BOOKKEEPING TIPS is a twice monthly e-letter published by The American Institute of Professional Bookkeepers (AIPB), Suite 500, 6001 Montrose Road, Rockville, MD 20852. Tel.: 800-622-0121, Fax: 800-541-0066, email: info@aipb.org.

August 16, 2005

Overtime: An old court case still causes problems

Overtime pay seems like a simple subject—unless you are the one who must decide when it is, or is not, due to an employee. For example:

- If an employee works 40 hours in the workweek, then takes a paid holiday (8 hours), do you include the paid holiday in determining overtime pay? (No)

- If an employee works all day Sunday, but does not work more than 40 hours in the workweek, does federal law require that you pay overtime rates or other premiums for the Sunday work? (No)

- How many hours of overtime pay is due to an employee who works 48 hours in a workweek that includes 8 hours of paid vacation? (None)

But these are the easy ones. What happens when you pay an employee a per diem? Should you include the per diem when calculating overtime pay? This case, which went to court several years ago, is still causing problems for employers:

The case: An electrician who received a $150/week per diem told the court he received the same allowance as other workers, regardless of their actual expenses. The court said this might affect overtime calculations if the amount was not reasonable, but for the electrician it was not excessive, since he lived 100 miles from the job site. Result: The per diem should not be included when calculating his overtime pay. [Berry v. Excel Group, 5th Cir. 4/19/02]

Experts also warn that the following can cause overtime problems:

- Deviations from the usual 5-day, 40-hour workweek.

- Assuming employees will work overtime without recording the hours on their timesheets.

- On-call time that severely restricts an employee’s personal activities is eligible for overtime.

- Nondiscretionary cash bonuses. These are bonuses required under a contract, agreement or promise, express or implied (such as a bonus for faster or higher production, improved quality or to get someone to stay with the company or take a job), or bonuses that employees have come to expect with the exception of holiday bonuses. A nondiscretionary bonus given to hourly employees must be added to gross pay for the week in which it is earned and included when calculating their pay for overtime purposes. [29 CFR 7788.209]

Example: Glenn crates crystal vases at a pay rate of $9 an hour. One week she works 43 hours and earns a $24 bonus because the company gives prorated bonuses for higher production.

Glenn’s regular pay: $387 for the week ($9/hour x 43 hours) + $24 bonus = $411 straight time pay.

Glenn’s overtime pay: $411 earned for the week (including the nondiscretionary bonus) ÷ 43 hours worked = $9.56 regular rate of pay x 50% premium rate = $4.78 x 3 hours overtime = $14.34 premium pay.

Glenn’s gross pay: $411 straight time pay + $14.34 premium pay = $425.34 gross pay for the week.

Note: Discretionary cash bonuses—those not required under a contract, agreement or promise and that are not part of a pattern that leads employees to expect them—do not affect overtime pay rates. [29 CFR 778.211] (There will be a complete wrap-up on giving cash and noncash bonuses, prizes and awards, including what withholding taxes each is subject to in the October General Ledger (www.aipb.org/general_ledger.html), the monthly technical briefing for AIPB members).

Bottom line: When you find yourself in a gray area, it is far less costly to ask an outside CPA or payroll expert than for the company to defend itself in court.

This practical tip came from a past iseu of The General Ledger newsletter, the free monthly newsletter for members.

Here's just a sampling of what you will et in your September 2005 issue, which you will receive upon joining:

- Identity theft: How to prevent it in the work place—how to help employees prevent it at home

- IRS issues new rules on how to take—or revoke—a Sec. 179 deduction retroactively (for a prior year)

- A quick recap on how to report back pay and special payments

- How to offer employees a tax-free, long-term disability benefit

- Readings you may have missed in your professional and business media, including:

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