How is the regular rate calculated?

To determine how much overtime to pay nonexempt workers, employers must determine what the employee's regular rate is. Federal law requires that overtime be paid at one and one-half times an employee's regular rate for hours worked over 40 per workweek.

Calculating the regular rate can be complicated and time-consuming. It is often recommended that you avoid this problem by paying all your nonexempt employees on an hourly wage basis.

What is the regular rate? Loosely speaking, an employee's regular rate is his or her straight-time earnings converted to an hourly figure. Technically speaking, the regular rate is the employee's total weekly remuneration for employment, less statutory exclusions, divided by the total weekly hours worked for which such remuneration was paid.

The regular rate is computed before any kind of payroll deduction is made. Regular rates are not based on take-home pay.

Regardless of how you pay employees- hourly, by piece, monthly - the rate must not fall below the minimum wage rate of $6.55 per hour (effective July 24, 2008).

How do you calculate an employee's regular rate? For employees who are paid hourly and work a 40-hour workweek, the calculation is simple and corresponds to the hourly rate of pay that you agree to pay them. However, when employees are not paid on an hourly basis, but instead are salaried or work on a piece rate basis, calculating the regular rate becomes more involved.

Exclusions from regular rate. But determining the regular rate is not always as easy as dividing weekly earnings by weekly hours worked because some types of pay shouldn't be counted toward weekly earnings. Federal wage and hour law requires you to omit the following items from calculations of an employee's regular rate:

• gifts, including Christmas bonuses

• idle-time payments, as for holidays and absences

• reimbursements for expenses

• payments similar to idle-time payments and reimbursement for expenses

• discretionary bonuses

• profit-sharing and savings-plan payments by employers

• welfare-plan contributions by employers

• premium pay of any amount for hours worked in excess of eight in a day or in excess of the statutory straight-time workweek

• premium pay of any amount for hours worked in excess of normal or regular daily or weekly standards

• premium pay resulting from time and one-half rates paid for outside of a contractual daily period not exceeding eight hours or outside of a contractual weekly period not exceeding the statutory straight-time workweek

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So, in the process of determining what amount of pay you're going to divide the employees number of hours worked into, be sure to exclude any of the payments above.

Regular rates and the minimum wage. The federal minimum wage is $6.55 per hour, effective July 24, 2008. This is the minimum rate that must be paid to all nonexempt employees for each hour worked up to and including 40 in a calendar workweek. In some states, a higher minimum rate applies and you must pay your employee at least that higher rate.

The law doesn't require you to pay an employee on an hourly basis - it merely requires you to pay a covered employee for a workweek an amount at least equal to the minimum. Wages may be paid on an hourly, salary, monthly, piecework, or any other basis as long as the statutory minimum requirement is satisfied.

What if the regular rate falls below the minimum wage? If an employee's regular rate is less than the minimum rate, then the employee's straight-time earnings will have to be adjusted to conform to the minimum wage requirement and the employee must be paid overtime on the basis of one and one-half times the minimum.

So, if the employee's regular rate falls below $6.55 per hour (effective July 24, 2008), you will have to adjust the employee's pay upward so that the regular rate is at least $6.55 per hour. You will also have to pay overtime based on time-and-one-half the minimum wage rate of $6.55.

Counting time-off pay toward the minimum wage. Can you credit holiday and vacation pay towards meeting the minimum-wage obligation? In other words, when you're adding up the hours an employee worked in a week, can you include a paid day off? No. The reason is that the federal law requires you to use compensation for hours worked and holiday or vacation pay is not made as compensation for hours worked.

Suppose you're trying to figure out whether you met the minimum-wage obligations for the week that included Labor Day, which you gave as a holiday. Even though you might have paid your employees for that day, you can still use only the pay and hours from Tuesday through Friday of that week to determine whether you met your minimum-wage obligations.

Special overtime arrangements. The FLSA does not limit the type of employment agreements that employers and employees may enter. The law merely requires that its minimum wage, equal pay, and overtime directives be followed.