## Non-Exempt (NE) Employees and Calculating Overtime (OT) as Part of Incentives, Commission and Bonuses

#### NE Salaried Classification

A company can create a NE salaried employee classification. A NE salaried employee is paid a set salary on a weekly, bi-weekly or semi-monthly pay period. However, **if the position is classified as non-exempt (NE), they must be paid OT for all hours above the defined workweek.**

If a NE employee is hired at a weekly salary of $350 and if it is understood that this salary is compensation for a regular workweek of thirty-five (35) hours, the employee’s regular rate of pay is $350 divided by thirty-five (35) hours, or $10 an hour, and when the employee works overtime the employee is entitled to receive $10 for each of the first forty (40) hours and $15 (one and one-half times $10) for each hour thereafter. If an employee is hired at a salary of $375 for a forty (40) hour week, the regular rate is $9.38 an hour.

#### Computing OT when Incentives/Commissions Are Paid

**When incentives/commissions are paid to NE employees, these need to be factored into the OT pay calculation.** Commissions (whether based on a percentage of total sales or of sales in excess of a specified amount, or on some other formula) are payments for hours worked and must be included in the regular rate. For computing OT for NE employees, whether salaried or hourly, this is true regardless of whether the commission is the sole source of the NE employee’s compensation or is paid in addition to a guaranteed salary or hourly rate, or on some other basis, and regardless of the method, frequency, or regularity of computing, allocating and paying the commission. It does not matter whether the commission earnings are computed daily, weekly, bi-weekly, semi-monthly, monthly, or at some other interval.

• **When a commission is paid on a weekly basis**, it is added to the employee’s other earnings for that workweek (except overtime premiums and other payments that are excluded), and the total is divided by the total number of hours worked in the workweek to obtain the NE employee’s regular hourly rate for the particular workweek. The NE employee must then be paid extra compensation at one-half of that rate for each hour worked in excess of the applicable maximum hours standard.

• **If the calculation and payment of the commission cannot be completed until sometime after the regular pay day for the workweek**, the employer may disregard the commission in computing the regular hourly rate until the amount of commission can be ascertained. Until that is done, the employer may pay compensation for overtime at a rate not less than one and one-half times the hourly rate paid the employee, exclusive of the commission. When the commission can be computed and paid, additional overtime compensation due by reason of the inclusion of the commission in the employee’s regular rate must also be paid. To compute this additional overtime compensation, it is necessary, as a general rule, that the commission be apportioned back over the workweeks of the period during which it was earned.

• The employee must then receive additional overtime compensation for each week during the period in which he worked in excess of the applicable maximum hours standard. The additional compensation for that workweek must be not less than one-half of the increase in the hourly rate of pay attributable to the commission for that week multiplied by the number of hours worked in excess of the applicable maximum hours standard in that workweek.

• **If it is not possible or practicable to allocate the commission among the workweeks of the period in proportion to the amount of commission actually earned** or reasonably presumed to be earned each week, some other reasonable and equitable method must be adopted.

The following methods may be used:

― *Allocation of equal amounts to each week.* Assume that the employee earned an equal amount of commission in each week of the commission computation period and compare any additional overtime compensation due on this amount.

― If there are delays in crediting sales or debiting returns or allowances which affect the computation of commissions, the amounts paid to the employee for the computation period will be accepted as the total commission earnings of the employee during such period, and the commission may be allocated over the period from the last commission computation date to the present commission computation date, even though there may be credits or debits resulting from work which actually occurred during a previous period.

― Overtime pay for employees paid wholly or partly on a commission basis may be computed on an established basic rate, in lieu of the method described above.

#### Computing of OT for Bonuses

• There is also a requirement to include bonuses in computing a NE employee’s pay for overtime purposes. **Where a bonus payment is considered a part of the regular rate at which an employee is employed, it must be included in computing his/her regular hourly rate of pay and overtime compensation. **

The amount of the bonus is merely added to the other earnings of the employee (except statutory exclusions) and the total divided by total hours worked. Under many bonus plans, however, calculations of the bonus may necessarily be deferred over a period of time longer than a workweek. In such a case, the employer may disregard the bonus in computing the regular hourly rate until such time as the amount of the bonus can be ascertained. Until that is done, the employer may pay compensation for overtime at one and one-half times the hourly rate paid by the employee, exclusive of the bonus. When the amount of the bonus can be ascertained, it must be apportioned back over the workweeks of the period during which it may be said to have been earned. The NE employee must then receive an additional amount of compensation for each workweek that he/she worked overtime during the period equal to one-half of the hourly rate of pay allocable to the bonus for that week multiplied by the number of statutory overtime hours worked during the week.

• **If it is impossible to allocate the bonus among the workweeks of the period in proportion to the amount of the bonus actually earned each week, **some other reasonable and equitable method of allocation must be adopted.

For example, it may be reasonable and equitable to assume that the employee earned an equal amount of bonus each week of the period to which the bonus relates, and if the facts support this assumption additional compensation for each overtime week of the period may be computed and paid in an amount equal to one-half of the average hourly increase in pay resulting from bonus allocated to the week, multiplied by the number of statutory overtime hours worked in that week.

Or, if there are facts which make it inappropriate to assume equal bonus earnings for each workweek, it may be reasonable and equitable to assume that the employee earned an equal amount of bonus each hour of the pay period and the resultant hourly increase may be determined by dividing the total bonus by the number of hours worked by the employee during the period for which it is paid. The additional compensation due for the overtime workweeks in the period may then be computed by multiplying the total number of statutory overtime hours worked in each such workweek during the period by one-half this hourly increase.

• **If a bonus is completely discretionary, it doesn’t need to be included in an OT calculations.** In order for a bonus to be considered discretionary, it must be at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.

#### Contact Us

It’s important to review what type of pay is being provided to NE employees and then ensure the proper OT calculations are being made. We’d recommend discussing the salaried NE classification and how incentives/commissions and bonuses are being administered by your payroll administrator.

Should you have any questions regarding the above or particular situations you want to discuss, let us know. For assistance in reviewing NE salaried employees and OT on your Company, reach out to **Benefits and Compensation Resources (BCR)** http://www.benefitsandcompensationresources.com. 1-847-236-1208 (phone); 1-847-236-1209 (fax).

**Written by: Barbara Manny, BCR President & Consultant**

**BCR is a local, minority-owned firm with more than 25 years experience in serving non-profit, public, and privately held entities in the key areas of Benefits and Compensation Consulting, Performance Management, Human Resource Organization Development, and Human Resource Information Systems and Processes.**

Share this post with your network…