Regular Rate of Pay: Understanding and Calculating this Critical Rate

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Business people counting on calculator On the surface, payroll is simply paying an employee for the work they do. But figuring out how to appropriately pay them is not always so simple. Understanding a few basic factors will help you figure out more complicated payments like overtime and bonuses.

Where to start:

First, you must understand what is included in the regular rate of pay. The regular rate of pay, by definition, is an employee’s hourly dollar wage. In most cases, the regular hourly rate of pay is determined by dividing an employee’s total pay (hourly pay plus bonuses and/or commissions) in any workweek by the total number of hours worked in that workweek.

Regular rate of pay includes the following items that are usually added to the regular rate of pay before overtime, taxes and more are calculated:

  • bonuses
  • commission
  • shift differentials
  • cost of living increase/allowances
  • and other monies tied to performance

Regular rate of pay does not include the following items:

  • non-working hours
  • payment for sick leave or vacation

How to figure out overtime:

Back in 1938, Francis Perkins, the Secretary of Labor under Franklin D. Roosevelt’s administration, helped draft the overtime law, by considering different factors that went into comprising a work week at that time. The result was a 40-hour work week with overtime premium paid at one and a half times the employee’s regular rate of pay for any time worked over 40 hours. You may know this as “time and a half for overtime.”

Beware, you cannot simply multiply the hours worked at the employee’s regular rate of pay by one and a half. Remember, the regular rate of pay also includes the rate factors we listed earlier.

Discretionary vs. Non-Discretionary:

In order to calculate overtime correctly, it helps to understand the difference between discretionary and non-discretionary income.

  • Discretionaryis when the boss decides after the work is done to award the employee with a bonus. These bonuses are not included in the overtime calculation.
  • Non-discretionary is when the employee is promised a bonus before he or she does the work. If the employee completes the job satisfactorily, he or she is awarded the promised bonus. These bonuses must be included in the regular rate used for determining overtime pay.

Why is all of this so important?

Most people will learn how to calculate regular rates of pay and overtime in preparation for the CPP exam, although many don’t remember how to use this in the real world. If you want to get – and keep – a job as a payroll professional, you need to know how to calculate payments accurately.

Almost all states (Arizona is the only exception) require that you know how to accurately calculate regular rates of pay and overtime in order to work as a payroll professional. State departments of labor and the federal government scrutinize the calculation of pay heavily in audits, so it’s important that you and your fellow payroll team members know how to perform this function successfully to comply with the law. Failure to calculate payments correctly could result in fines and IRS penalties.

As you can see, calculating an employee’s appropriate pay is not always clear cut. Understanding how and when to apply overtime rates and bonuses will help guide you in preparing payroll checks and statements accurately for your company.

By Vicki Lambert