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Do you really know how to calculate overtime pay? For most employers, the overtime calculation is very straightforward – employees receive one-and-a-half times their regular rate of pay for all hours worked over 40. But what if your employees work various jobs at different rates? For example, you own a hair salon and your employees perform a variety of duties at the following rates: cut/style hair at $20 per hour, wash hair at $15 per hour, and schedule appointments at $10 per hour. When your employees work over 40 hours in a week, how do you calculate their overtime rate?

Blended Rate
Generally, the federal Fair Labor Standards Act (“FLSA”) requires that where work is performed at two or more rates, overtime must be compensated at a blended rate. “Blended rate” means a rate of not less than one-and-a-half times the weighted average of all non-overtime rates used during that workweek. For example, let’s assume an employee cut/styled hair for 20 hours, washed hair for 20 hours, and scheduled appointments for 10 hours in a workweek. The blended rate would be determined by the following equation: 20 hours X $20 + 20 hours X $15 +10 hours X $10 = $800; $800/50 total hours = $16 per hour. Therefore, $16 per hour is the blended rate. The premium pay for overtime is then half of $16, $8, multiplied by the 10 overtime hours for a total of $80. Total compensation would be $880 for this week. Using the blended rate, the overtime rate may change as the total hours worked in a week change. For instance, if the employee worked 5 hours cutting/styling, 25 hours washing hair, and 20 hours scheduling appointments, the blended rate per hour would be $13.50. Employers (or their payroll company) must do this calculation every single week for each employee who performs work at different rates. Remember, all rates must be over minimum wage and the regular rate must include any other compensation, such as nondiscretionary bonuses, promotional bonuses, cost-of-living adjustments, and the like.

Be prepared, employees may not like the blended rate method. They may feel entitled to $30 per hour for all hours worked cutting/styling over 40 and will be disappointed to see this is not the case.

Exception
Employers who think the blended rate calculation may dissuade employees from performing higher-rate work are in luck. There is an exception to this general rule under FLSA where:

1) an employee performs two or more kinds of work for which different hourly rates have been established;
2) overtime compensation is computed at rates not less than one-and-a-half times such bona fide rates applicable to the same work when performed during non-overtime hours; and
3) such computation method is applied pursuant to an agreement or understanding between the employer and employee before the work is performed.

This exception is not as simple as it looks. It places several burdens on the employer. First, there must be different designated rates for different work performed. Fortunately, Courts have interpreted this very broadly. In an Eleventh Circuit case, bus drivers received different rates depending on the routes they drove. Even though the “work” was the same – driving – the Court held that FLSA contains no requirement that employees be performing different types of work in order for an employer to use a blended rate for overtime calculations. See Allen v. Bd. of Public Education, 495 F.3d 1306 (11th Cir. 2007). It was sufficient that there were different rates for different routes. In our example, when the employee is washing hair, he must be paid at $15 per hour for those hours. The employer cannot decide one day to pay him only $12 per hour. In other words, the employer could not simply decide that despite the fact an employee washed hair, she will be paid at the rate paid to employees scheduling appointments. The employee who is washing hair must receive the hourly rate that employees receive when they are washing hair.

Second, the employer must have precise records showing which hours were worked at which rates so the pay rate is clear for each hour worked over 40. In our example, if the employer knew only that in a workweek the employee cut/styled hair for 20 hours, washed hair for 20 hours, and scheduled appointments for 10 hours, this would be unacceptable. Similarly, records showing daily hours worked Monday through Saturday as: 3.3 hours cutting/styling, 3.3 hours washing hair, and 1.7 hours scheduling appointments would still not show which specific hours were overtime hours. Rather, the employer would need records which show: Monday: 8-12 p.m. cut/style, 12-p.m. to 4 p.m. wash hair, and 4-6 p.m. schedule appointments.

Third, the employer and employee must have an agreement or understanding regarding the overtime arrangement. This should be (but is not legally required to be) in writing and signed by both the employer and employee so that should an issue arise, the employer can prove the arrangement existed and the employees consented to it.

But note, employers who use different hourly rates for the same type of work cannot use this exception. For example, in one Second Circuit case, the employer paid employees at a higher rate for the first 35 hours worked and at a lower rate for the next 5 hours and paid overtime based on the lower rate. This was not allowed. See Estrella v. P.R. Painting Corp., 356 Fed. Appx. 495 (2d Cir. 2009).

Brody and Associates regularly advises management on complying with state and federal employment laws including wage and hour laws. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.

THIS ARTICLE WAS FIRST PUBLISHED ON THE LAW.COM CONTRIBUTOR NETWORK ON MAY 2, 2014.