Should PTO Be Calculated in Overtime Pay?
The Fair Labor Standards Act of 1938 governs employers' obligations concerning overtime pay, working hours and exempt versus non-exempt classification for salaried and hourly workers. There are no FLSA mandates concerning benefits or paid time off, nor are there any state laws that require employers to give any paid time off benefits to employees. Employers aren't required to provide paid time for vacation, sick leave or holidays. That being said, the decision to include paid time off in calculation for overtime pay is up to the employer.
Despite there being no laws requiring it, employers provide vacation and sick time as a recruitment and retention tool. Many employers combine vacation and sick time and refer to it as paid time off, or PTO. Policies concerning employees' use of time off and how it applies to working hours are at the employer's discretion. It's common practice to exclude PTO hours from calculating the number of hours an employee works where overtime pay is an issue. Whether your organization should include or exclude PTO from overtime pay calculations depends on your workplace policies, patterns and practices of employees and their PTO use and, in some cases, the size of your workforce and labor costs.
The term "non-exempt" means an employee is not exempt from the FLSA guidelines on overtime pay. Only non-exempt employees are entitled to overtime when they work more than 40 hours in a work week, according to the FLSA. Employees who are eligible for overtime pay receive 1-1/2 times their hourly rate when they work more than 40 hours in a work week. The FLSA rule that states non-exempt employees are entitled to overtime pay when they work more than 40 hours in a work week contains the operative word, "work." The operative word is what many employers rely on when they construct workplace policies that exclude PTO or vacation time from the 40-hour work week for overtime pay calculations. According to many employer policies, an employee has to actually work the 40 hours in a workweek to be eligible for overtime pay.
Under a strict interpretation of the FLSA rule concerning hours worked, an employer doesn't pay employees who don't actually work 40 hours in the work week. Therefore, if the employee takes 16 hours PTO for a two-day absence, yet works 10 hours each of the three remaining days, she may not be entitled to overtime, because her actual hours worked are only 30 hours for the week.
For example, if Jane earns $12 an hour and works 10-hour days on Monday, Tuesday and Wednesday and takes PTO for Thursday and Friday, if her employer excludes PTO from overtime pay calculations, Jane would receive $360 for her hours worked and $192 for PTO pay, making her week's paycheck $552.
However, if Jane's employer includes PTO in the 40-hour work week calculation for overtime pay, Jane would earn $480 for 40 hours, and $18 an hour for 6 hours of overtime, which is $108.
Her total weekly earnings would then be $588, $36 more than if the employer didn't exclude the PTO hours from the hours worked.
Employers' policies are typically based on the size of the organization, how much structure is necessary to manage the workforce and how well the workforce follows company guidelines. Large organizations concerned about labor and overtime costs may consider excluding PTO from the overtime pay calculations to minimize additional expenses.
On the other hand, companies that have fewer employees or employees who generally take off one or more full weeks for PTO don't need to specifically exclude PTO from overtime pay unless it becomes problematic, such as employees working two to three long days and then taking off two days in the week so they can earn a little more money.
If a pattern emerges with employees taking PTO and working long hours on the remaining days, it may be time to review your organization's compensation practices, because this might signify that employees don't feel they're being paid enough.