State and Local Governments: Are You Calculating Overtime Correctly?

Many state and local governments regularly issue overtime pay, but the pay rules are more complex than many human resources and payroll professionals realize.

Overtime pay is based on a “regular” rate of pay — not the hourly rate. So, what does that mean? Explore the difference and learn if your government entity is meeting federal overtime rules and, if not, how to comply.

Overtime requirements in the Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) governs overtime pay for employees in the private sector as well as in federal, state and local government.

The two key aspects to complying with the FLSA’s overtime pay requirements are:

• Understanding who is exempt or non-exempt (classification) — The Department of Labor recently updated the regulations related to employee classification — effective July 1, 2024.
• Accurately calculating the overtime pay — This requires accurate recording of all employee time worked and compensation, as well as a clear understanding of how overtime should be compensated under FLSA.

Obtain appropriate legal counsel to facilitate compliance in both areas.

Understanding hourly rate vs. regular rate

Did you know there is a difference between an hourly base rate of pay and a regular rate of pay?

The FLSA mandates covered employers to pay non-exempt employees at an overtime rate for hours worked after 40 per week. While FLSA overtime is generally calculated on a weekly basis, the law allows overtime to be calculated on a “work period” basis for employees in fire protection or law enforcement, where a work period may consist of 7 to 28 consecutive days.

Many employers interpret the FLSA to calculate overtime pay by taking an employee’s hourly base rate and multiplying that rate by 1.5. However, according to the FLSA, for all hours worked over 40 in a week, an employer must use 1.5 times the employee’s regular rate of pay, which is commonly misunderstood and miscalculated.

Components of the regular rate of pay

An employee’s regular rate of pay is not necessarily the same as an employee’s hourly base rate — and it may change weekly depending on what other types of compensation they earn for the week.

The regular rate must include all eligible compensation the employee has earned for the week — even if the amount is not paid in that specific week. For example, if a payment is made to an employee annually — and it’s determined it should be included in the regular rate — the payment should be deemed to have been paid in equal weekly installments for the purposes of regular rate calculation.

Examples of eligible types of compensation that may be included are stipends, differentials, certain incentives, longevity, retroactive pay, and other pay types.

The regular rate of pay is calculated by adding all compensation earned for the week (less statutory exclusions) and dividing that total by the number of hours worked in that week. Only after the employee’s regular rate is calculated can it be multiplied it by 1.5 to get the FLSA overtime rate.

There are specific exceptions and guidelines as to what is included in the total compensation amount — and what hours are considered hours worked — when calculating the regular rate of pay. Paying overtime in line with contractual bargaining agreements doesn’t eliminate the need to comply with the FLSA. You must comply with not just FLSA requirements, but also with state and contractual obligations.

What governments should keep in mind

Calculating an employee’s regular rate under the FLSA can be complex. It’s critical to be proactive in understanding FLSA rules and consulting appropriate legal counsel to determine which employees are exempt/non-exempt, and which pays and hours must be included in determining the regular rate.

You’ll also need to consider whether you are capturing time in compliance with the regular rate calculation, and whether your current payroll software can be configured to calculate FLSA overtime accurately.

How CLA can help with FLSA overtime calculations

For state and local governments trying to understand the FLSA overtime calculation rules, CLA can help:

• Review your current positions, processes, and pays to understand questions you may need to discuss with your legal counsel regarding employee classification and the components of the regular rate calculation
• Provide guidance on necessary changes to how you currently capture time, to comply with decisions of your legal counsel
• Configure your system to perform the calculation, if your system has that functionality, or provide other tools to facilitate the calculation
• Analyze historic data to determine if overtime has been paid appropriately in line with FLSA under the guidance of your legal counsel

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