Not Paying Overtime Properly Can Be Very Costly

Contributed by Sara Zorich

The Department of Labor (“DOL”) announced this week that Harris Health System had agreed to pay over $4 million in back wages and liquidated damages to employees for failure to properly pay overtime.  The issue investigated by the DOL was an alleged failure to include an employee’s incentive pay when calculating overtime premiums resulting in an underpayment.  Under the Fair Labor Standards Act, employers who fail to pay wages properly can owe employees back wages along with an equal amount of liquidated damages.

Employers should review their pay practices to ensure they are properly paying overtime to their employees.  Under federal law and Illinois state law, employers must pay employees 1.5 times their regular rate of pay for any hours worked in a workweek over 40 by the employee.  The regular rate of pay is computed by totaling all of the remuneration for the week (regular pay, incentive pay, shift differential, bonus, etc.) and dividing that number by the number of hours worked in that workweek.  One of the most common mistakes employers make is failing to include the extra compensation (i.e. bonus, incentive pay, etc.) when determining the regular rate of pay.  Below are two examples of overtime calculations:

Weekly Incentive Bonus Example:

An employee earns $10.00 and works 46 hours the week of January 1, 2013.  In that same week, the employee is paid an incentive bonus of $100 for meeting his production goals that week.  His total pay before overtime for the week is $460 (46 hours x $10) + $100 = $560.00.  His regular rate of pay is $560.00 divided by 46 hours = $12.17 hours.  The employee has been paid for all hours worked at straight time for the week so the overtime premium is calculated at one-half of the regular rate of pay: $12.17 (regular rate) x .5 x 6 (overtime hours) = $36.51.  The employees total compensation for the week is $560.00 + $36.51 = $596.51.

Shift Differential Example:

An employee earns $10.00 and works 46 hours the week of January 1, 2013.  In that same week, the employee is paid a shift differential of $1.00/hr for each hour he worked the midnight shift.  He worked the midnight shift for a total of 16 hours this week thus his shift differential was $16.00.  His total pay before overtime for the week is $460 (46 hours x $10) + $16 = $476.00.  His regular rate of pay is $476.00 divided by 46 hours = $10.35 hours.  The employee has been paid for all hours worked at straight time for the week so the overtime premium is calculated at one-half of the regular rate of pay: $10.35 (regular rate) x .5 x 6 (overtime hours) = $31.05.  The employees total compensation for the week is $476.00 + $31.05 = $507.05

Overtime calculations can be even more complicated if employees are paid at more than one rate during a workweek or bonuses or commission payments are allocated over multiple work weeks.  Employers should review the Department of Labor regulations regarding overtime compensation and consult with counsel if they have questions regarding how to properly compute overtime. Small mistakes can add up very quickly and lead to large amounts owed to employees in back wages.