Quirky Question #233, The Regular Rate: Where Math and Law Collide

by Dorsey & Whitney LLP
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Question:

We operate a warehouse in Minnesota where the employees work two weeks on / two weeks off. They work 10 hours per day, 7 days per week when they’re on at an hourly rate of $30. The employees also ordinarily receive a non-discretionary year-end bonus of 10% of total compensation, which is meant to compensate them both for their work and for their having to deal with such a crazy schedule.

The employees don’t like the swings in their pay from big checks to zero based on the on/off pay periods. We would like to make the employees salaried non-exempt in order to even out their pay, but we don’t want to change their total compensation in any meaningful way.

Can you explain how to figure this out?

Answer:

Let me warn you in advance: this answer requires some serious math and a sprinkling of algebra. It also requires an understanding of the regular rate of pay and bonuses under federal wage and hour laws. Because you’re in Minnesota, we thankfully don’t have to worry about daily overtime or consecutive day premium pay like we would were you in California or other states with similar wage and hour laws.

Let’s start with calculating your employees’ yearly compensation as they currently are paid. During week one, they work 70 hours. They would earn their hourly rate times 40 hours, plus a time-and-a-half overtime rate times 30 hours, or:

($30 x 40 hours) + ($30 x 1.5 x 30 hours) = $2,550

Week two is the same hours so same $2,550 paycheck. Weeks 3 and 4 they don’t work at all, so earn nothing. At 13 4-week periods in the year, the total yearly compensation is $2,550 x 2 x 13 = $66,300. That’s it, right? Not quite.

You said they earn a 10% annual non-discretionary bonus. Under federal wage and hour law, overtime pay must be determined using the employee’s “regular rate” of pay, which includes all earnings paid to the employee during the workweek. Non-discretionary bonuses are included in the employee’s earnings, so those bonuses must be included in the overtime calculation. For a bonus paid well after a workweek during which the bonus was earned, federal wage and hour law allows an employer to initially disregard the bonus, then, once the bonus has been determined, to apportion it back over the workweeks of the period during which it was earned. There are different methods for calculating additional overtime due for bonuses paid to cover a multiple-workweek period, but if we can assume your employees earned an equal portion of the year-end bonus each workweek (which appears to be the case based on your description of the bonus), you may divide the bonus amount by the number of workweeks in the period to get the weekly bonus amount. Any additional overtime due to the employee for a given workweek is then calculated by dividing the weekly bonus amount by the total number of hours worked that workweek (to determine the regular rate increase attributable to the bonus) and then multiplying the result by the number of overtime hours worked and the premium rate of one-half (time-and-a-half is not used because you’ve already paid these hours once).

This explanation may make more sense with real numbers. In your case, a 10% bonus amounts to $6,630. Spread over 52 workweeks, that’s $127.50 per week. To calculate the new overtime pay having apportioned that $127.50 into the employee’s regular rate of pay each week, you would take the employees’ hourly rate times the 40 regular hours, plus a time-and-a-half overtime rate times the 30 overtime hours, plus the weekly bonus allocation of $127.50 divided by the total hours for that week (70) times the number of overtime hours (30) times a half time premium, or:

($30 x 40 hours) + ($30 x 1.5 x 30 hours) + [($127.50/70) x .5 x 30] = $2,577.32

Week two results in the same earnings, and weeks 3 and 4 are paid nothing. Again, with 13 4-week periods in the year, the annual compensation after the bonus and overtime on the bonus is includes is ($2,577.32 x 2 x 13) + $6,630 = $73,640.36.

We’ve now arrived at your employees’ accurate annual compensation after the bonus is correctly included. Your question, then, is what weekly salary to pay the employees to achieve the same pay as salaried non-exempt employees. As you appear to understand, salaried non-exempt employees receive a salary rate for a fixed number of hours; however, when they exceed the fixed number of hours and work more than 40 hours in a week, they receive overtime compensation. The basis of the calculation of their overtime compensation is the equivalent hourly rate the employee earns, based on a 40-hour workweek.

To arrive at the answer to your question requires a bit of algebra. Let me present the equation, with weekly salary abbreviated to WS:

[{[WS + (30 hours x (WS/40 hours) x 1.5) + (($127.50/70 hours) x .5 x 30 hours)] x 2} x 13] +

[{WS x 2} x 13] + $6,630 = $73,640.36

The equation works by taking the weekly salary, plus the overtime earned from the 30 overtime hours, plus the weekly bonus premium for those 30 overtime hours…multiply that by 2 for the first 2 “on” weeks in the 4-week period, then by 13 for the 13 4-week periods in the year. Then take the weekly salary times 2 for the last 2 “off” weeks in the 4-week period, and multiply by 13 for the 13 4-week periods in the year. Add to those totals the year-end bonus and you arrive at the annual compensation.

Solving the equation for WS results in WS = $816. Go ahead – plug it in and you’ll see! So, you’ll need to pay your employees $816 weekly as salaried non-exempt employees in order for them to earn the same amount they were earning by making $30 per hour.

This type of wage and hour law is hyper-technical and requires facility in both the math and the law. You are to be commended for listening to your employees to revise your compensation structure to better meet their needs. But hopefully now you understand that your seemingly simple question is, in fact, a very complicated request requiring an equally complicated set of equations to reach an answer.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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