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Susan Combs  •  Texas Comptroller of Public Accounts

Non-Salary Payments
Overtime

This Payroll Policy Statement supersedes the following archived Notices to State Agencies:

  • FM 95-15: Calculation of Overtime Pay and Request for Comments on Policy Change
  • FM 95-61: Adoption of the Weekly Methodology for Overtime Pay Calculations

This discussion of overtime applies to each employee who is subject to overtime provisions of the Fair Labor Standards Act of 1938 (FLSA). Overtime provisions for employees of the Legislature, the lieutenant governor or legislative agencies are also discussed in this policy statement.

Background

An employee is entitled to compensation for overtime as provided by federal and state law. To the extent that federal law conflicts with state law, federal law controls, regardless if federal law prescribes a stricter rule.

State law says that an employee required to work hours in excess of 40 hours in a workweek is entitled to compensation for the excess hours, either by:

  • The agency allowing or requiring the employee to take compensatory time off at the rate of 1.5 hours for each hour of overtime; or
  • The employee receiving pay for the overtime at the rate of 1.5 times the employee’s regular rate of pay, at the discretion of the employing agency, in cases in which granting compensatory time off is impractical.

Further explanation of rate of pay is found in this policy statement at Current regular rate of pay vs. regular rate of pay when overtime earned.

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Overtime Credit Accumulations

With certain exceptions, an employee may not accumulate more than 240 hours of overtime credit that may be taken as compensatory leave.

An employee engaged in any of the following activities may accumulate not more than 480 hours of overtime credit that may be taken as compensatory leave, if the accumulation does not violate 29 U.S.C. Section 207(o)(3)(A):

  • A public safety activity
  • An emergency response activity
  • A seasonal activity

Note: In these instances, “overtime credit” means the number of hours computed by multiplying the number of overtime hours by 1.5 (1-1/2), per Texas Government Code, Section 659.015(e).

When employee overtime hours exceed amount of overtime credit

An employee must be paid for the number of overtime hours the employee works that causes the employee to exceed the amount of overtime credit the employee may accumulate.

The payment must be at 1.5 times the employee’s regular rate of pay. Further explanation of rate of pay is found in this policy statement at Current regular rate of pay vs. regular rate of pay when overtime earned.

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Holidays or Other Paid Leave

Holidays or other paid leave taken during a workweek are not counted as hours worked in computing the number of overtime hours.

Employee who does not work more than 40 hours in a workweek

If the number of hours worked plus the number of hours of holiday or other paid leave taken during the workweek exceeds 40 hours, the employee is entitled to compensatory time off at the rate of one hour off for each of the excess hours.

Example:

An employee:

  • Uses eight hours of sick leave on Monday,
  • Works 10 hours on Tuesday, Wednesday and Thursday, and
  • Works eight hours on Friday.

At the end of the week, the employee has a total of 46 compensable hours and no overtime. Of those hours, he or she accrues six hours of compensatory time.

Employee who works more than 40 hours in a workweek including paid leave

The employee is entitled to compensatory time off at the rate of one hour for each hour remaining after subtracting the hours compensable (either as regular 40 hours or overtime hours), from the sum of the number of hours worked plus the number of hours of holiday or other paid leave taken during the workweek.

Example:

An employee:

  • Works 10 hours on Monday,
  • Uses eight hours of sick leave on Tuesday,
  • Works 10 hours on Wednesday and Friday,
  • Is paid eight hours for a Thursday holiday, and
  • Works four hours on Saturday.

This gives the employee a total of 50 paid hours during the week. The employee is entitled to 10 hours of compensatory time and no overtime.

Hour-for-hour compensatory time

Any compensatory time that is computed on an hour-for-hour basis instead of a 1.5 hours-for-each-hour basis must be taken during the 12-month period following the end of the workweek in which the compensatory time was accrued.

The compensatory time lapses if the time is neither taken nor paid in accordance with Texas law.

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When a Person is Employed by More Than One State Agency or Institution of Higher Education

Overtime compensation accrues for each employment independently of every other employment except as discussed in this paragraph.

If the person is subject to FLSA overtime provisions in an employment, the employing agencies and institutions of higher education shall ensure that the person is compensated for all combined time actually worked that exceeds 40 hours per week, in accordance with those provisions.

The agencies and institutions shall cooperate to determine which agency or institution is responsible for ensuring compliance with this requirement.

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Documentation Requirements

In addition to the normal payroll processing and documentation requirements, agencies must document the following information related to the particular overtime payment:

  • Monthly salary
  • Total salary
  • Number of hours to be paid
  • Any other entitlement to be included in the computation

Expenditure code 7021

The applicable expenditure code for overtime payments is Comptroller object 7021 – Overtime pay. See “Comptroller Object Codes — Expenditure” in the Texas Comptroller Manual of Accounts.

Calculating the Amount of Overtime Pay

Weekly calculation method

When calculating the hourly pay rate to be used for overtime payments for a non-exempt monthly salaried employee, an employer normally must use the weekly method:

  1. Multiply the monthly salary by 12 months
  2. Divide by 52 weeks
  3. Divide by the number of hours in a week the employee is expected to work to earn a full salary.

Example:

If an employee earns $2,000 per month and works 40 hours per week, the calculation is:

  1. $2,000 per month x 12 months = $24,000
  2. $24,000 divided by 52 weeks = $461.54
  3. $461.54 divided by 40 hours = 11.54 hourly rate

The employee is paid at one and one-half times the hourly rate multiplied by the number of overtime hours to be paid.

Monthly calculation method

An employer may use the monthly method to calculate the hourly salary rate by dividing the monthly salary by the number of work hours in the month, if the employer obtains the employee’s consent to this method before work is performed.

Employers cannot unilaterally require this method to be used.

Example 1:

If the employee earns $2,000 per month and works four hours per week in a month containing 160 work hours, and the agency has obtained the employee’s consent before the employee works the overtime, the calculation is:

$2,000 per month (monthly salary) divided by 160 (number of hours in the month) = $12.50 per hour.

The employee would be paid at one and one-half times the hourly rate multiplied by the number of overtime hours to be paid.

Example 2:

If the month contained 184 hours, the calculation would be:

$2,000 per month divided by 184 = $10.87 per hour

The employee would be paid at one and one-half times the hourly rate multiplied by the number of overtime hours to be paid.

Effect of multiple positions on the calculation

When an employee, in a single work week, works in two or more positions for which different non-overtime rates of pay have been established, the employee’s regular rate of pay for the week is the weighted average of the rates.

Compute the weighted average by dividing the employee’s total compensation for the week by the total number of hours worked.

This method does not apply if an employer and an hourly employee have agreed in advance that the employee’s overtime rate will be based on the pay rate for the type of work performed during the overtime hours.

Example:

An employee works 20 hours per week in a position that pays $30,000 annually and works 20 hours per week in a second position that pays $35,000 annually, with both positions covered under FLSA.

One week, the employee worked a total of 50 hours with no paid leave and no holidays (= 10 overtime hours). To compute the overtime rate of pay, we must use the weighted average to determine the regular rate of pay. In this case, the salaried employee is paid for a month with 160 work hours in the month.

The regular rate of pay is determined as $625.00 for the first job and $729.17 for the second job.

  • Divide the sum ($625 + $729.17 = $1354.17) by 40 hours, for a rate of pay of $33.85 per hour.
  • The hourly rate of overtime pay is 1.5 x $33.85, or $50.78 per hour.
  • The employee is paid $507.80 in overtime pay ($50.78 x 10 hours overtime).

Current regular rate of pay vs. regular rate of pay when overtime earned

An employer that chooses to pay an employee for overtime hours worked instead of banking the hours must use the regular rate of pay at the time the employee earned the overtime.

However, an employer that waits to pay the overtime beyond what is reasonably necessary for the employer to compute and arrange for payment must treat the overtime as if it had been banked.

An employer that banks overtime hours and subsequently pays for those hours must use the employee’s regular rate of pay at the time the employee receives the overtime payment.

However, an employer that pays for overtime hours upon termination of employment must use the higher of the following regular rates of pay:

  • The average regular rate of pay received by the employee during the last three years of employment, or
  • The employee’s final regular rate of pay.

Note: The phrase “last three years of employment” refers to the three-year period immediately before termination. Where an employee’s last three years of employment are not continuous because of a break in service, the period of employment after the break is treated as new employment. The break, however, must have been intended to be permanent, and any banked overtime must have been cashed out at the time of initial separation.

When night/evening/weekend shift differential pay must be included in the regular rate of pay

If an employee earns overtime while working the night, evening or weekend shift, the night/evening/weekend shift differential must be included in the regular hourly rate for calculation of overtime pay.

If the employee is on a rotating shift, the overtime must be calculated for each period the employee worked and the appropriate shift rate must be included in the calculation.

Example:

If an employee works the evening shift the second week of the month and the employee works overtime that week, the overtime pay rate must include the evening shift differential.

When payments in the form of goods and facilities must be included in the regular rate of pay

When an employer makes a payment to an employee in the form of goods or facilities regarded as part of wages, the reasonable cost to the employer or the fair value of the goods or of furnishing the facilities must be included in the employee’s regular rate of pay.

Other types of payments that must be included in the regular rate of pay

Special payments must be included in the regular rate of pay for the calculation of overtime pay, including:

  • Longevity pay
  • Hazardous duty pay
  • Benefit replacement pay
  • Housing emoluments
  • Other special payments

Bonuses included/not included in the regular rate of pay

Discretionary bonuses

The FLSA states that the “regular rate” at which an employee is employed does not include sums paid in recognition of services performed during a given period, if both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement or promise causing the employee to expect the payments regularly.

The Department of Labor has ruled that a discretionary bonus is excluded from the regular rate. For a bonus to be excluded, the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid.

The amount of the bonus must be determined without promise or agreement by the employer. The employee must have no contract right, express or implied, to any amount.

An employer that promises in advance to pay a bonus has abandoned the employer’s discretion with regard to the bonus.

Bonuses included in the regular rate of pay

The following bonus types would not be excluded from the regular rate of pay:

  • Any bonus promised to an employee upon hiring
  • A bonus announced to employees to induce them to work more efficiently or to remain employed with the employer
  • An attendance bonus or a bonus for quality and accuracy of work

When a bonus is considered part of an employee’s regular rate of pay, no difficulty arises in computing overtime compensation if the bonus covers only one weekly pay period.

The amount of the bonus is merely added to the employee’s other earnings and the total divided by total hours worked.

When calculations of a bonus are deferred over a period longer than a workweek

Under many bonus plans, however, calculations of the bonus are deferred over a period longer than a workweek. In that case, the employer may disregard the bonus when computing the employee’s regular rate of pay until the amount of the bonus is ascertained.

When the amount of the bonus is ascertained, the amount must be apportioned back over the workweeks of the period during which the bonus is said to have been earned.

The employee must then receive an additional amount of compensation for each workweek the employee worked overtime during the period, equal to one-half of the hourly rate of pay allocable to the bonus for that week multiplied by the number of statutory overtime hours worked during the week.

If it is impossible to allocate a bonus among the workweeks of the period in proportion to the amount of the bonus actually earned each week, some other reasonable and equitable method of allocation must be adopted.

For example, it may be reasonable and equitable to assume the employee earned an equal amount of bonus each week of the period to which the bonus relates. Or, if there are facts that make it inappropriate to assume equal bonus earnings for each workweek, it may be reasonable and equitable to assume the employee earned an equal amount of the bonus each hour of the pay period.

Recruitment or retention bonus

The Comptroller’s office believes that a recruitment or retention bonus must be included in the regular rate of pay as this type of bonus is paid under a contract between an agency or institution of higher education and the recipient of the bonus.

One-time merit payment or performance reward

The Comptroller’s office believes that a one-time merit payment is not included in the regular rate of pay as the payment satisfies the criteria for exclusion listed in this policy statement.

For the same reason, the Comptroller’s office believes that a performance reward is not included in the regular rate of pay.

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Overtime and Employees of the Legislature, the Lieutenant Governor or Legislative Agencies

The following discussion applies only to an employee of:

  • The Legislature
  • The lieutenant governor
  • A legislative agency subject to FLSA overtime provisions

Consistent with FLSA requirements, overtime pay and compensatory time off for employees of the legislative branch, including employees of the lieutenant governor, is determined:

  • For employees of the House of Representatives or the Senate – by the presiding officer of the appropriate house of the Legislature.
  • For employees of an elected officeholder – by the employing officeholder.
  • For employees of a legislative agency – by the administrative head of the agency.

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Historical Notes:

This policy/guidance was first issued by the Comptroller’s office on Dec. 14, 1994. Though it has been updated over time, the guidance has not changed significantly. Changes relate only to references to different types of bonus payments that are no longer authorized.

In November 1994, agency representatives who were users of the Uniform Statewide Payroll/Personnel System (USPS) were contacted and asked to advise their preference for moving to the weekly method for calculating overtime. As a result of that survey, USPS was designed to use the weekly method to calculate overtime.

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Definitions

Non-exempt monthly salaried employee
The Fair Labor Standards Act (FLSA) administered by the Department of Labor defines a non-exempt employee as one eligible for overtime. The non-exempt employee who physically works more than 40 hours in a given workweek accrues overtime hours at the rate of one-and-one-half hours for every overtime hour worked.
Overtime credit
The amount of time for which a FLSA non-exempt employee can either be paid or take off is tracked by the agency as overtime credit. If the FLSA non-exempt employee works hours in excess of 40 hours physically worked during the week, those hours are considered as overtime credit (overtime hours are either paid or taken off at the rate of one and one-half hours for each hour of overtime).

Sources

Texas Government Code, Sections 659.015, 659.017; Code of Federal Regulations, Title 29.

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Susan Combs
Texas Comptroller of Public Accounts
Questions? Contact statewide.accounting@cpa.state.tx.us
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