Overtime pay calculation is a complex area of wage and hour law, often creating compliance risks for employers operating across different jurisdictions. Accurate compensation is a foundational compliance issue for businesses and a fundamental right for employees. Correct payroll processing requires understanding the interaction between various pay premiums and mandatory overtime rules. Pyramiding is a common error that involves the improper stacking of overtime payments.
What Is Pyramiding of Overtime?
Pyramiding of overtime is the practice of counting the same work hours more than once to calculate different overtime or premium pay requirements. This error results in an employee receiving “overtime upon overtime” for the same period. Federal and state wage laws prohibit this practice, as the intent is to ensure an employee receives the time-and-a-half rate only once for qualifying hours. Pyramiding most frequently arises when an employer is subject to both federal weekly overtime and state or contractual daily overtime standards. The core principle dictates that an hour paid at an overtime rate under one rule cannot be used again to trigger a separate overtime payment.
The Fair Labor Standards Act and Overtime
The federal foundation for overtime rules is the Fair Labor Standards Act (FLSA), established in 29 U.S.C. § 207. The FLSA mandates that covered, non-exempt employees must receive compensation at a rate of not less than one and one-half times their regular rate of pay for all hours worked over 40 in a single workweek. A workweek is defined as a fixed period of 168 hours. The FLSA does not require overtime pay for work performed on weekends, holidays, or regular days of rest, unless those hours exceed the 40-hour weekly limit. To prevent pyramiding, the FLSA allows employers to credit certain premium payments toward their weekly overtime obligation. This ensures an employer is not forced to make two separate overtime payments for the same hour worked.
Common Scenarios That Constitute Pyramiding
Pyramiding commonly occurs when hours paid at a daily overtime rate are mistakenly included in the calculation of weekly overtime hours. Consider an employee earning $20 per hour who works five 10-hour shifts, totaling 50 hours. If the state requires overtime after eight hours daily, the employee accrues 10 daily overtime hours (two hours per day). The pyramiding error happens if the employer counts all 50 hours toward the 40-hour weekly threshold. This improper calculation results in 10 daily overtime hours plus 10 weekly overtime hours, totaling 20 hours of overtime premiums. The correct method excludes the 10 hours already paid at the daily overtime rate from the weekly overtime calculation. The employee is owed 10 total hours of overtime, as the daily premium covers the federal weekly overtime requirement.
Pay Situations Often Confused with Pyramiding
Several pay practices are mistakenly identified as pyramiding but are permissible or required under law. Confusion often arises with state or local laws that require daily overtime, such as mandating overtime after eight hours in a workday. When state law requires both daily and weekly overtime, the employer must pay the higher rate, but not both for the same hour. For example, an hour paid at time-and-a-half under a state’s daily rule cannot also be subject to the federal weekly overtime premium.
Another distinction involves contractual premiums, like hazardous duty pay or shift differentials, which are not overtime but must be included in the employee’s regular rate of pay. These payments must be factored into the regular rate calculation before the federal time-and-a-half rate is determined for hours over 40. This inclusion increases the base rate for overtime but does not constitute the stacking of two overtime payments.
Calculating Overtime When Premiums Overlap
Employers must use the FLSA’s “credit” mechanism to calculate overtime correctly when premiums, such as weekend or holiday pay, overlap. This mechanism allows an employer to credit certain premium payments against their statutory overtime obligation, preventing double payment for the same hour. To qualify, the premium rate must be at least one and one-half times the rate established for non-overtime work.
For example, an employee works 45 hours, including five hours on Sunday paid at time-and-a-half ($15/hour based on a $10 regular rate). The federal obligation is a $5 weekly overtime premium for those five hours. Since the employer already paid a $5 premium ($25 total) for the Sunday hours, they may credit this payment against the federal obligation. No additional overtime payment is due because the voluntary premium equals the statutory overtime premium.
Consequences of Wage and Hour Violations
Failing to properly calculate overtime, whether due to pyramiding or simple miscalculation, leads to serious consequences. The Department of Labor (DOL) investigates wage practices and can compel employers to pay back wages to affected employees. Liability for back wages generally extends for two years, or three years in cases of willful violations.
Employers may also be liable for liquidated damages, which are an additional penalty equal to the unpaid back wages, effectively doubling the amount owed. The DOL can assess civil money penalties for willful or repeated violations of minimum wage or overtime requirements. Accurate record-keeping and legal consultation are necessary to minimize exposure to these financial and legal risks.