What is overtime pay?

Overtime pay protects employees from being taken advantage of by employers and ensuring them a fair day’s pay for a fair day’s work. But what is overtime pay and how is it calculated? Are you required to be paid overtime? Can an employer ever not pay you overtime even if you have worked more than forty hours per week?

The Fair Labor Standards Act, passed in 1938, requires employers to pay an employee for every hour of compensable time he works over forty hours in a workweek at a rate of one and a half times the regular rate.

An easy example is the hourly employee who makes $10/hour and works a 50-hour week. The employee is paid at $10/hour—the regular rate—for 40 hours of “straight time.” As a result, his regular pay is $400. The overtime rate is $10/hour times 1.5, or $15/hour. The employee has worked 10 hours of overtime (50 hours minus 40 hours). Thus, his overtime pay is 10 hours times $15/hour, or $150. His total take-home pay for the week is $400 plus $150, or $550.

The calculations become more complicated for salaried employees and those employees with fluctuating workweeks, but the central principle is that an employee who works more than forty hours per week must be paid one a half time his regular rate for that extra time.

However, that leaves the question, what is the regular rate? First, the regular rate must be equal to or greater than the minimum wage. In the above example, the regular rate is simply the hourly rate of the employee. For a salaried employee, the regular rate is just the weekly salary divided by the number of hours worked.

The regular rate is not only limited to wages—an employee’s entire compensation is considered. This includes productivity bonuses, longevity pay, and shift differentials. The only payments excluded are reimbursements for expenses incurred on the employer’s behalf, premium payments for overtime work, discretionary bonuses, gifts and payments for special occasions, and paid sick days, vacation, or holidays.

However, the FLSA only applies to employees, not independent contractors. The FLSA defines “employee” as an “individual who is employed by an employer,” and “employ” as “to suffer or permit to work.” Thus, an employee is one who suffers or is permitted to work. Courts have consistently held this definition of employee to be the broadest of the federal employment statutes.

Under the FLSA, the test for determining who is an employee depends on the economic realities of the worker’s dependence on the employer. This is called the “economic realities test.” Five factors are important: the degree of control exercised by the employer, the relative investments made by the worker and the employer, the worker’s opportunities for profit and loss, the skill and initiative required, and the permanency or duration of the relationship.

If an employer-employee relationship exists, the FLSA will apply only if there is individual coverage or if there is enterprise coverage.

An employee is covered by the FLSA, and thus required to be paid minimum wage, if he is engaged in work that is in or affecting interstate commerce. This is called individual coverage. Since the New Deal, work that is in or affecting interstate commerce has included most jobs, and “affecting interstate commerce” has been interpreted broadly. Thus, individual coverage of the FLSA includes most employees, such as those who produce goods that are sent out of states, those who regularly make telephone calls out of state, and those who handle interstate transactions. Especially with the introduction of the internet and electronic commerce, most workers will be engaged in or affecting commerce and will be protected by the FLSA.

Even if there is no individual coverage, there still may be enterprise coverage. An employee is covered by the FLSA if he is employed by an enterprise—any group of related activities performed under common control for a common business purpose—that has a total gross volume of $500,000 or more, and has at least two employees engaged in or affecting interstate commerce. These employers include hospitals, schools, and government agencies.

Even if the FLSA applies because a worker is an employee and not an independent contractor and the employer is covered by the statute, an employee may be exempt under the FLSA because of his job duties.