Reducing Overtime Costs for Employers | Kennedy Law, P.C.

Overtime Pay: Options For Employers to Reduce Costs

Author: Robin Foret

A.  Basic Overtime Rate:

The Fair Labor Standards Act (“FLSA”) mandates that all employees not “exempt” from overtime pay be paid overtime for all hours “actually worked” in excess of 40 in any single workweek at a rate of 1 ½ times the “regular rate” of pay.  This rule applies to both salaried and hourly employees who do not meet any FLSA overtime exemption.  The term “actually worked” means that, days off from work for sick leave, vacation, holidays or personal time do not count toward overtime hours.  The “regular rate” refers to the number arrived at when the total amount of earnings are divided by the hours worked for that week.  For salary non-exempt employees, it is generally calculated based on a 40 hour workweek, which is divided by the weekly salary earned.  Nevertheless, there remain options for reducing overtime costs to employers while remaining in compliance with the FLSA.

B.  Hourly Employees:

Employees paid on an hourly basis, but who perform different types of work within the same company may be paid at different rates for each job, as long as the hourly rate for each job exceeds the federal minimum wage rate (currently $7.25 per hour).  If your company is located in a state that mandates a higher minimum wage rate, you need to use that as the minimum.  Texas and Louisiana have no such requirement, while certain states such as California mandate a higher hourly rate.

For example, if an employee spends about 60% of his hours as a technician, and about 40% of his hours driving other employees between job sites, the hourly rate may be different for each job performed.  There are a couple of ways in which the overtime calculation can be performed

1. Averaging Two Different Rates Paid for Different Jobs.

Using the first option allowed by the FLSA (29 C.F.R. §778.115), the employee’s regular rate of pay may be calculated as the weighted average of the two different rates.  For example, the regular rate of an employee who works 35 hours per week at $16 per hour as a technician (total of $560), and works 10 hours that same week at $12 per hour driving other employees between job sites (total of $120), is $680, which is divided by 45 hours to get a regular rate of $15.11 per hour.

The overtime premium owed to the employee is an additional $7.55 ($15.11 divided by 2) for each hour over 40, regardless of which job the employee performs during the extra hours.  The total salary for that week is $7.55 x 5 = $37.75 (overtime) + $680 (straight time) = $717.75.  In this example, the employee working on an hourly basis has already been paid straight time for all 45 hours worked (which includes the 5 overtime hours), and, therefore, is only entitled to the additional ½ of the time and one-half of overtime pay on the balance over 40.  The employee’s regular and overtime rates may vary from week to week with the number of hours spent performing each job.

2.  Agreement to Use One of Two Different Rates for Overtime Calculation.

Alternatively, under the FLSA (29 C.F.R. §778.419(a)), an employer and employee may agree in advance, that the overtime rate will be based on the regular rate that applies to the type of work performed during the hours in excess of forty. Thus, if an employee spends 35 hours in a week working as a technician at a rate of $16 per hour, and five hours a week as a driver at $12 per hour, the overtime rate for any additional hours spent as a driver is $18.00 per hour ($12 times 1.5). The overtime rate for any additional hours spent working as a technician is $24.00 ($16 times 1.5). This overtime calculation method is available for hourly employees only.  It should be noted that different rates for the same job at different times of the day is not permitted.

This method makes sense when overtime hours will most likely be performed at the lower rate.  Under employment law, employer should have a short written agreement with the employee to confirm the employee’s acceptance of this arrangement.  In addition, precise record keeping is required to keep track of which job is worked during specific times of the day so that overtime can be calculated correctly.

C. Day Rates and Job Rates:

When an employee receives a flat sum of money for a day’s work or for performing a particular job without regard to the number of hours worked, the regular rate is the total number of hours actually worked (holidays, sick days or vacation days do not count) during a particular workweek divided by the flat rate paid for the week.  The hourly rate must not fall below the federal minimum wage rate of $7.25 per hour (or higher rate mandated by state law).  The employee is then entitled to an addition half-time pay at this rate for all hours worked in excess of 40 in any given workweek.  The regular rate, and thus, overtime rate, may change each week unless the flat amount paid and hours worked stay constant.  It is important to have the employees complete and sign time sheets to verify the number of hours worked each week.

D. Salaried Employees and the Fluctuating Wage Rate:

For salaried non-exempt employees, the “fluctuating workweek” (“FWW”) method of calculating overtime may be applied to reduce the employer’s overtime pay obligations to ½ the regular rate of pay for overtime hours worked in excess of 40.  This method requires an agreement between the employee and employer to confirm the employee’s consent to this overtime calculation.  Some jurisdictions permit employers to use this alternative method as a defense to claims for unpaid overtime, which frequently arise when employees are misclassified as exempt from federal overtime requirements.

This method of calculating overtime hours worked in excess of 40 may be applied to salaried employees who do not work a set schedule each week.  It is intended to compensate the employee at straight time rates for all hours worked during the workweek up to a maximum of 60 (for example, the employee may work 45 hours one week and 35 hours the next).  The FWW method allows the payment of overtime hours at the reduced pay rate of ½ the regular rate of pay for hours worked in excess of 40 in satisfaction of the overtime pay requirements under the FLSA.  This mutually agreed upon salary arrangement already compensates the employee for all straight time worked regardless of the fluctuations in the employee’s weekly schedule.  This overtime calculation method (See 29 C.F.R §778.114, §778.411) requires that:

  1. The “employee clearly understands” that the salary will encompass whatever hours the job may demand in a particular workweek, whether more or less hours are worked (a written agreement with the employee specifying maximum hours and rate should be used to confirm such an agreement);
  2. The employer pays the salary even if the employee works less than a full schedule of hours and may not make deductions in any particular workweek that the employee fails to work a certain number of hours (this method is not appropriate for employees with mandatory fixed hours each week);
  3. The amount of salary is sufficient each week to provide compensation at an hourly rate not less than the applicable minimum wage requirement.  The hourly rate (after taking the salary and dividing it by the total hours actually worked) must not be less than the applicable minimum wage; and
  4. The employee receives compensation in addition to his or her salary for all hours worked in excess of 40 at a rate not less than ½ the regular rate of pay (overtime is still paid for all hours actually worked in excess of 40, but at the reduced ½ time rate).  This is because the salary paid already compensates the employee for all hours worked in any given workweek.

Example: an employee’s hours vary from week to week; the total weekly hours of work never exceed 60 hours in a given workweek.  She has a set salary of $600 a week.  She is paid with the understanding that it constitutes the employee’s compensation, except for overtime premiums, for whatever hours are worked in the workweek. If during the course of 4 weeks this employee works 40, 37, 50, and 48 hours, the regular hourly rate of pay in each of these weeks is $15.00, $16.22, $12.00, and $12.50, respectively. For the weeks in which the employee worked 40 and 37 hours, her salary remains at $600.00 per week.  In the weeks in which she worked 50 and 48, she gets ½ time additional pay for every hour over 40 because she has already received straight-time compensation on a salary basis for all hours worked that week, and only additional ½ time pay is due.

A comparison between standard overtime pay vs using the FWW Method is as follows:

Hours in Workweek Standard Overtime Pay FWW Method
50 hours $600 / 50 = $12 hour (reg. rate)

$18 x 10 = $180 + $600 = $780.00

$600 / 50 = $12 per hr. (reg. rate)

$6 x 10 = $60 + $600 = $660.00


48 hours $600 / 48 = $12.5 hour (reg. rate)

$18.75 x 8 = $150 + 600 = $750.00

$600 / 48 = $12.5 per hour (reg. rate)

$6.25 x 8 = $50 + $600 = $650.00


The FWW method can reduce overtime costs, but requires separate calculations each week.

Please note that the information contained in this article is not designed to address specific situations, and does not include rules or regulations that apply to all states.  If you have questions concerning this topic, you should consult with legal counsel of your choice to obtain advice on various fact specific matters.

Robin Foret is a Partner in the Houston office of Kennedy Law, PC.  She can be reached at or by telephone at (713) 491-4644.

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