Overtime pay and the regular rate: the rule employers get wrong

Overtime seems simple: time-and-a-half for hours over 40 in a week. The part employers get wrong — and it’s a common, costly error — is what “time-and-a-half” is a half of. Overtime is 1.5× the regular rate, and the regular rate is often more than base hourly pay. Miss that, and you underpay overtime in a way that quietly accrues into back-pay liability.

The basic rule

Under federal law (the FLSA), non-exempt employees must be paid at least 1.5 times their regular rate for hours worked over 40 in a workweek. Exempt employees — who meet specific salary and duties tests — are not entitled to overtime. Correctly determining who is exempt is its own compliance question, and misclassifying a non-exempt worker as exempt is a frequent source of claims.

The mistake: the regular rate isn’t just base pay

Here’s the trap. The “regular rate” used to calculate overtime must generally include more than base hourly wages. Non-discretionary bonuses, commissions, shift differentials and certain other payments have to be folded into the regular rate before the overtime multiplier is applied. An employer who pays a production bonus and then calculates overtime only on base pay has underpaid the overtime on the weeks that bonus covered.

Because this understatement is small per paycheck and invisible unless you look for it, it compounds — across many employees and many weeks — into a real liability that surfaces in an audit or a claim.

What’s included and what isn’t

• Generally included in the regular rate: non-discretionary bonuses, commissions, shift differentials.
• Generally excluded: truly discretionary bonuses, certain gifts, and some other specific categories.

The line between discretionary and non-discretionary is exactly where employers slip — a bonus that’s announced or expected is usually non-discretionary and must be in the rate.

State rules can go further

Federal law is the floor. Some states add daily overtime, double-time, or different thresholds. A multi-state employer has to apply each employee’s state rules on top of the federal baseline.