A key component of audit processing is determining whether the insured paid overtime wages to their employees. Per the premium basis rule, overtime is an increase in hourly wages for time worked. If overtime wages were paid and proper record keeping was maintained, the insured is eligible to have the premium portion of the overtime deducted from the total chargeable payroll.  This allows for the insured to pay a lower overall insurance premium.

Overtime wages can be paid time and a half or 1.5 of the hourly wage, double time or twice the hourly wage, and triple time or thrice the hourly wage.  Proper record keeping would include the total amount of dollars paid for overtime and not the total number of hours used for overtime.  The auditor removes the premium portion of the overtime wage in order to charge for the true hourly wage.  The auditor’s goal is to charge for the actual hourly wage and not the premium pay used in the overtime wage. Rate shift differentials, holiday shift pay, and weekend shift pay do not qualify for overtime deductions.  To help explain the importance of adequate overtime record keeping, we have provided these helpful examples:

A)   John Doe works for the insured, ABC Company.  His total payroll for the audit period was $10,000.  He has overtime wages of $400 and was paid time and a half.  The auditor would remove 1/3 of the overtime wages or $400/3 which is $133.  This amount is deducted from the total wages and the insured is charged for $9,867 of payroll.

B)   Jane Smith works for XYZ Company.  Her total payroll for the audit period was $15,000.  She has overtime wages of $200 and was paid double time.  The auditor would remove ½ of the overtime wages or $200/2, which is $100.  This amount is deducted from the total wages and the insured is charged for $14,900 of payroll.

C)   James Adams works for TLC Company. His total payroll for the audit period was $5,000. He has overtime wages of $300 and was paid triple time. The auditor would remove 2/3 of the overtime wages or $300 X 2/3, which is $200.  This amount is deducted from the total wages and the insured is charged for $4,800 of payroll.

D)   Scott Jones works for AB Corporation. He normally works first shift and earns $8.00 an hour. Sometimes he is asked to work second shift and the pay per hour for second shift is $8.50 an hour. He didn’t work any overtime. For the audit period, his total payroll was $12,500.  The rate shift differential of $.50 is not considered overtime pay. Scott’s total wages of $12,500 would be chargeable on the audit.  Holiday shift pay and weekend shift pay are also not removed from the audit as they are not considered overtime pay.

Keeping proper payroll records and maintaining the amount of overtime paid is very important both for the insured and for your agency.  If you have any questions regarding overtime and how it affects the audit, please contact our Audit Team at extension 2586 or your Underwriter.