Compensation plays a significant role in an organization's success. A compensation strategy must be designed well to attract and retain talent. As the single largest expense for most companies, it's imperative to develop the right pay structure and appropriate recognition methods. This course is for HR Generalists who need to learn basic compensation principles and their application to the business. During this course, you'll learn about developing a compensation strategy, methods for conducting a job analysis, developing job descriptions, and setting up base and variable pay structures. Compensation is one of those topics you must understand to not only drive the success of your business but also build essential skills for a successful career in HR.
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Module: Base Pay
Regarding overtime often referred to as just OT, it's important to know how overtime is calculated to avoid FLSA compliance issues and liabilities.
The FLSA requires employees be paid overtime at 1.5 times an employee's regular rate for the workweek. The regular rate equals the average hourly rate calculated by dividing the total pay for the workweek by the total number of hours worked. Let's walk through an example of how overtime is calculated.
Let's say an employee's Hourly Rate is $12 and they worked a total of 50 hours.
Let's also say an employee worked 10 hours on second shift and the shift differential is $1.50 an hour.
To calculate the employee's overtime and total pay for the workweek, the steps are:
Number 1, calculate the regular pay, which is $12 x 50 hours or $600
Step 2, 2nd Shift Additional Pay, which is a $1.50 x 10 = $15
Step 3, is to calculate the Regular Rate for OT Calculation, which is ($600+$15)/50 = $12.30
Step 4, calculate the OT Pay which is $12.30 x .5 (half rate) x 10 hours = $61.50
And then the final step, step 5, Total Pay which equals $600 + $15 + $61.50 = $676.50
Nonexempt employees may be paid on an hourly or salaried basis as long as they are paid overtime for all hours worked over 40 in a workweek. For those paid on a salaried basis, it may be possible to calculate overtime using a method called the fluctuating workweek (FWW) method. The FWW method may save an organization substantial dollars, and therefore, is worth considering. Here's how it works.
When using the FWW method, an employee is paid a fixed salary for all hours worked plus overtime at a half rate and thus the regular rate and OT rate fluctuate based on hours. The more hours an employee works, the lower the regular and OT rates, something employees may find confusing as well as frustrating. For this reason, some organizations pay the fixed salary for all hours worked but establish a fixed regular rate based on the salary divided by 40 hours or some other number.
This chart shows the potential savings of calculating overtime using the regular way versus the fluctuating workweek method. As you can see the savings are significant.
In this example, a nonexempt employee's base pay salary is $800 and the employee worked 50 hours for the week. When we calculate OT the regular way, the employee's total gross pay is $1,100.
If we use the FWW method, however, the employee's base salary is straight time pay for all hours, in this case 50 hours or $16 per hour. Thus, the OT rate equals $8 or half the regular rate, resulting in total pay of $880, a savings to the organization of $220. If we use the FWW method and a fixed regular rate of $20, the OT rate becomes $10 and the employee's total pay equals $900. This is still a savings to the organization of $200.
The employee may also benefit from this FWW method. The base salary is guaranteed. Therefore, if the employee works fewer than 40 hours, the employee still receives the full salary. In addition, the employee may also gain benefits available to employees on a salaried basis (even though classified as nonexempt). Finally, an employee may feel they are treated as a professional because they are paid a salary rather than an hourly rate of pay.
To use the fluctuating workweek method, several requirements must be met:
First, there must be an “understanding” between the employer and the employee that the fixed salary is straight time pay for all hours worked in a workweek, regardless of whether the employee works fewer or more than 40 hours in a workweek. A formal agreement is not required to establish this “understanding”; however, at minimum the employee should be provided a written notice.
Secondly, an employee's fixed salary cannot be reduced if the employee works fewer than 40 hours. This means you cannot reduce an employee's salary if the employee takes time off for illness although there is some flexibility allowed for absenteeism issues.
An employee's regular rate (that is, salary divided by all hours worked) may not be less than the federal and applicable state or local minimum wage rates. Because the FWW method is to pay a fixed salary for all hours worked, the DOL has taken the position that paying a bonus, commission, or other compensation on top of the salary is not allowed.
Also, there are a few states that do not allow use of the FWW method for paying overtime, for example, California and Nevada. Therefore, be sure to check whether your state allows this method to be used before determining if it is something worthwhile to consider for your organization.
Finally, please do consult with your compensation consultant and outside counsel to determine whether the FWW method is right for your organization. Although the savings may be considerable, implementing the FWW method is complex administratively and legally.
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Pamela Sande, CCP, is the Managing Principal of Pamela Sande & Associates, LLC. Pamela has over 25 years of human resources experience in both consulting and corporate roles, including as an HR executive and as a specialist in designing total rewards programs that drive organizational performance.
In her current role as Managing Principal, Pamela and...