An employer who requires or permits an employee to work overtime is generally required to pay the employee premium pay for such overtime work. We all understand that to mean “time and a half” for all overtime hours worked.

But time and a half of what? This question confuses many people — employers and employees alike. Time and a half refers to the employee’s regular rate. By statute, an employee’s regular rate includes not only the employee’s hourly rate (e.g., “I earn $9.00 per hour”), but also any other compensation earned, subject to certain exceptions.

Consider this example. Joe earns $9.00 per hour, plus a bonus for hitting performance targets each workweek. Assume Joe works 45 hours, and he also earns a $60.00 performance bonus. Joe is a non-exempt employee. Therefore, Joe is entitled to overtime because he worked 45 hours. Joe’s employer will pay him $9.00 per hour for each of the 45 hours and the $60.00 bonus.

So what is Joe’s regular rate for purposes of computing his overtime? Many would erroneously assume it is 1 1/2 of his hourly rate. In other words, 1 1/2 multiplied by $9.00 per hour, which is $13.50 per hour. That is wrong.

The regular rate generally includes all compensation attributable to the workweek (with certain exceptions — such as discretionary bonuses, gifts, and premiums paid for weekend work). So Joe’s regular rate is computed by adding up the total amount of compensation and then dividing it into the number of hours worked. The total amount of compensation for Joe in our sample workweek is $465.00, which represents 45 hours at $9.00 per hour plus the $60.00 bonus. Thus, Joe’s “regular rate” is $10.33 per hour. That figure represents total compensation ($465.00) divided by the total number of hours worked (45 hours).

For each of Joe’s five overtime hours, he is entitled to receive premium pay of one half the regular rate, or $5.17 per hour ($10.33 per hour divided by 2). Thus, Joe’s overtime rate of pay for the sample workweek should be $14.17 per hour (which is $9.00 per hour plus $5.00 per hour as premium pay). If the employer only pays Joe $13.50 for each overtime hour, then Joe is being shorted 67 cents per overtime hour.

Such miscalculations may seem trivial. But when aggregated over time, and across hundreds or thousands of employees, the miscalculation of premium rates can lead to significant liability. And the law presumes that double damages are awarded unless the employer shows it had a good faith and reasonable basis not to pay the appropriate overtime compensation. Therefore, care must be taken in calculating employees’ “regular rates.”