For many businesses, overtime becomes a necessity. While certain strategies can help reduce overtime expenses, there are instances where it’s unavoidable. Calculating standard overtime pay is straightforward, but things get trickier when dealing with employees working multiple roles at varying pay rates. This scenario is known as blended overtime. In this article, we’ll delve into the concept of blended overtime, understand its calculation, and explore ways to simplify the process.
What is blended overtime?
Blended overtime refers to the compensation an employee, engaged in multiple roles with distinct pay rates, receives for working more than 40 hours within a 7-day period. Like standard overtime, blended overtime is mandated by federal regulations and is overseen by the Department of Labor.
There are many examples of an employee who would work at multiple pay rates. A restaurant employee may work as a hostess one shift at minimum wage, and then a server the next day and fall under the FICA Tip Credit rules and make a lower wage. Another example would be a construction worker having different responsibilities at different jobsites, resulting in different pay rates for each. Should these two employees work overtime hours, their overtime pay would be calculated using the blended overtime formula.
It is also important to note that any compulsory payments are considered “regular pay” and must be included in the blended overtime calculation. Compulsory payments are items like commissions, piece work and service charges. This items are considered to be part of an employees’ regular pay.
Calculating blended overtime
Calculating blended overtime is more intricate compared to traditional overtime. Here’s how it works:
Consider an employee with the following pay rates and hours worked:
- 32 hours at $35.25/hour (Regular)
- 8 hours at $36.00/hour (2nd Shift)
- 6 overtime hours at $35.25/hour (Regular)
- Commission of $500
| Hours Worked | Rate of Pay | Total Pay | |
|---|---|---|---|
| Regular Hours | 32 | $35.25/hour | $1128.00 |
| 2nd shift | 8 | $36.00/hour | $288.00 |
| Overtime | 6 | $35.25/hour | $211.50 |
| Commission | $500.00 | $500.00 | |
| Total Straight Time | 46 | $2127.50 |
We will now calculate the overtime premium at half-time, since the straight time is already calculated in the previous table:
| Total Regular Pay | Total Hours | Calculation |
|---|---|---|
| $2127.50 | 46 | $2127.50 straight time / 46 hours = 46.25 blended hourly rate |
| $46.25 x 0.5 = $23.125 overtime premium rate | ||
| 6 OT | 6 overtime hours x $23.125 overtime premium rate = $138.75 | |
| Total Pay | $2127.50 straight time + $138.75 overtime premium = $2266.25 gross pay |
**Total Overtime Paid = $211.50 straight time + $138.75 overtime premium rate = $350.25
Calculating blended overtime with for tipped employees
For tipped employees, such as those in the restaurant industry, the calculation gets more complex due to the FICA tip credit and minimum wage considerations. For employees who are paid using the tip credit, the minimum wage must be used to calculate their straight time and blended rate. Then, the gross pay is calculated using the original rate of pay for the work they are doing.
Compulsory payments in this industry most often include service charges (think 20% gratuity on a check). Tips (either cash or credit card) paid to employees are NOT compulsory and are not included as part of the employees’ “regular rate of pay” when calculating blended overtime.
Let’s examine another scenario for calculating blended overtime for a tipped employee:
- 31 hours on the bar at $10.00 per hour
- 6 overtime hours on the bar at $10.00 per hour
- 9 hours working a private event at $6.90 per hour
- Received $900 in service charges.
| Hours Worked | Rate of Pay | Minimum Wage for Blended Calculation | Straight Time Wages | |
|---|---|---|---|---|
| Bar Hours | 31 | $10.00/hour | $13.80/hour | 31 hours x $13.80/hour = $427.80 |
| Bar Overtime Hours | 6 | $10.00/hour | $13.80/hour | 6 hours x $13.80/hour = $82.80 |
| Event Hours | 9 | $6.90/hour | $13.80/hour | 9 hours x $13.80/hour = $124.20 |
| Service Charge | $900.00 | |||
| Totals | 46 | $1534.80 |
As with above, we must now calculate the overtime premium at half-time. With tipped employees, we use the minimum wage to determine the straight time and overtime premium, but then covert back to the original hourly rate to calculate gross pay.
| Total Hours | Calculation | Amount to be Paid to Employee in Check |
|---|---|---|
| 46 | $1534.80 straight time / 46 hours = $33.37 blended hourly rate | |
| $33.37 blended rate x 0.5 = $16.68 overtime premium rate | ||
| 31 Bar | 31 Bar Hours x $10.00 per hour | $310.00 |
| 9 Event | 9 Event Hours x $6.90 per hour | $62.10 |
| 6 Bar OT |
6 overtime hours x $16.68 overtime premium rate + 6 hours x $10.00 per hour regular rate = Fully loaded overtime rate $26.68 |
$160.08 |
| Service Charges to be paid | $900.00 | |
| Total Gross Pay to Employee: | $1432.18 |
For more detailed insights and examples, refer to this guidance letter from the Department of Labor on blended overtime for restaurant workers paid below minimum wage.
Blended overtime for bi-weekly payrolls
It’s crucial to adapt the blended overtime calculation for bi-weekly payrolls. This involves breaking the pay period into weeks and treating them independently, while ensuring proper compensation for overtime hours. State and local laws may vary, so be sure to verify your local overtime rules when calculating your overtime period.
Simplifying blended overtime calculation
To streamline the intricate process of blended overtime calculation, consider using time tracking software that seamlessly integrates with your payroll system. Tools like isolved automate calculations, reducing errors and ensuring accurate compensation for employees with varying pay rates.
In conclusion, understanding and accurately calculating blended overtime is essential for fair compensation and adherence to labor regulations. By grasping the concept and utilizing efficient tools, businesses can navigate the complexities of blended overtime seamlessly.