Monday, May 10, 2010

Is Regular Rate of Pay Regular Enough for the 21st Century?

Since 1938 and the passage of the Fair Labor Standards Act (FLSA) employers have been mandated to calculate overtime using the regular rate of pay. Although most employees and by the way most employers understand overtime to be one and one-half times the regular rate for hours worked over 40 in a workweek. The term regular rate of pay has not been commonly understood. If you were to ask anyone in the “street” what the term means they would most likely answer ‘it’s the employee’s hourly rate”. But it has never been that. And that’s why I think we need to address the issue of calculating overtime for the 21st century. It is ridiculous for payroll professionals to have to calculate overtime by hand because they are subject to an archaic law that needs to be updated to reflect the 21st century technology and common practice.

As I just mentioned most employees think overtime is calculated by taking the hourly rate of the employee times one and one-half and then by the number of overtime hours. For example if an employee works 50 hours in a workweek and is paid $10 an hour they believe the calculation would go something like this:

40 x $10.00 = $400.00

$10.00 x 1.5 = $15.00 x 10 hours of OT = $150.00

$400.00 + $150.00 = $550 for the gross pay.
And that is how most payroll computer software calculates it. And it would be acceptable to the Department of Labor (DOL) in most cases. But the regular rate of pay is a calculated rate by law. So anything that is included in the paycheck for other items such as commissions, or shift differential or even bonuses affects the rate. So let’s do this again paying the employee a small commission of $20. Again most employees would think it should be calculated as:
40 x $10.00 = $400.00

$10.00 x 1.5 = $15.00 x 10 hours of OT = $150.00

$400.00 + $150.00 + $20 bonus = $570 for the gross pay.
And if the employer calculated it that way they would be out of compliance and subject to fines and penalties for failure to pay overtime correctly. For the FLSA actually requires the employer to pay all the items to an employee first including the straight time for all hours worked and then add on the “overtime premium”. The calculation actually should be performed as follows:

50 x $10.00 = $500.00 + $20 = $520 This is paying all the hours worked at straight time plus all other payments

$520/50 = $10.40 x .5 = $5.20 This is taking all the straight time and dividing it by all the hours worked to get the regular rate of pay and then multiplying by one-half to get the overtime premium rate.

$5.20 x 10 = $52.00. This is the overtime premium. It gets added by to the all the straight time gross

$520 + $52.00 = $572.00 gross pay.

The difference is $2 to the employee.

And computer systems cannot generally handle this calculation. Especially if there is more than one workweek involved. For example if an employee worked 45 hours one week and 47 hours the next week of a biweekly payroll and earned commissions of $20 the first week and $30 the second week each week would have to be calculated separately to determine the correct overtime payment.

This type of manual calculation was okay in 1938 when it was mandated because all payrolls were calculated by hand. Let’s face it. No companies had computers to do their payroll. And even up until the 1970’s this would have been fine. But we use computers systems now and I think the FLSA needs to reflect changing technologies. Because what tends to happen is that the employer uses the generally understood way to do the overtime, ends up out of compliance and doesn’t even understand why. It’s not fair to employers to expect them to calculate thousands of paychecks by hand because of an archaic law. Yes, it would end up costing employees some money. In our example, for instance, the employee would get $2 less in his paycheck. But the payroll department had to spend more than that to handle the calculation. And let’s face it most employees don’t even know they are supposed to be paid that way. So when the employer fails to follow the FLSA the employee doesn’t even know to complain.

Although I am a Democrat and a liberal I still think that there comes a time when laws have to reflect actual reality. I thought that the Bush Administration would address this issue but they did not, much to my surprise. So I think that the Obama administration should. By changing the definition of regular rate of pay to the generally understood one of “the employee’s hourly rate” regardless of anything else paid it would mean less confusion to the employer, the employee wouldn’t know the difference and Obama could gain some points with the business community. And most important of all, payroll professionals can stop worrying about hand calculating overtime.

What do you think?

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