From an employee’s perspective, overtime pay is a nice reward for a long week. From an employer’s perspective, overtime can be both costly and confusing. Getting everyone who’s involved in payroll on the same page is essential here. Not only does miscalculating overtime wreak havoc on your books and cause conflict with employees, but it risks drawing the attention of the Department of Labor’s wage and hour division.
Calculating Overtime for Non-Tipped Employees
One of the areas where employers make mistakes around overtime is in determining when an employee is eligible for it. As experienced employers are aware, not all workers are eligible for overtime at all times. Employees who are classified as exempt are paid by salary and don’t receive overtime at all.
Under the Fair Labor Standards Act (FLSA), if an eligible employee works more than 40 hours during a standard workweek, the employer must pay an overtime rate of one-and-a-half times the employee’s regular rate of pay for those hours. The workweek is a fixed seven-day period, but different employees can have different workweeks. One person’s workweek might run from Monday morning through Monday morning, while another employee’s workweek might start and end at noon on Wednesday. That means that two employees with the same pay rate could work side-by-side from Monday through Friday and still end up with different overtime earnings.
So, when calculating overtime for hourly non-tipped employees, the employer should:
- Verify that the employee is eligible for overtime.
- Verify the number of hours exceeding 40 that the employee worked during his or her standard workweek.
- Multiply the employee’s regular pay rate by 1.5 to determine the pay rate for each hour of overtime.
Calculating Overtime for Tipped Employees
Calculating overtime is perhaps most complicated for restaurant workers and other tipped employees. A lot of employers are fuzzy on the details of how this works.
The confusion around overtime for tipped workers stems from the difference between the tipped minimum wage and the general minimum wage. As employers of tipped workers well know, these employees must be paid at least the federal minimum wage – or, in states with their own minimum wage laws, the state minimum wage. But because tips make up part of these workers’ wages, employers are allowed to pay a lower tipped minimum wage provided the employees earn enough through tips to bring their hourly earnings to at least the state minimum wage. The difference between the two amounts is called a tip credit.
When tipped employees earn overtime pay, some employers make the mistake of multiplying the tipped minimum wage by 1.5 to calculate the overtime hourly rate. The correct way to do this is to multiply 1.5 by the full minimum wage, then subtract the tip credit to find the hourly overtime rate.
Exactly what tipped employees earn varies from state to state. Here in Massachusetts, the 2019 minimum wage is $12.00, so tipped employees are guaranteed to earn at least that amount per hour. The tipped employee minimum wage is $4.35. Assuming an employee earns at least $7.65 in tips per hour, the employer can take a $7.65 tip credit and pay the worker that $4.35 hourly rate.
Let’s say a Massachusetts employer needs to pay a tipped worker for 50 hours of work in one week. The first 40 hours of pay would be calculated using the $4.35 tipped minimum wage, assuming the worker earned enough in tips to reach the $12. Overtime pay for the additional 10 hours should be calculated using the general minimum wage.
The wrong way: $4.35 x 1.5 = $6.525 overtime rate
$6.525 x 10 hours = $65.25
The right way: $12 x 1.5 = $18 per hour
$18 – $7.65 = $10.35 overtime rate
$10.35 x 10 hours = $103.50
Calculating overtime is more complicated for some employers than for others. For one thing, state overtime laws come into play. They sometimes conflict with federal laws. For example, Massachusetts law says that restaurant employees are exempt from receiving overtime – but they’re afforded overtime under federal law. However, restaurants are subject to the FLSA if they have gross sales exceeding $500,000 per year, and any person who participates in interstate commerce is also covered by the FLSA. Handling a credit-card transaction counts as interstate commerce. So a lot of Massachusetts restaurant workers are entitled to overtime, just by virtue of working for large restaurants or by processing credit-card payments.
There are some industry-specific exceptions to overtime laws that affect certain employers. Hospitals and other health-care institutions are allowed to calculate overtime using the “8 and 80 system,” in which employees earn overtime for working more than 8 hours in a single workday, or more than 80 hours in a 14-day work period. With this system, a hospital employee could work 60 hours one week and 20 hours the next and earn no overtime.
Blended Rate Overtime Complications
Another complication that arises in restaurants is calculating blended overtime. Demand for workers is high in both front and back of house and sometimes there just aren’t enough that are available to work without asking some employees to work more than 40 hours per week so many restaurant employees may take on several roles that each have different rates leading to the need to calculate blended overtime..
While Massachusetts does not require overtime, federal law still does, and as a result so do Massachusetts hospitality owners and operators. The MA minimum wage is $12 per hour. Once we reduce that by the $7.65 tip credit, we get to $4.35 as our tipped minimum wage. Many employers assume that simply they can apply the 1.5x standard to the $4.35, but that would be wrong. And open you up to treble damages in an employee lawsuit.
Overtime must be applied to the blended rate, which is a combination of all the rates and hours worked at those rates to get to 40 hours. Here is an example of this calculation.
10 hours worked at $15 per hour earns $150
25 Hours worked at $20 per hour earns $500
8 hours worked at $12 per hour earns $96
In this case, the total hours worked are 43 and total earned is $746.
To determine the blended rate we divide $746 by 43 and we have an hourly blended rate of $17.35
The first 40 hours would be paid at the rate mentioned, and the 3 hours of overtime would be paid at $17.35 x 1.5.
In a hospitality setting we would be combining sub minimum wage rates with rates at or above minimum wage, and would be adding in gratuities or service charges to the amounts earned and calculated for the employee’s blended rate.
Employee tips would not be included as they are considered paid directly by the customer to the employee, and were never in custody of the employer.
Employers that pay overtime must also pay close attention to changing minimum wage laws. In Massachusetts, both the general minimum wage and the tipped minimum wage are scheduled to go up over the next few years. Many other states are also adjusting minimum wages, which will affect overtime calculations in coming years.
Because calculating overtime can be so complicated, smart employers take advantage of resources that help them get it right every time. At Commonwealth Payroll, our team can help with your restaurant’s payroll needs. Contact us today. You can also join our free webinar: Trending Topics for Restaurant Owners, Monday, June 10 at 2:00 PM.