweek.

Regular Rate of Pay

The regular rate of pay includes all payments made by the employer to or on behalf of the employee (except certain statutory exclusions ). The regular rate is determined by adding together the employee’s pay for the workweek, along with all other nonexcludable earnings, and then dividing the total by the number of hours the employee worked during that week.

Excludable from Regular Rate

The regular rate does not include the following:

• Discretionary bonuses (where the employer has discretion as to whether to make the payment and the amount of the payment).
• Gifts (which are not dependent on hours worked, production, or efficiency and which are neither promised in advance or annually received such that the employee comes to expect them).
• Payments made according to a bona fide profit-sharing plan, trust, thrift, or savings plan.
• Payments made to a retirement or insurance plan.
• Vacation, holiday, or sick pay.
• Reimbursements for business expenses.
• Show up, reporting, or call-back pay.
• Loans or pay advances.
• Certain stock options or stock purchase plans.

2020 Interpretive Guidance and Regular Rate

Effective January 15, 2020, the U.S. Department of Labor’s Final Rule ( RIN 1235-AA24 ) updates several regulations on the calculation of overtime compensation. The final rule does not eliminate the exceptions listed above (except as otherwise discussed) but rather amends them.

Under the final rule, employers may exclude the following from an employee’s regular rate of pay:

• Benefit plan contributions: Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense. The primary purpose of the plan must be to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, retirement, illness, medical expenses, hospitalization, accident, unemployment, legal services, or other events that could cause significant future financial hardship or expense.
• Benefits and perks: Cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
• Bonuses: Sign-on bonuses with no clawback provision (an employee must pay back a portion of the bonus to the employer under certain conditions) and certain longevity bonuses (for example, if provided a reward for future service) qualify as excludable gifts under 29 CFR § 778.212. Longevity payments are excludable from the regular rate when employees receive these payments as a reward for tenure, and the payments are not, for example, made pursuant to a city ordinance, city policy, or collective bargaining agreement;
• Discretionary bonuses: Bonuses are discretionary and excludable if both the fact that the bonuses are to be paid and the amounts are determined at the employer’s discretion, at the end of the periods to which the bonuses correspond, and are not paid pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly; and
• Gifts, Christmas, and Special Occasion Bonuses (§ 778.212): Bonuses paid at Christmas or other special occasion as gifts. Cost of office coffee and snacks to employees as gifts, which are considered as gifts provided with more regularity (as opposed to special occasion) throughout the year with the understanding that they are in fact gifts;
• Holidays and unused leave: Payments made to an employee for periods during which they do not perform any work because of a holiday, vacation, or illness are not required to be included in the regular rate because they are not regarded as compensation for working. Payments for unused paid leave, including paid sick leave or paid time off, are also excludable;
• Reimbursed expenses: Reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred solely for the employer’s benefit (reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are reasonable payments);
• Scheduling change premiums or predictably pay: Payments of certain penalties required under state and local scheduling laws (show-up pay);

The final rule also provides the following:

• Basic rate: Per 29 CFR § 548, which implements section 7(g)(3) of the FLSA and as an alternative to the regular rate, employers may use a basic rate to compute overtime compensation, under certain circumstances. Prior to the final rule, § 548 authorized a basic rate that excludes additional payments which, if included in the computation of overtime, would not increase the total compensation of the employee by more than 50 cents a week on the average for all overtime weeks in the period for which such additional payments are made. Under the final rule, instead of 50 cents per week the rate is 40 percent of the higher of the applicable local, state, or federal minimum wage a week on average for the overtime workweeks in which the employer makes the payment.
• Call-back pay: Eliminates the requirements (at 29 CFR §§ 778.221 and 778.222) that call-back pay, and payments similar to call-back pay, must be “infrequent and sporadic” to be excludable from an employee’s regular rate; however, these payments still must not be prearranged.

Call-Back Pay

Call-back pay (29 CFR § 778.221) compensates the employee for unanticipated work and is excludable. A prearranged payment, however, constitutes compensation for work that was anticipated, and so is not excludable call-back pay.

Call-back or call-out payments are made after an employee ends their scheduled hours but gets unexpectedly called back to work by their employer. It’s usually done via agreement or common workplace practice and is for a specific number of hours at either straight time or overtime. The amount by which the specified number of hours’ pay exceeds the compensation for hours actually worked is considered as a payment that is not made for hours worked. Subsequently, call-back pay is excludable from an employee’s regular rate calculation because it pays the employee for returning to work, not the hours actual worked. Additionally, call-back pay is treated the same as show-up pay. For example, if an employee returns to work for an emergency and works two hours, but is paid a minimum of five hours, then the three additional hours may be excluded from their regular rate.

The DOL provides the following additional example in its final rule:

If a retail employer called in an employee to help clean up the store for three hours after an unexpected roof leak, and then again three weeks later for two hours to cover for a coworker who left work for a family emergency, payments for those instances would be without prearrangement and any call-back pay that exceeded the amount the employee would receive for the hours worked would be excludable.

The key inquiry for determining prearrangement is whether the extra work was anticipated and therefore reasonably could have been scheduled. For example, if an employer restaurant anticipates needing extra servers for two hours during the busiest part of each Saturday evening and calls in employees to meet that need instead of scheduling additional servers, that would be prearrangement and any call-back pay would be included in the regular rate.

SIMILAR TO CALL-BACK PAY (INCLUDING PAYMENTS UNDER STATE OR LOCAL SCHEDULING LAWS)

Payments are similar to call-back pay if they are extra payments, including payments made under state or local scheduling laws, to compensate an employee for working unanticipated or insufficiently scheduled hours or shifts. These extra payments, over and above the employee’s earnings for the hours actually worked at their applicable rate (straight time or overtime), is considered as a payment that is not made for hours worked. Prearranged payment may not be excluded from the regular rate.

Examples of payments similar to excludable call-back pay include:

• Call-back during rest period or ”clopening” pay: Extra payments made solely because the employee has been called back to work before the expiration of a specified number of hours between shifts or tours of duty (closing and opening);
• Predictive scheduling: Pay mandated by state or local law for employees who are scheduled to work the end of one day’s shift and the start of the next day’s shift with fewer than the legally required number of hours between the shifts; and
• Predictability pay: Predictability pay mandated by state or local law for employees who do not receive requisite notice of a schedule change. Predictability pay is mandated by state or local law for employees who do not receive requisite notice of a schedule change.
• Show-up pay: Extra payments made to employees for failure to give them sufficient notice to report for work on regular days of rest or during hours outside of their regular work schedule;

Show-Up or Reporting Pay

Under some employment agreements, an employee may be paid a minimum of a specified number of hours’ pay (at the applicable straight time or overtime rate) on infrequent and sporadic occasions when after reporting to work at their scheduled starting time on a regular work day, or on another day on which they were scheduled to work, they were not provided with the expected work amount. The amounts that are paid under such an agreement are not compensation for hours worked but instead are extra pay (over and above what the employee would receive if they were paid at their customary rate). This extra pay is to compensate the employee for the time they wasted by reporting for work (and not working) and to prevent undue loss of pay resulting from the employer’s failure to provide expected work during regular hours. A primary purpose for this type of pay is to discourage employers from calling their employees in to work for only a fraction of a day when they might get full-time work elsewhere.

The following is an example of a show-up or reporting pay scenario:

1. An employee who is entitled to overtime pay after 40 hours a week, whose workweek begins on Monday, and who is paid $12 an hour reports for work on Monday according to their schedule;
2. The employee is sent home after being given only two hours of work;
3. The employee then works eight hours each day on Tuesday through Saturday, inclusive, making a total of 42 hours for the week; and
4. The employment agreement covering the employee, who normally works eight hours a day, Monday through Friday, provides that an employee reporting for scheduled work on any day will receive a minimum of four hours’ work or pay, so based on the above factors:
   1. The employee must receive the $24 earned in the two hours of work on Monday and an extra two hours’ of “show-up” pay ($24 because of the agreement); and
   2. The $24 in “show-up” pay is not considered compensation for hours worked, so the employee’s regular rate remains $12 and the overtime requirements of the FLSA are satisfied if the employee receives, in addition to the $504 straight-time pay for 42 hours and the $24 “show-up” payment, $12 as extra compensation for the two hours of overtime work on Saturday.

   REPORTING PAY, STATE OR LOCAL LAW, INCLUDING PENALTIES

   State and local laws may also mandate payments or penalties paid to an employee when, before or after reporting to work as scheduled, the employee is not provided with the expected amount of work. All such payments or penalties paid to employees that are mandated by state or local law, and that are not payments for hours worked by the employee, are excludable from the regular rate if such penalties are paid or payments made on an infrequent or sporadic basis. They cannot be credited toward statutory overtime compensation due.

   Discretionary Bonuses

   The label assigned to a bonus does not conclusively determine whether a bonus is discretionary, and thus excludable from regular rate calculation. Discretionary bonuses are usually:

   • Not promised in advance; and
   • The fact and amount of payment is in the sole discretion of the employer until at or near the end of the period to which the bonus corresponds.

   Examples of bonuses that may be discretionary include all of the following:

   • Bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria.
   • Severance bonuses.
   • Referral bonuses for employees not primarily engaged in recruiting activities.
   • Bonuses for overcoming challenging or stressful situations.
   • Employee-of-the-month bonuses.
   • Other similar compensation.

   Stock Options

   Profits from stock options or stock purchase plans need not be included in an employee’s regular rate if the following requirements are satisfied:

   • The terms and conditions of the plan are communicated to employees at the beginning of an employee’s participation or at the time of the grant.
   • At least six months elapse between the grant of an option and its exercise by the employee.
   • The exercise of any grant or right is voluntary.
   • The price is at least 85 percent of the fair market value of the stock at the time of the grant.
   • Terms of the option or stock purchase plan are disclosed to the employee.
   • Any performance criteria for receiving option or purchase rights must be predetermined and apply to at least 10 employees or be discretionary and made based on an employee’s past performance.

   These requirements were set out in the Worker Economic Opportunity Act. Before this time, it was unclear whether profits from stock options or stock purchase plans were included in an employee’s regular rate of pay.

   There are no penalties to employers for noncomplying plans in effect before the act’s effective date of August 19, 2000, if the following apply:

   • The options or rights were granted before the act’s effective date.
   • The options or rights will be granted within a year of the act’s effective date under plans requiring shareholder approval for modification.
   • The option or rights are provided for in a current collective-bargaining agreement.

   Inclusion of Bonus in Regular Rate

   Weekly Bonuses

   Calculation of overtime, which includes a bonus applicable to only one weekly pay period, is simple. To find the increase in the employee’s regular hourly rate caused by the bonus, divide the bonus amount by the total number of hours worked. Multiply one-half (50 percent) of the increase in the regular rate by the number of overtime hours worked to calculate the additional amount owed the employee.

   Example: If an employee works 46 hours at $10/hour and receives a $50 bonus for meeting a weekly production goal, the overtime would be computed as follows:

   Pay Without Bonus: (40 hrs x $10/hr) + (6 hrs x $10/hr x 1.5) = $490Increase in Regular Rate: $50 bonus ÷ 46 hrs worked hour = $1.09Extra Compensation Due: $1.09 x 6 hrs x 50 percent = $3.27Total Pay: $490 + $50 bonus + $3.27 = $543.27

   Fifty percent is used because only the overtime portion of the employee’s compensation — the half of the time and one half — is affected by the calculation. For instance, here the bonus has already caused the employee to receive an extra $1.09 per hour for each of the 46 hours worked, therefore, only half (50 percent) of the $1.09 for each of the six overtime hours remains to be added.

   Deferred Bonuses

   Many bonus plans defer payment of the bonus until some time after the regular payday for the workweek. The employer may disregard the bonus in computing overtime until the exact amount of the bonus can be determined. Once the exact amount of the bonus is determined and paid, it must be apportioned back over the workweeks in which it may have been said to have been earned. If it is impossible to apportion the bonus among the workweeks, some other reasonable method may be used such as assuming the employee earned an equal amount of bonus each workweek or each hour worked.

   Example: If the employee in the example above instead earned a $200 production bonus for an entire month, the overtime for the week the employee worked 46 hours would be calculated as follows:

   Weekly Bonus Amount: $200 x 12 months ÷ 52 weeks = $46.15Increase in Regular Rate: $46.15 ÷ 46 hrs = $1Extra Compensation Due: $1 x 6 hrs x 50 percent = $3

   Note: To determine how much of a monthly bonus is apportioned to a particular week of the month, multiply the bonus amount times 12 (for 12 months per year) divided by 52 (for 52 weeks per year). The reason for this is that not every month has the same number of days.

   AVOIDING COMPLICATED BONUS CALCULATIONS

   Complicated recalculations of overtime to take a bonus into account may be avoided by paying the bonus as a percentage of total earnings. Total earnings must include both straight-time earnings and overtime earnings. This method provides for the simultaneous payment of the bonus and of overtime compensation due on the bonus.

   Example: If the employee worked 46 hours at $10/hour and earned a 5-percent bonus for meeting a weekly production goal, the employee’s total pay would be computed as follows:

   Pay Without Bonus: (40 hrs x $10/hour) + (6 hrs x $10/hour x 1.5) = $490Bonus Amount: $490 x 5 percent = $24.50Total Pay: $490 + $24.50 bonus = $514.50

   Inclusion of Facilities in Regular Rate

   Wages may include facilities such as housing or meals. If an employer provides facilities, the reasonable cost to the employer or the fair value of the facilities must be included in the regular rate. The value of the facilities is added to overtime using the same calculation as for bonuses.

   Example: An employer pays an employee $10 per hour and provides an apartment with a fair rental value of $100 per week. The employee works 45 hours. Her overtime is computed as follows:

   Pay Without Lodging: ($40 hours x $10/hr) + (5 hours x $10/hr x 1.5) = $475Increase in Regular Rate: $100/ 45 hours = $2.22 per hourExtra Compensation Due: $2.22 x 5 x 50 percent = $5.55Total Pay: $475 + $5.55 = $480.55

   Two or More Different Rates of Pay

   There are two permissible methods for determining the regular rate for employees who work at two or more different rates of pay during a single workweek. The usual method is to calculate the regular rate for overtime purposes by dividing the total amount of straight-time compensation by the total number of hours worked.

   Example: If an employee performs 30 hours at $9/hour and 20 hours of custodial work at $8/hour, the employee’s regular rate for overtime compensation would be determined as follows:

   Total Compensation: (30 hrs x $9/hr) + (20 hrs x $8/hr) = $430Total Hours: 50 hoursRegular Rate: $430 ÷ 50 hours = $8.60/hour

   The overtime premium pay for the hours worked over 40 hours would then be $43 (10 hours x 50 percent of the regular rate or $4.30). The employee’s total compensation is $473 ($430 + $43).

   The second method is to compute overtime compensation on the basis of the regular rate for the work being performed during the overtime hours. This method is permissible only by prior agreement with the employee. It is not required but is certainly advisable that such an agreement be in writing. This method reduces overtime compensation costs where an employee’s overtime hours are typically spent on the lower paying of two job functions (for example, the custodial work in the example above).

   Extra overtime compensation for any additional pay (for example, bonuses) would still need to be computed and paid.

   Fluctuating Workweek Method of Calculating Regular Rate

   The Department of Labor’s regulations offer detailed guidance for acceptable methods of calculating overtime for nonexempt salaried employees other than using a regular rate calculated by dividing the employee’s weekly salary by 40. One such method, the fluctuating-hours method, is a little-used method offering significant cost savings to employers. Before calculating an employee’s regular rate using the fluctuating workweek method, the employer and employee must have a mutual understanding that the salary is to cover straight time for all hours actually worked, regardless of whether the employee works more or less than 40 hours per week. The regular rate is calculated by dividing the salary by the actual hours worked in a given workweek. The employer need only pay an additional one-half time for hours worked over 40 hours per week. The regular rate will fluctuate from week to week depending upon the number of hours actually worked; the more hours worked, the lower the regular rate. While the fluctuating-hour method poses difficulties in administration, it generally results in greater cost savings to the employer. Employers may use this method if the employee understands that the salary is intended to cover the straight time payment for all hours worked. The employee should receive information stating that salary covers all hours worked and containing examples of how overtime will be calculated. The employee should be required to sign an acknowledgment that the employee has received this information.

   Bonuses and premium pay are incompatible with with the fluctuating workweek method of computing overtime. Employers should revise their policies to ensure that bonuses and premium pay are not paid to employees who are compensated using the fluctuating workweek method.

   Example: If an employee receives a salary of $500 per week and works 45 hours, the employee would be paid $5.56 per overtime hour. The same employee working 50 hours would be paid at only $5 per overtime hour.

   45 hours

   Regular Rate:$500 ÷ 45 hours = $11.11Half-Time Rate:$11.11 ÷ 2 = $5.56Overtime Pay:$5.56 x 5 overtime hours = $27.80

   50 hours

   Regular Rate:$500 ÷ 50 hours = $10Half-Time Rate:$10 ÷ 2 = $5Overtime Pay:$5 x 10 overtime hours = $50

   If this employee were not paid under the fluctuating hour’s method, the employee would be paid at $12.50 for each overtime hour ($500/40) and would receive $93.75 in overtime for working 45 hours and $187.50 pay for working 50 hours. The fluctuating-hours method provides a considerable cost savings although it is more difficult to calculate. Another disadvantage is that it may create problems with employee morale since the employee is being paid less per hour for each overtime hour that employee works.

   Belo Agreements

   Another fluctuating hour’s method involves what is called a Belo agreement, which may be entered into if an employee’s duties necessitate irregular hours of work.

   A valid Belo agreement allows the employer to pay a guaranteed salary compensating for overtime for an agreed-upon number of hours up to 60 per week. The fluctuating hours method may be used whether or not the employee always works over 40 hours or whether the employee’s hours vary between over 40 and under 40 hours. In contrast, for a Belo agreement to be valid the employee’s hours must vary between over 40 and under 40 hours.

   In order to qualify for this type of agreement the following criteria must be met:

   • The employee’s duties must require irregular hours of work. It is not enough that the employee’s hours fluctuate at the discretion of either the employer or the employee. The employee may not work an irregular number of hours according to a predetermined schedule. The employee’s duties must be such that neither the employee nor the employer can control or anticipate the number of hours that must be worked from week to week.
   • The employee’s hours must be unpredictable and swing between over 40 and under 40 hours.
   • The employee must be aware of and agree to this method of compensation in advance. Although this agreement need not be in writing, the best practice is to fully explain how the employee’s compensation will work and reduce the agreement to writing.
   • The employee must receive a weekly guaranteed payment for the number of hours the employee reasonably could be expected to work. The agreement must set forth a regular rate and an overtime rate and state all hours worked in excess of 40 per week will be paid at a rate at least equal to one and-one half times the regular rate. This overtime rate must be paid to the employee for all work over the guaranteed number of weekly hours, which may not exceed 60 per week.

   Examples of the types of employees whose duties may necessitate irregular hours of work include outside buyers, on-call repairpersons, photographers, insurance adjusters, or newspaper reporters. Ordinary office employees generally do not qualify for a Belo plan. An exception would be those whose duties compel them to work variable hours, such as the confidential secretary of a top executive whose hours are irregular or unpredictable.

   Example: An insurance adjuster’s hours unpredictably vary because she must visit claimants and witnesses at their convenience. Some weeks the adjuster works fewer than 40 hours and some she works more than 40 hours. She is likely to work about 50 hours per week. The adjuster and her employer agreed that every week the adjuster would be paid a total of $600 for 40 hours of work plus 10 overtime hours. The parties agreed the adjuster’s regular rate would be $10 and the adjuster’s overtime rate would be $15. (40 hours x $10) + (10 hours x $15) = $550 guarantee. The parties also agreed that the adjuster would be paid $15 per hour for all hours worked over 50 per week. The arrangement meets the requirements for a Belo plan.

   Tipped Employees

   In computing overtime for tipped employees, the employee’s regular rate of pay is divided by the total number of hours the employee worked.

   The regular rate of pay includes the cash wage amount, the difference between this amount and the minimum wage which is comprised of tips (the tip credit), and any other amount paid by the employer such as bonuses, the employee’s share of compulsory service charges, or the fair value of lodging.

   Any amount received by the employee in tips in excess of the difference between the cash wage and the minimum wage is not included in the regular rate for calculation of overtime.

   Example: A tipped employee works 45 hours in one week and earns $326.25 in straight-time earnings from her employer ($7.25 x 45). $95.85 of the straight-line earnings constitutes cash wages from the employer ($2.13 x 45). $230.40 of this amount comes from tips, which her employer credits toward her $7.25 minimum wage $5.12 x 45). The employee also received $100 as her share of mandatory service charges for special convention groups, which may not be considered tips.

   If the employee received more than $230.40 in tips from customers, these extra tips may be ignored for purpose of calculating overtime. Only tips the employer used as part of the tip credit are part of the overtime calculation.

   The employee’s regular rate for purposes of overtime is $9.47 per hour ($326.25 + $100 = $426.25/45 hours = $9.47). The employee must be paid an additional $23.67 for her overtime premium ($9.47 x 50 percent x 5 hours = $23.67). Her total pay is $449.92 ($426.25 + $23.67).

   Hospital and Residential Care Facilities

   Ordinarily, overtime must be paid to nonexempt employees at one and one-half times the employee’s regular rate of pay for all hours over 40 in a workweek.

   Hospital and residential care facilities may elect to use the 8/80 method. Under this method, overtime is paid for all hours worked in excess of 80 in a 14-day (two-week) period. In order to use this method, the regular rate of pay must be calculated based on the two-week work period, and the facility must pay overtime for hours worked over 8 in a day and 80 hours in the two-week period, whether or not the employee works over 80 hours in a two-week period.

   There must be an agreement or understanding between the facility and the employee that overtime will be computed using the 8/80 method. This agreement must be in place before work is performed subject to this calculation.

   Note: Employers should obtain agreement from their employees in writing and maintain this agreement in the employees’ personnel files.

   Compensatory Time

   Employers may relieve employees from duty during a workweek to avoid incurring overtime liability during that workweek. However, the FLSA does not permit private sector employers to grant employees time off during a workweek in lieu of overtime pay for hours worked during another workweek (also referred to as “comp time”). Public sector employers may, with certain limitations, utilize comp time in lieu of overtime pay.

   Example: If an employee works 40 hours Monday to Thursday, the employer may relieve the employee of work on Friday to avoid an overtime situation. This time-off within the same workweek is not considered comp time.

   Unauthorized Overtime

   Even when an employee does not have specific permission to work overtime, extra hours will count toward the total hours worked and thus be included in overtime as long as the employer knew or should have known that the employee was working extra hours and permitted the employee to do so.

   The employer may discipline an employee for working unauthorized overtime; however, the employer may not refuse to count the hours worked for purposes of determining overtime.

   Scheduling the Workweek

   Employers are free to set the day and hour when the seven-day workweek starts and ends, although it must be a fixed time. A change may be made later, although it must be intended to be permanent. The employer cannot attempt to minimize overtime payments by juggling the workweek to respond to changes in the pattern of hours worked.