Q&A: Include shift differentials and bonuses in overtime calculations

Question: A swing shift employee contacted Payroll, upset that her overtime rate didn’t include her shift differential. Our policy is to only use the base rate when calculating overtime. Is that okay?

Answer: The federal Fair Labor Standards Act (FLSA) requires nonexempt employees to be paid overtime at one-and-one-half times their “regular rate,” not just their base rate. The regular rate includes “all remuneration,” with limited exceptions. This means that you need to include extra payments such as shift differentials and non-discretionary bonuses (including production or attendance bonuses) in your overtime calculations. The FLSA excludes certain categories of payments from the regular rate (such as discretionary bonuses, vacation pay, and gifts), so those types of payments don’t need to be included in your calculations. Keep in mind that states have their own laws affecting overtime calculation and bonus payments (for example, in California, overtime on flat sum bonuses is calculated differently than under federal law).

We recently discovered that a major payroll services provider’s software didn’t automatically include shift differentials in the regular rate for purposes of calculating overtime; the employer was expected to turn on that option in the software. We recommend spot-checking your software provider’s calculations to make sure you’re not unintentionally excluding these types of extra payments from your employees’ overtime rates.

For more information about bonus payments and overtime calculations, see our Legal Guides, Effect of Bonus Payment Plans on Overtime Pay for Hourly Employees and Effect of Bonus Payment Plans on Overtime Pay for Nonexempt Salaried Employees. If you have any questions about whether a certain type of payment should be included in the regular rate for overtime calculations, be sure to connect with your Vigilant Law Group employment attorney.