An employer has two choices in how to pay overtime to a salaried non-exempt employee: by a fixed work week or based on a fluctuating work week. For reasons that will be illustrated below, the latter is a much more cost-effective option for most employers.
By a Fixed Work Week
- If the employee is paid solely a weekly salary, his regular hourly rate of pay—on which time and a half must be paid—is computed by dividing the salary by the number of hours that the salary compensates. For example, If an employee is hired at a weekly salary of $525, which is intended to be compensation for a regular 35 hour work week, the employee’s regular rate of pay will be $15 per hour ($525 / 35). If that employee works overtime (more than 40 hours in a given work week), he or she will have to paid $22.50 for each overtime hour worked. Thus, in a 45-hour week, the employee would be paid $637.50.
- Where the salary covers a period longer than a work week, such as a month, it must be reduced to its work week equivalent. Thus, for example, a monthly salary can be converted to a weekly salary by multiplying it by 12 and dividing by 52. Once the regular weekly salary is calculated, the analysis is the same as #1 above.
- Often times, the number of hours a salaried employee works will vary from week to week, depending on the given needs of the job. One might work 40 hours one week, 45 the next, and 38 the week after that. An employer and employee can agree that a salary will cover all straight time pay for all hours worked in a given week, no matter how few or how many. Payment for overtime hours at one-half such rate satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate as part of the salary. And, that overtime premium will vary from week to week depending on the number of hours worked.
- To use this method of overtime calculation, there has to be a clear mutual understanding of between the employer and employee that the fixed salary is compensation (apart from overtime premiums) for the hours worked each work week, whatever the number.
- This “fluctuating workweek” method of overtime payment may not be used unless the salary is sufficiently large to ensure that there will be no work weeks in which the employee’s average hourly earnings from the salary fall below the minimum wage.
- For example, taking our $525 salary from above, in a 45-hour work week, the hourly rate would be $11.66 ($525 / 45). But, for the extra 5 hours the employee would only be owed an additional $29.15 ($5.83 * 5), for a total weekly compensation of $554.15. The fluctuating work week saves this employer $83.35 in wages for the week. Thus, it is easy to see why the fluctuation work week is the preferred method for calculating overtime premiums for salaried non-exempt employees.