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How do you calculate overtime pay for your employees?

The national retail giant Wal-Mart learned a lesson in overtime pay the hard way recently. It learned that overtime must be calculated on “average hourly compensation,” not “base rate.” The lesson has cost it $33 million.

Wal-Mart has agreed to pay that $33 million in back wages to more than 86,680 of its employees nationwide.

The reimbursement puts Wal-Mart in compliance with federal and California overtime laws.

The U.S. Labor Department alleged that Wal-Mart violated the Fair Labor Standards Act, or FLSA. The retailer under-calculated the overtime for the employees by using their “base rate” rather than their “average hourly compensation,” which is a larger number. All employees must be paid 1.5 times their pay for any hours over 40 hours. It’s customarily called “time-and-a-half.” But the law says the 1.5 must be calculated according to the employee’s base pay plus premiums and incentives – in other words, the “average hourly compensation” The “base rate,” which Wal-Mart was using, is the pay without premiums or incentives. For example, if $6 an hour is the base rate but the employee gets, on average, $7 with premiums and incentives, then $7 is the figure that must be used for overtime payment.

“This settlement provides $33 million in back wages, plus interest, to Wal-Mart workers, and the company has taken corrective action to prevent this from happening again,” said Victoria A. Lipnic, Assistant Secretary of Labor for Employment Standards.

The incentive behind the settlement may have been provided by a court judgment supporting the agreement. The Labor Department filed a complaint in U.S. District Court against Wal-Mart alleging violations of the FLSA overtime regulations and state minimum wage laws. The court issued a consent judgment ordering Wal-Mart to pay the back wages, and it directed the retailer against future violations. The consent decree includes not only payment of the back wages, but has Wal-Mart agreeing to pay interest on the amount.

The Labor Department says that should act as a deterrent to similar violations.

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