Question: Recently, the Pennsylvania Department of Labor and Industry updated its rules regarding overtime and the regular rate of pay. The new rules require that the regular rate of pay be computed based on 40 hours rather than the total hours worked during the workweek. Does this apply for all employees?
Answer: The new regulations update the definition of the regular rate of pay for nonexempt salaried employees. Hourly employees are not affected by the new regulations, which clarify that the regular rate for nonexempt salaried employees paid on a fluctuating workweek basis is based on a 40-hour workweek.
Under the federal Fair Labor Standards Act the regular rate of pay is an hourly rate computed by dividing the employee’s total pay for a given workweek, excluding statutory exemptions, by the total number of hours worked during that workweek.
Employers do not have to compensate nonexempt employees with an hourly rate. Employers may instead opt to pay on a salary, commission, piece rate, daily, job, or other basis. Regardless, employers must calculate their nonexempt employees’ hourly rates because overtime is based on an hourly rate.
For a salaried employee paid weekly, the regular hourly rate is the weekly salary divided by the number of hours the salary is intended to compensate. For example, an employee paid a weekly salary of $350 for a 35-hour workweek would have a regular rate of $10 ($350 divided by 35 hours). If the employee works overtime during a workweek, the employee is entitled to $10 per hour for the first 40 hours and $15 per hour for time over 40 hours.
A fixed salary may also be set for a fixed workweek of more than 40 hours. For example, if the salary is intended to cover 48 hours, the regular rate is the weekly salary divided by 48 hours.
For salary periods longer than a week, employers must compute the workweek equivalent . For example, a monthly salary can be multiplied by 12 to determine the annual salary and then divided by 52 to determine the weekly equivalent.
The FLSA also permits two guaranteed salary methods, the fluctuating workweek and the Belo plan. Both have restrictions on when the plan may be used and how overtime compensation is provided under the plans.
Under a fluctuating workweek method, a guaranteed weekly salary amount is paid regardless of the number of hours an employee works. The regular rate of pay varies from week to week because it is computed by dividing the guaranteed salary amount by the number of hours worked during the week. This means that the more hours the employee works, the lower their regular rate of pay will be for a given workweek.
The guaranteed salary is intended to cover all straight-time hours worked, but employees remain entitled to an overtime premium for all hours worked exceeding 40 in a week. Overtime hours are compensated by adding one-half times the regular rate for the week times the number of overtime hours worked that week to the guaranteed salary.
Like the fluctuating workweek method, a Belo plan also provides a guaranteed salary that is intended to be the regular pay for all hours worked, including overtime hours. Employers may establish agreements with employees whose work duties necessitate irregular work hours to provide a guaranteed weekly salary for no more than 60 hours of work per week. The guaranteed salary must provide a regular rate of pay at least at the applicable minimum wage rate and an overtime rate at 1.5 times the regular rate of pay.
However, for Pennsylvania, the regular rate for nonexempt salaried workers is the amount of compensation, less statutory exemptions, divided by 40 hours.
The Pennsylvania Code allows for employees to be paid under a Belo plan, but there is no provision for payment under fluctuating workweek arrangement. Furthermore, the Pennsylvania Code does not permit “half time” payment for overtime hours except where it is specifically allowed for day or job rates.
As the Supreme Court of Pennsylvania ruled in Chevalier v. General Nutrition Centers, overtime hours must be compensated at one-and-one-half times the regular rate of pay. In contrast, methods like the federal day or job rate rules and Belo plan have been specifically adopted into the Pennsylvania Code.
Question: An employer is scheduled to pay a wage settlement to several employees. In some cases, the settlement will be for wages earned over several years. In a few cases, the employees are retired and drawing Social Security. The payments are so large that the Social Security wage base for 2022 may be exceeded for some employees. How should the payments be reported for Social Security purposes?
Answer: The employer reports back pay on Form W-2, Wage and Tax Statement, for the year the payment is made. However, the Social Security Administration has special reporting procedures for back pay awards to help the SSA correctly compute employee earnings and benefits. These special reporting rules are for Social Security coverage and benefits purposes only and do not affect reporting for tax purposes.
Back pay is pay received for actual or deemed employment in an earlier pay period, which might cover multiple years. Back pay is wages for Social Security purposes if it is payment for covered employment. Payments for other purposes — such as damages for personal injury, interest, penalties, and legal fees — that are included with back pay awards are not wages.
Back pay is either statutory or nonstatutory. The SSA has a separate set of reporting procedures for each type.
Back pay is statutory — a that is, awarded under a statute — if it is paid because of an award, determination or agreement sanctioned by a court or by a government agency responsible for enforcing an employee’s right to employment or wages.
Qualifying statutes include Americans with Disabilities Act, Equal Pay Act, Fair Labor Standards Act, state wage and hour laws, Age Discrimination in Employment Act, National Labor Relations Act, state laws that protect rights to employment and wages, and other laws that have a similar effect.
The nature of the back pay award does not change if a statement or provision included in the settlement agreement that the payment is not an admission of discrimination, liability, or an act of wrongdoing.
Nonstatutory back pay is usually negotiated between the employer and employee without the sanction of a court or government agency. The compensation is back pay, but it is not made under a statute. Nonstatutory payments include delayed or retroactive pay increases resulting from union negotiations, individually negotiated adjustments, and payments under local ordinances or regulations.
Back pay, whether statutory or nonstatutory is reported on Form W-2 for the year in which it is actually paid. This is true even for payments to someone who has not been an employee for several years.
For income tax purposes, the IRS treats all back-pay awards as wages in the year paid. Like the IRS, the SSA credits nonstatutory back pay as wages in the year paid. However, the SSA credits statutory back pay to the year or years it should have been paid. This is important because failure to credit the amounts to the proper periods could result in employees receiving reduced Social Security benefits or even failing to qualify for benefits.
The employer is not required to notify the SSA of the different periods involved in a back pay award. However, if neither the employer nor employee notifies the SSA, the payment remains credited to the year paid and may result in incorrect benefits or coverage. A settlement agreement or order may require the employer to file a report notifying the SSA of the years covered by the back-pay award.
The employer provides the SSA notification of a statutory back pay award in a separate special report. This report allows the SSA to allocate the back-pay award to the appropriate years for Social Security purposes. The format of the report and the address to which it is to be sent are provided in IRS Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration. The report should be sent after the Form W-2 is filed for the year of payment. There is no time limit for filing the report.
If the back pay is nonstatutory, the SSA credits the back pay as wages in the year it was paid. However, it may be appropriate for the employer to report the back pay to the SSA as a special wage payment.
Special wage payments are payments made to employees for services performed in a prior year. Such payments include back pay, payments of accumulated sick and vacation pay, bonuses, deferred compensation, certain retirement payments, sales commissions, severance pay, and stock options. However, payments after retirement that are part of the normal payroll cycle should not be routinely reported as special wage payments.
Special wage payments will increase earnings reported on the current year’s Form W-2. This can be a problem for beneficiaries who are receiving Social Security benefits but have not reached full retirement age. The SSA’s earnings test may reduce the individuals’ benefits. To have reduced benefits restored, the beneficiary must get documentation from the employer of the special wage payments. Form SSA-131, Employer Report of Special Wage Payments, is used to provide this documentation.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.
Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at firstname.lastname@example.org.
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