Employees must be compensated according to rules set forth by the U.S. Department of Labor under the Fair Labor Standards Act. There isn’t one exact formula for wages and overtime because there are different categories of workers.
All employee compensation must follow the same basic rules, but the exact formula for figuring pay varies depending on the type of job and method of payment. StaffScapes, an HR solutions company, explains the basics of what you need to know below:
The FLSA sets minimum standards for the compensation of employees paid hourly wages. Covered workers must be paid a minimum hourly wage ($7.25 per hour as of 2011). States are free to set higher minimum wages and some do. Some categories of salaried employees are exempt from the FLSA overtime requirements such as executive roles and outside sales personnel. Other examples include some seasonal, agricultural and newspaper delivery workers.
Workers who are entitled to overtime must be compensated with an overtime premium of at least one-half of their regular hourly rate for all time worked in excess of 40 hours. Another way of saying this is that a worker gets paid time and one-half for hours worked over 40 hours in a week. For example, if you have an employee who works 55 hours in a workweek, they will need to be paid fifteen hours of overtime. Multiply their hourly rate by the overtime rate of 1.5 to determine their overtime pay rate. Then, add the employee’s overtime wages to their regular earnings to get the total wages for the workweek.
When an employee regularly earns a significant amount in tips (those who regularly receive more than $20 per month in tips), employers may take a credit against regular wages up to a maximum of $5.12 per hour (as of 2011). Tipped employees must be paid time and one-half for overtime, as with other hourly employees. However, the size of the tip credit remains the same for overtime hours. That is, if the employer deducts $5.12 per hour from the regular hourly rate as a tip credit, only $5.12 is deducted from time and one-half. Since employers can utilize up to a $5.12 per hour tip credit, that can be subtracted from the employee’s overtime wage.
Salaried Employees (Exempt)
Salaried employees are paid a predetermined amount rather than wages at an hourly rate. Some salaried employees are exempted from the FLSA overtime requirements. Any exempt employee must be paid at least $455 per week. Under FLSA rules, the salary amount for an exempt employee may not be reduced if the employee works less than the expected number of hours. Also, non-recurring earnings such as commissions and bonuses do not count as part of the fixed, or base, salary amount.