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How Do Holidays and Bonuses Affect Overtime?

29 July 2010

How Do Holidays and Bonuses Affect Overtime?

Calculating overtime can be even more challenging this time of year when paid holidays and bonuses are paid out. Find out how these items affect your nonexempt employees’ pay.

E-Tips Alert – COBRA subsidy extended:Congress extended the COBRA subsidy as part of its Department of Defense Appropriations Act, 2010, which was passed on Saturday, December 19. President Obama signed the bill into law on Monday, December 21.

The subsidy allows qualified beneficiaries who are eligible for COBRA because of an involuntary termination to pay only 35% of the cost of the COBRA coverage. The other 65% of the plan cost is be paid by the federal government as a tax credit to the employer. The subsidy, which was set to expire on December 31, 2009, has been extended to February 28, 2010. In addition, the subsidy period has been extended from 9 months to 15 months of the COBRA 18-month entitlement period.

For many employers, the month of December is punctuated with vacations, paid holidays, and the payment of end-of-the year bonuses. As a result, calculating overtime can be a bit more complicated at this time of year than just paying a normal premium to nonexempt employees for all hours worked over 40 in a week. (“Nonexempt” refers to employees covered by the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA), i.e., those who are not exempt from it.)

To compute overtime payments properly, you have to consider certain premium pay and whether the employee actually worked 40 hours in any given week. Find out below how bonuses and paid time off affect overtime calculations.

* Holidays and Other Paid Days Off *

According to the FLSA, nonexempt employees must be paid overtime at time and one-half their regular rate of pay for all hours actually worked over 40 in a single workweek. So, when calculating actual working hours for a nonexempt employee, you do not have to count any paid time off in the overtime calculation if the employee did not perform any work during the time off.

(Download free Holidays model policy, including HR best practices and legal background .)

So, if a nonexempt employee works a full 40-hour workweek and also takes a day of paid holiday, vacation, or sick leave, the employee is entitled to overtime pay only if he actually works more than 40 hours in the workweek. (Note, however, that a limited number of states, such as Rhode Island, require payment of at least time and one-half for employees who work on certain holidays.)

Consider the following example. A nonexempt employee normally works Monday through Friday, eight hours a day. She receives a paid holiday for New Years on Friday (the day most employers are providing a paid holiday) and does not work on that day. The employee does work the other four days of the week, eight hours a day, and is asked to work eight additional hours on Saturday. The employee’s pay would be for a total of 48 straight-time hours (40 hours worked plus 8 hours holiday). Since she actually worked only 40 hours, she would not have to receive premium pay for the extra hours on Saturday. (The same calculation would apply for last week as well, with Friday as the Christmas holiday.)

As an aside, if you voluntarily pay a premium of time and one-half (the equivalent of overtime) for work on a holiday, weekend, or evening, the FLSA regulations generally allow you to credit this extra compensation towards any overtime that might actually be earned in the same week.

* Bonuses and Incentives Pay *

The answer to whether bonuses and incentives must be included in overtime pay depends on the underlying reasons for the extra pay. Bonuses and incentives that are dependent on hours worked, productivity, or efficiency must be included in determining an employee’s “regular rate” of pay.

(Download free Salary Administration model policy, including HR best practices and legal background .)

For example, an hourly employee who earns $9 per hour in a 40-hour workweek has a “regular rate” of pay of $9 per hour and an overtime rate of $13.50 ($9.00 x 1.5). If that same employee received a $50 production bonus for that week, the employee’s regular rate of pay would change to $10.25 per hour ($50 plus the regular weekly rate of $360, divided by 40 hours) and the overtime rate becomes $15.38 per hour for that week ($10.25 x 1.5).

Under some bonus plans, the extra amount is not paid on a weekly basis.In that case, you may disregard the bonus until the time when the bonus amount is actually determined. In the meantime, you may pay compensation for overtime at one and one-half times the employee’s base hourly rate, exclusive of the bonus. When the amount of the bonus is actually calculated, it must be allocated over the period it covers. Then, a revised overtime rate must be applied to any hours in excess of 40 that were worked during the bonus period. The employee should receive additional compensation for each workweek in which overtime was earned during the period. The amount will be calculated based on the new overtime premium using the bonus, less the overtime premium previously paid.

Other examples of bonuses or incentives that must be included in an employee’s regular rate of pay are: nondiscretionary bonuses paid according to a contract; efficiency bonuses for completing work in less than the allotted time; attendance bonuses; and bonuses paid to employees to work in undesirable locations.

Bonuses that do not have to be included in the regular rate of pay are those received on special occasions (such as Christmas) as a reward for service and which are not measured by or dependent on hours worked, productivity, or efficiency. In addition, premium pay for working on holidays, Saturdays, or Sundays does not have to be included in overtime calculations if the amount is at least one and one-half times the employee’s regular rate of pay.

* Don’t Be a Scrooge (or a Defendant) *

The end of the year, traditionally a time for holiday cheer and goodwill, also can be a time for confusion and mistakes, especially if you are in charge of payroll and overtime calculations.

The issue of the proper payment of overtime is probably one of the most contested areas under the FLSA, and you may have more legal exposure than you realize. The Department of Labor has been aggressively pursuing wage and hour claims, as have plaintiff’s attorneys. These actions have resulted in large dollar judgments when nonexempt employees were not paid properly for all their overtime.

So, make sure you understand what your overtime obligations are when paying for holidays and bonuses. You don’t want to be the Scrooge who ruins the holidays, either for your employees or your organization, by not handling overtime correctly.

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