The US Fair Labor Standards Act (FLSA) requires that overtime premiums be calculated by including a bonus or commission amount in the FLSA base rate. The standard US Payroll schema calculates FLSA in the time schema. Recurring payments and additional payments are processed at a much later stage in the standard schema. Using an example case, I will demonstrate how to customize the standard schema to read the recurring or additional payments prior to the time schema and to configure the wage types so that they are valuated with the new calculated rate of pay.

An Overview of the FLSA Overtime Valuation Process

FLSA overtime valuation is done by schema UTR0: Regular rate of pay (FLSA overtime valuation). This schema uses the function RGRTE to process the table IT in the schema. According to the values set in processing class 85, function RGRTE determines the so-called regular rate of pay for each work week, and valuates the relevant wage types with this rate.

The processing class 85: Regular rate of pay (FLSA overtime valuation) values are as follows:

• 0 = No influence from or to regular rate.
• 1 = Contributes to Regular Rate with number and amount, not valuated with Regular Rate.
• 2 = Contributes to Regular Rate with amount only, not valuated with Regular Rate.
• 3 = Contributes to Regular Rate with number and amount, is valuated with Regular Rate.
• 4 = Contributes to Regular Rate with amount only, is valuated with Regular Rate.
• 5 = Does not contribute to Regular Rate, is valuated with Regular Rate.

Function RGRTE operates as follows:

• The regular work week is calculated using the payroll calculation rule UTR0, based on the system configuration in the planned working time infotype (0007). This information comes from table ZL.
• The function then calculates the regular rate of pay by dividing the total gross pay amount for the week by the total hours worked. For example:
  • Pay = $800 (total for wage types with a processing class 85 value of 1, 2, 3 or 4).
  • Hours = 40 (total for wage types with a processing class 85 of value 1 or 3)
  • Regular rate of pay = $20 (stored in wage type /R00)
• It then again valuates the wage type amounts (where the processing class value is 3, 4, or 5) using wage type /R00 (regular rate of pay) as the new rate.

Processing of recurring deductions or payments (infotype 0014) and additional payments (infotype 0015) occurs during the gross cumulation and tax processing step in the payroll schema. FLSA calculations occur in the FLSA: Overtime valuation with the regular date step in the payroll schema.

To use the payments from infotype 0014 or 0015 in the calculation for FLSA base rate, infotypes 0014 and 0015 need to be read into payroll before the schema UTR0 is executed. This is because the wage types from these infotypes need to be available in table IT at the time function RGRTE is called, which puts the new valuation basis or rate for calculations in the output table.

Once FLSA calculations are complete, some customization is required to ensure that payments and deductions from infotype 0014 and 0015 are not processed twice in payroll. This can be achieved by either:

• Implementing a custom rule to remove infotypes 0014 and 0015 wage types that were brought over for use in processing step FLSA: Overtime valuation with regular date, from table IT. This allows the wage types from infotypes 0014 and 0015 to be processed normally during the gross cumulation and tax processing step.
• Implementing a custom value for processing class 47 that prevents the subsequent calls to P0014 and P0015 from reading the wage types into payroll in the gross cumulation and tax processing step.

Example Case

This example illustrates how to pay an employee correctly in compliance with FLSA, when the employee is paid a bonus and works overtime in the same pay period. In my example, an employee on a weekly payroll is scheduled to work 40 hours per week and has a base pay rate of $28.35 per hour. In the payroll period under consideration, the employee receives a bonus payment of $113.40. The employee ends up working two hours of overtime, which is paid at 150 percent.

Since the employee has a bonus payment in the same period that he works overtime, payroll needs to calculate the FLSA bonus rate and use it to adjust the rate used to calculate overtime pay. In compliance with FLSA, the employee in the payroll period under consideration should be paid using the following calculation:  (Regular Hours @ Base Rate) + [(100% of Overtime hours @ Base Rate) + {50% of Overtime hours @ (Base Rate + FLSA Bonus Rate)}] + (Bonus Payment)

The steps to calculate the FLSA bonus rate are as follows:

• The first step is to calculate the total amount of the regular wage and bonus payments. The formula is: (40 hours @ $28.35 = $1134.00) + (100% of 2 hours @ $28.35 = $56.70) + (bonus payment $113.40) = $1304.10.
• The second step is to calculate the FLSA premium regular rate. The formula is: (Total of regular wage and bonus payment $1304.10) / (Total 42 hours worked) = $31.05.
• The third step is to calculate the FLSA bonus rate. The formula is: (FLSA premium regular rate $31.05) – (Base rate $28.35) = $2.70.

Plugging the value of FLSA bonus rate into the formula for calculating the correct employee pay amount in compliance with FLSA, the calculation comes out to: (40 regular hours @ base rate of $28.35) + [(100% of 2 overtime hours @ base rate of $28.35) + {50% of 2 overtime hours @ (base rate of $28.35 + FLSA bonus rate of $2.70)}] + (bonus payment of  $113.40).

This brings the total employee pay to: 40 hours @ $28.35 = $1134.00) + ((100% of 2 hours @ $28.35 = 56.70) + (50% of 2 hours @ $28.35 + $2.70 = $31.05)) + (bonus payment of $113.40) = $1335.15.

Figure 1 depicts how this FLSA calculation happens in the payroll schema.

Figure 1

FLSA calculation in payroll

The employee’s 40 regular hours that are paid at the base rate of $28.35 are stored in wage type 2001. The bonus payment of $113.40 is stored in wage type 1003. Wage type 2018 is used to calculate overtime at a rate of 100 percent of the base pay rate of $28.35, times the overtime hours (2). Wage type 2017 is used to calculate overtime at 50 percent of the base rate plus the FLSA bonus rate amount, times the overtime hours (2). The configuration for valuation bases was used to valuate wage type 2018 at 100 percent of wage type 2001, and wage type 2017 is derived at 50 percent of wage type 2001.

To calculate the FLSA overtime valuation, processing class 85 is used. For example:

• The wage type 2001 (regular working time) is assigned a value of 1. This implies that the amount and hours stored in this wage type are used to calculate the regular rate. However, the hours stored in this wage type are not valuated using the calculated regular rate; they are valuated using the base rate.
• The wage type 2018 (overtime 100 percent) is assigned a value of 1.This implies that the amount and hours stored in this wage type are used to calculate the regular rate. However, the hours stored in this wage type are not valuated using the calculated regular rate; they are valuated using the base rate.
• The wage type 2017 (overtime 50 percent) is assigned a value of 5. This implies that the amount and hours stored in this wage type are not used to calculate regular rate. However, the hours stored in this wage type are valuated using the calculated regular rate.
• The wage type 1003 (corresponding to the bonus payment) is assigned a value of 2. This implies that only the amount in this wage type is used to calculate the regular rate. However, this wage type does not have any hours to valuate.

Nikhil S. More

Nikhil S. More has over 10 years of experience designing and deploying HR business processes across multiple industry sectors. He has substantial experience managing the delivery of the SAP ERP HCM enterprise application and hands-on experience managing the delivery of SuccessFactors/SAP ERP HCM hybrid solution. Nikhil has expertise implementing Employee Benefits and US Payroll with good knowledge of Employee Central. Nikhil is currently a Manager at Capgemini.

You may contact the author at nikhil.more@capgemini.com.

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