Miscalculating Overtime Pay The Long Arm of As

10 | 2014
The Magazine of WorldatWork©
The Long Arm of
®
Miscalculating
Overtime Pay
Morale, engagement and productivity are all
affected by miscalculated overtime pay.
As
most HR professionals know,
calculating overtime pay
can be complicated. (See “Overtime
Pay Basics” on page 26.) In addition
to the legal aspects of determining
which employees must receive overtime pay, it is easy to miscalculate
overtime pay, and any inaccuracies
can affect the entire organization.
Improperly calculated overtime
pay can generate inaccurate payroll
costs, business inefficiencies, low
employee morale and increased
turnover. In one organization in
which timekeeping and payroll
systems were not well synchronized,
the HR team spent countless hours
manually entering and reconciling
time. This not only strained
the already lean department, it
resulted in inaccuracies because
of manual data entry.
Moreover, the fact that President
Barack Obama has asked for
proposals to update the overtime
rules for inflation and other changes
could make this issue even more
pressing. Among the revisions
suggested for consideration are
raising the salary threshold below
which overtime must be paid
to reflect inflation and updating
exemptions like the “executive,
administrative and professional”
(or “white collar”) exemption to
reflect changes in the workplace.
How to Determine if
There’s a Problem
Organizations with overtime pay
problems exhibit a number of
symptoms. For example, employees
may be asking human resources to
explain inaccurate paychecks. This
may lead employees to question
the organization’s compensation system, which can damage
trust, engagement and retention.
Concerns by more vocal employees
may create “noise” that can be
detrimental to morale.
By Elyse Rinaldi and Emma Browning, Sibson Consulting
© 2014 WorldatWork. All Rights Reserved. For information about reprints/re-use, email copyright@worldatwork.org
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Managers usually do not make
these mistakes intentionally —
they simply do not understand
the rules governing overtime.
Overtime pay miscalculations generated by poor overtime pay practices
may be the culprit. For example, are
managers setting their own overtime
pay policies and/or applying existing
policies inconsistently? Managers
usually do not make these mistakes
intentionally — they simply do not
understand the rules governing
overtime. The authors’ company
has seen data from organizations in
which managers use overtime pay to
recognize employee efforts or entice
them to work different hours. The
company has also seen instances in
which managers try to offer “comp
time” (i.e., future time off to compensate for overtime work) or reward
employees by changing their job classification to exempt, which some may
view as more prestigious. At the same
time, the employees may be working
overtime without permission and/or
not recording their time accurately.
Managers who misuse overtime
pay policies undermine the intent
of the Fair Labor Standards Act of
1938 (FLSA), which is to protect
workers from unfair labor demands.
If employees think the rules are
subjective, it can appear that the
organization is using the nonexempt
classification to distinguish classes
of employees. The guidelines for
determining classification are definitive and clear. They are not intended
to assign value to a particular group;
they are designed to ensure that all
employees are protected.
There are several ways an organization can diagnose overtime pay
calculation problems. One strategy
is to implement auditing programs
to ensure overtime payments are
accurate. Human resources and the
finance department can conduct
regular reviews and evaluations of
overtime costs to confirm they are
necessary and to determine if the
operating or staffing model should
be changed. Setting up the auditing
process and understanding what to
do with the results can be complex
and may require an outside resource
to provide guidance.
Common Pitfalls and
How to Avoid Them
Leaders, managers and employees
have the ability to ensure that the
organization follows proper overtime
pay practices so overtime pay calculations are performed properly. In many
organizations, this requires addressing
the following three pitfalls:
❙❙ Lack of organizational awareness
❙❙ Timekeeping issues
❙❙ Complex shift differentials.
Lack of organizational awareness
Leaders, managers and employees all
need to be made aware of potential
overtime pay calculation problems
and know what they can do to avoid
them. This can be done with training
and internal communications.
Managers must be trained that overtime pay is a formulaic calculation
Overtime Pay Basics
To find out who must receive overtime pay,
organizations need to determine which
employees are covered by the Fair Labor
Standards Act of 1938 (FLSA). Employees
who are covered by the FLSA and must
receive overtime pay are called nonexempt.
Employees who are not covered by the
FLSA and do not have to receive overtime
pay are called exempt.*
Organizations can
follow this simple
Although FLSA addresses many aspects
of pay — including minimum wage,
record keeping and youth employment
standards — there are three key points of
the legislation with regard to overtime pay:
❙❙ Covered nonexempt employees must
receive overtime pay for hours worked
over 40 per workweek**.
❙❙ The overtime pay rate must equal no less
than one and one-half times the regular
rate of pay.
❙❙ Overtime pay is not required for work
on weekends, holidays or regular days
of rest, unless overtime is worked on
such days.
Source: Sibson Consulting
STEP
Calculate the weekly
straight time rate
Add all time worked (including appropriate shift differentials), then
divide the sum of all time worked by the total number of hours.
STEP
Calculate the weekly
overtime pay rate
Multiply the straight time rate by 1.5.
1
formula to calculate
an employee’s weekly
overtime pay rate:
2
*F
or more information, see the Department of Labor (DOL) Wage and Hour Division’s Overtime Pay page at www.dol.gov/whd/overtime_pay.htm.
* T he DOL defines a workweek as “any fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods.”
26 | workspan October 2014
that cannot be manipulated and
must be managed appropriately.
They should know how to recognize
what classifies a job as exempt or
nonexempt and take responsibility for
reviewing and approving time entered.
Human resources can help managers
by providing training sessions that
include role-playing conversations
with employees about organizational
policies and the purpose and the
meaning of nonexempt classification. Managers need to know how to
consistently apply the policies in their
area and to ask human resources if
they are unclear.
All employees, especially nonexempt employees, should be educated
about overtime pay and how to
follow the organization’s policies. This includes recording time
accurately and asking their manager
for approval before working overtime. Nonexempt employees need
to be encouraged to alert their
manager or human resources if they
think their paycheck is inaccurate.
This will allow human resources
to fix the problem quickly and
inexpensively while promoting
open communication and trust
throughout the organization.
Internal communications can be
used to reinforce the organization’s
training program and promote a
culture of transparency, compliance
and fairness regarding overtime pay.
It is especially important to communicate to nonexempt employees
that their job classification has no
bearing on their value to the department or the organization. Human
resources may want to seek outside
help in establishing a training
and/or communications program.
Timekeeping issues
Improper timekeeping is a common
cause of overtime pay problems.
Managers must be vigilant in
ensuring that employees complete
their timesheets accurately and properly record all hours worked.
If the timekeeping system’s time
entry method differs from the payroll
28 | workspan October 2014
Figure 1 | Sample Overtime Pay
Calculation with Shift Differential
Organizations can check their shift
differentials as part of the review
of overtime costs.
SUE WORKS
50 hours in a week
30 OF THOSE HOURS
are at her regular rate
of $10/hour
20 OF THOSE HOURS
are at an increased rate of $12/hour
because she worked the night shift.
THEREFORE, HER REGULAR RATE IS
CALCULATED AS FOLLOWS:
(10 x 30) + (20 x 12) = $540
540 / 50 = $10.80/hour
HER OVERTIME PAY RATE IS THEN
$10.80 x 1.5
= $16.20/hour.
system’s method, hours must be
accurately transferred from one
system to the other. Manual entries,
which are subject to error, should be
avoided or carefully checked. Time
codes must have a single, unique
equivalent in the parallel system
and must be added to and removed
from both systems simultaneously.
Rates of pay — flat or percentagebased — must be the same in both
systems. Finally, updates to pay rates
must also be made simultaneously
in both systems.
Complex shift differentials
Overtime pay calculation issues are
common in industries and facilities,
such as health care and distribution
centers, that use shift differentials to
compensate employees for working
irregular shifts. Calculations can be
highly complex given the varied
amounts paid for each hour worked in
a given week. Payroll systems are also
more complicated, which naturally
introduces a greater potential for error.
Rates for these predetermined shifts
are set by the organization, generally
based on prevailing market values.
However, it is critical to accurately
record hours worked during these
shifts to ensure that overtime pay
calculations are handled correctly.
When factoring shift differentials
into overtime pay calculations, it
is important to note that overtime
pay does not equal the regular rate
of pay multiplied by 1.5. Figure 1
illustrates how to calculate the
overtime pay rate for an employee
with shift differentials.
Conclusion
The negative repercussions of
ineffective overtime pay practices
can affect all levels of an organization. There are many ways
organizations can make mistakes
with overtime pay, and these errors
can have significant ramifications
that generate unnecessary costs and
employee issues. Fortunately, there
is much that organizations can do to
address this issue. Most importantly,
organizations can prevent overtime
pay miscalculation by supporting
proper overtime pay practices. Elyse Rinaldi, CCP, GRP, CSCP, is a
consultant for Sibson Consulting in New York.
She can be reached at erinaldi@sibson.com.
Emma Browning is a senior consultant at
Sibson Consulting in Raleigh, N.C. She can be
reached at ebrowning@sibson.com.
To watch a webinar
about this topic, visit
www.worldatwork.org/
workspan.
resources plus
For more information, books and
education related to this topic, log
on to www.worldatwork.org and
use any or all of these keywords:
❙❙ Calculating overtime pay
❙❙ FLSA
❙❙ Shift differentials.