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Answers to common questions on benefits and compensation

Posted January 10, 2017

By Ed Zalewski, PHR, editor, J. J. Keller & Associates

Running a Human Resources department – or having the HR function among your job duties – is not easy. Questions that have legal and/or regulatory implications pop up on a regular basis. Answers to some of those questions aren’t always straightforward, and can require insight into various statutes or even case law. This article shares two common scenarios related to benefits and compensation, and offers some interpretive guidance.

Question: We are planning to let employees cash out a limited number of PTO (paid time off) hours per year. Does that payout have to be counted toward the overtime wages of nonexempt employees?

Answer: In short, no, the payout does not have to be counted toward overtime.

As you know, most forms of compensation provided to employees must be counted as wages and will affect the average hourly rate upon which overtime is calculated. This includes bonuses and other payments given for work performed. Essentially, the payment is divided over the weeks in which it was earned, which increases the employee’s average hourly rate (or regular rate) on which overtime is calculated.

However, some forms of compensation do not have to be counted toward the regular rate or the resulting overtime rate. One of the excluded categories is pay for nonworking time, such as vacation or holiday pay.

Even if the employee cashes out the PTO rather than taking paid days off, the payment does not have to be counted toward the regular rate and does not affect the overtime rate. The federal regulations address this in 29 CFR §778.219, Pay for foregoing holidays and vacations.

Q: We have nonexempt employees who usually work the same hours every week. Can we pay them a fixed weekly amount that includes overtime pay, kind of like paying a fixed salary?

A: You can, but it probably won’t work out well in actual practice. If an employee works a fixed schedule, you may calculate total pay (including overtime) based on those hours. However, the employee must verify having worked those hours every week, preferably in writing. Your records must show the exact number of hours worked each day and each week; so if the employee diverges from the schedule, your records must reflect that. Essentially, this means the employee must still keep track of his or her working time, and you must adjust pay accordingly.

For example, if an employee usually works 44 hours and is paid $12 per hour, the total pay with overtime pay would be $552. If, however, the employee works only 43 hours, he or she must report that variance, and you must reduce the pay for that week.

Any number of situations could change the hours worked per week. The employee might arrive early or work late to finish a project, increasing the hours for that day. Alternatively, the employee might leave early for an appointment, or call in sick. And, some weeks will include holidays or vacation days. Given these variables, it is unlikely that the employee will work the exact same number of hours every week. For any variation, you’ll have to record the change and recalculate the wages. If your records never show any variation, this may raise questions about their accuracy, since some variation is normal.

About the author:

Ed Zalewski

Ed Zalewski is a certified Professional in Human Resources and an editor at J. J. Keller & Associates, a nationally recognized compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Zalewski specializes in employment law topics such as the Fair Labor Standards Act, employee benefits, and discrimination and harassment. He is the author of J. J. Keller’s FLSA Essentials guidance manual and BottomLine Benefits & Compensation newsletter. For more information, visit