Weighted Average Overtime: How HR and payroll providers might explain it, and why it’s wrong

A company might ask their HR software or payroll provider how to meet their overtime pay obligation when an employee works at two or more pay rates in a work week. A variety of methods may be described:

  • Method 1: Always use the higher pay rate when calculating overtime. This is a “throw money at it” approach and not a practical business option
  • Method 2: Weight Average Overtime. Of note: the math in many cited examples is either wrong or incomplete; more detail below
  • Method 3: Rate based on the position in which the employee is working during the OT hour. This requires agreement from the employee in advance of the work performed.

In “Fact Sheet #23: Overtime Pay Requirements of the FLSA” published by the US Department of Labor Wage and Hour Division, the following is written:

Where an employee in a single workweek works at two or more different types of work for which different straight-time rates have been established, the regular rate for that week is the weighted average of such rates. That is, the earnings from all such rates are added together and this total is then divided by the total number of hours worked at all jobs.”

One of the tenets of prevailing wage is “every hour stands on its own”. This makes intuitive sense when considering Certified Payrolls show every applicable hour by job and classification for an individual. Most HR and payroll providers do not consider this, and the effect on Certified Payroll Reports, when giving examples.

To calculate the OT premium due and gross wages paid, the company must answer the following questions:

  1. Which hours worked this week (if any) are overtime?
  2. What is the regular rate?
  3. What is the overtime premium?
  4. What is the correct hourly rate of pay?
  5. What are the total wages due?

A Weighted Average Overtime Example

An employee who is paid weekly works 32 hours as a laborer at $15 per hour and 16 hours mowing at $11 per hour.

  1. Which hours worked this week (if any) are overtime?

The identification of overtime hours is of critical importance to the construction contractor. Most examples attempting to explain weighted average overtime do not take this into account. This will be revisited later to explain why this is of importance.

 

  1. What is the regular rate?

The regular rate is calculated as follows:

Laborer: 32 hours x $15/hr = $480

Mowing: 16 hours x $11/hr = $176

sum: 48 hours, $656

 

“regular rate” = total straight wages paid / total hours worked

= $656 / 48 hours

= $13.67/hr

 

  1. What is the overtime premium?

The OT premium is one half the regular rate:

 

OT premium = .5 x $13.67

= $6.84/hr

 

  1. What is the correct hourly rate of pay?

The correct hourly pay rate is the straight time pay rate for the applicable hour plus the OT premium:

 

For an OT “Laborer” hour = $15/hr + $6.84/hr

= $21.84/hr

 

For an OT “Mowing” hour = $11/hr + $6.84/hr

= $17.84/hr

 

  1. What are the total wages due?

 

If the 8 OT hrs were “Laborer” = (24 hrs x $15/hr) + (16 hrs x $11/hr) + (8 hrs x $21.84)

= $360 + $176 + $174.72

= $710.72

 

If the 8 OT hrs were “Mowing” = (32 hrs x $15/hr) + (8 hrs x $11/hr) + (8 hrs x $17.84)

= $480 + $88 + 142.72

= $710.72

 

Items to Notice

Notice the calculated total gross wages are the same, but the Certified Payrolls would certainly be different. This shows why point #1 (“Which hours worked this week are overtime?”) is of such importance.

Also, some examples attempting to explain weighted average overtime will show calculated OT earnings as 8 hrs x ($13.67/hr x 1.5) = $164.08. What if the “Laborer” hours were Prevailing Wage and $15/hr was the PW required minimum base rate? It’s easy to see this would be an issue.