Understanding blended overtime rates is essential to maintaining wage and hour compliance.
Every U.S. employer that compensates individual workers at more than one pay rate (a common practice in industries with hourly workers) must have a thorough understanding of blended overtime rates. In addition, they must have a fail-safe payroll process in place to ensure blended overtime rates are actually “blended”—i.e., calculated—correctly.
Any discussion of blended overtime rates begins with a nod to several basic U.S. Labor Department rules, courtesy of the Fair Labor Standard Act (FLSA):
- All nonexempt workers are entitled to overtime pay for time worked over 40 hours per week.
- Overtime pay must be paid at a rate not less than one and one-half times a worker’s regular rate of pay.
- These rules apply to eligible workers who are compensated at more than one pay rate.
Now, here’s where it gets interesting. Because these workers are compensated at multiple pay rates, their overtime pay must accurately reflect how much work was performed at each pay rate. The magic number required for that calculation is called the blended overtime rate.
How Blended Overtime Rates Are Calculated
In order to calculate a worker’s blended overtime rate for a given pay period, the employer must add the employee’s earnings at all pay rates together, then divide by the total number of hours worked at all jobs.
That yields the employee’s “weighted average pay rate.” Multiply that figure by 1.5 (i.e., time and a half), and you have the blended overtime rate for that workweek.
Because employees may work a different number of hours at each pay rate during every pay period, their blended overtime rate may fluctuate week to week. Therefore, it must be recalculated every pay period.
Employers can perform those calculations manually using a step-by-step formula. However, manual calculations are prone to errors. For this reason, many employers use time and labor and/or payroll software that automates the calculations, ensuring the correct blended overtime rate every time.
Why You Need to Get Blended Overtime Rates Right
Committing federal wage and hour violations—even accidentally—can result in stiff penalties. Many common wage and hour violations involve inaccurate overtime payments.
Employers that are penalized by the Labor Department’s Wage and Hour Division must not only pay employees back wages, but also often “liquidated damages,” which basically doubles the amount an employer must pay out.
Last year, the Wage and Hour Division took nearly 25,000 compliance actions, which resulted in $230 million in back wages. This number does not reflect collected liquidated damages.
And the stakes are about to get higher. The Labor Department recently announced that it will soon add 100 Wage and Hour investigators to its ranks with even more hiring planned for later in the year.
End result? Closer scrutiny of employers will yield more investigations, which will yield a higher risk of incurring penalties. Yet another reason why it’s critical to get those blended overtime rates right.