Wagenmaker & Oberly, LLC would like to express gratitude to Mike Batts, CPA, and the accounting firm Batts Morrison Wales & Lee (BMWL), for their contribution and assistance in the editing and distribution of this article. BMWL is a CPA firm dedicated exclusively to serving nonprofit churches, charities, ministries, schools, foundations, and associations across the United States from their national headquarters in Orlando, Florida. BMWL provides audit and assurance, tax, and strategic advisory services (www.nonprofitcpa.com).
Calculating Overtime Pay for Salaried, Non-Exempt Employees
With the new federal overtime regulations becoming effective December 1, 2016, employers across the country are addressing how to calculate a salaried, non-exempt employee’s overtime wages. This question has become more acute now that many currently exempt employees will be classified as non-exempt, if they do not meet the increased salary threshold of $47,476 for the white-collar exemption, and therefore are owed overtime pay. The specific calculation approach may significantly impact the resulting overtime pay owed, and the results may be surprising. The following examples and recommendations provide insights for optimal overtime pay practices.
Bob the Salaried, Non-Exempt Employee
Consider Bob, an employee who earns an annual salary of $39,000, which is $750 per week. Because this amount is too low for the new salary threshold, and because Bob’s role does not fall within any other overtime exception, he will be non-exempt effective December 1, 2016. As of that date, Bob will be entitled to overtime pay if he works more than 40 hours in a workweek.
Bob usually works about 40 hours per week, but occasionally he works 45 hours a week and sometimes 50 hours a week. His employer has indicated that his work hours may fluctuate. His overtime pay thus will be owed for 5 hours worked some weeks and 10 hours in other weeks. What is Bob’s hourly rate? Should it be based on his regular hourly rate during a 40-hour work week? Or the total number of hours he works per week? And how much overtime is owed? Here are the available calculation options.
- No More Salary – Pay Hourly Rate.
One approach is simply to convert Bob to an hourly paid employee. This may or may not be an attractive option, since Bob may like being a salaried employee and he will need to record all hours worked. More importantly from the employer’s perspective, it could be the least attractive option financially.
Under this approach, Bob’s hourly rate will be $18.75 based on his previous $750 weekly salary and normal 40-hour workweek. During the weeks when he works 45 hours a week, he will earn time-and-a-half pay, or $18.75 X 1.5 for the extra five hours he works. Using this calculation, Bob will earn $28.13 per extra hour, totaling $140.63 for such weeks. During the weeks when he works 50 hours a week, his total overtime pay will be $281.25 for the 10 extra hours. This total amount is obtained from the time-and-a-half rate of Bob’s $18.75 hourly pay multiplied by the mandatory 1.5.
Note, however, that to the extent Bob works less than 40 hours in one or more weeks, the employer will owe him less than $750 each week. This could be a strong positive for the employer, to the extent that Bob regularly works less than 40 hours per week.
- Pay Overtime Based on Total Hours Worked Each Week.
According to the U.S. Department of Labor’s guidance, Bob’s regular hourly rate of pay may be computed by dividing his salary by the number of hours worked each week. (See DOL Fact Sheet #23; DOL Field Operations Handbook, Section 32b04b). Under this approach, Bob’s hourly rate during 40-hour workweeks will be $18.75, but it will decrease to $16.67 during 45-hour workweeks and decrease more to $15 during 50-hour workweeks. 
Notably, under this calculation, the “time” part of the mandatory time-and-a-half overtime pay is considered to be included in Bob’s salary already, with the computed hourly rate changing as more hours are worked. Consequently, his employer will owe him only the extra half of his hourly rate for the overtime work (along with his usual salary). This is a potential game-changer, which may well pivot employers away from the first option above.
Under this second approach, Bob will earn an extra $8.33 ($16.67 X .5) per hour during his 45-hour workweeks, for a total of only $41.67 additional for the 45-hour workweek. During his 50-hour workweek, he will earn an extra $7.50 ($15.00 X .5) per hour for a total $75 for the additional 10 overtime hours. These results may thus be starkly different than under the first approach. With multiple employees like Bob, an employer may be much better off financially using this approach over the first option, so long as such employees regularly work at least 40 hours per week.
- Pay Overtime Based on a 40-Hour Workweek.
According to the U.S. Department of Labor, an employer who wishes to avoid weekly computations for employees with fluctuating hours may choose to pay the extra half-time pay based on the salary divided by 40 hours. (See U.S. DOL Field Operations Handbook, Section 32b04b.) Under this approach, Bob’s straight-time hourly rate will remain at $18.75, for computational purposes. Consequently, he will earn $9.38 per hour extra at the half-time overtime rate, or $46.88 additional for the 45-hour workweek and $93.75 for the 50-hour workweek.
This approach is a little better financially for Bob than the second approach above. It may be easier for the employer to administer, and may seem more fair all around, than using a fluctuating hourly rate of pay. However, the fluctuating rate of pay certainly remains a legally appropriate way to address the overtime requirements for salaried non-exempt workers.
What Next? Recommendations for Implementation
As illustrated by the above examples, employers with non-exempt employees need to think carefully through their approaches to overtime pay – with resulting financial, record-keeping, and employee morale considerations. The second and third approaches above may be the most financially attractive for employers and, by definition, the least attractive for employees.
Key issues that employers should consider with respect to overtime pay include the following:
Employee qualification for the white-collar, ministerial, and other potentially available exemptions should be examined, which may completely avoid these overtime pay issues. A helpful flow-chart analysis is available through Batts Morrison Wales & Lee’s reference tool for religious organizations and for non-religious organizations.
In light of the overtime calculation options described above, employers should consider whether it is better, all things considered, to pay non-exempt employees who work a relatively consistent number of weekly hours an hourly rate or a salary.
For non-exempt salaried workers, employers should choose (from the acceptable options described above) a method for determining and calculating the employer’s hourly rate, and understand that the choice can significantly affect the amount of overtime pay owed when a worker’s hours exceed 40 in a work week.
To avoid record-keeping issues and overtime pay calculations for salaried non-exempt employers, the employer may wish to prohibit them from working more than 40 hours per week. This approach assumes that such prohibition can be enforced, which may or may not be realistic.
Keep in mind too that overtime pay is to be calculated according to the number of hours for which an employer intends to compensate an employee through his or her salary. Consequently, if an employer informs an employee that he or she will be paid for a specific amount of expected work hours, then the employer must pay the employee for any additional hours worked at time-and-a-half (based on the salary amount), not just the extra half-time rate.
From an overall budgeting perspective, it may be beneficial to determine the total compensation desired for a specific job position. In other words, the likely overtime pay should be factored into a salaried, non-exempt employee’s salary amount. Applying the second approach, if an employer expects to pay an employee $39,000 total for a year with regular 50-hour workweeks, the base weekly salary should be less than the $750 amount as listed above, so that the regular hourly amount and the 0.5 overtime amount will – when combined – total $750 per week (regular pay plus overtime). The salary amount in this example thus should be about $35,455, with the overtime expected to make up the difference for a total pay of $39,000. The following formula can be used to find the weekly salary needed to end up at the same total weekly compensation (and then multiplied by 52 for the annual salary):
Remember that employers must also comply with applicable federal and state minimum wage requirements. For example, if Bob works 80 hours one week, his hourly pay rate will thus be calculated at $9.38 per hour. If the applicable minimum wage is $10 per hour, his pay will be too low. In that case, he either should be paid more or should be required to work fewer hours per week.
As a final point, salaried non-exempt employees may benefit through flexible hours worked within a week. They will not be eligible for “comp” time – that is, time off one week based on extra hours worked a different week, as is typically allowed for exempt employees who receive the same salary regardless of total hours worked. On the other hand, an employer may allow an employee within the same workweek to take some time off one day after working longer hours on other days. For example, an employee who recently wanted to take off an afternoon to celebrate the Chicago Cubs’ World Series victory could have worked longer hours the next day, but not exceeding 40 hours total for the work week. Under this scenario, the employer would not owe any overtime pay (although state laws should be checked for additional wage requirements based on lengthy work days). And employee morale would definitely benefit!
Nonprofit organizations requiring assistance in applying the overtime pay rules should consult their employment law counsel.