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 [email protected] | www.worldatwork.org | 877-951-9191 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 [email protected]. Emma Browning is a senior consultant at Sibson Consulting in Raleigh, N.C. She can be reached at [email protected]. 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.
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