Is Overtime Included in Workers' Comp Payroll? Overtime, Tips and Bonuses at Audit

North Carolina, New York and Wisconsin share one exception: the exclusion does not apply to stevedoring classifications whose code number is followed by "F," which North Carolina's manual explains means the code includes federal longshore (USL&H) coverage (NCRB, NYCIRB, WCRB).

To see how a lower payroll figure changes your premium subtotal, enter your own payroll and rate in the workers' comp and EMR calculator.

North Carolina's manual, which contains National Council on Compensation Insurance (NCCI) material, and the New York and Wisconsin manuals use the same three cases (NCRB, Rule 2-C, NYCIRB, Rule V-E, WCRB, Rule V-E):

North Carolina's manual gives this example. An employee's normal week is 40 hours at $10 an hour. In one week the employee works 44 hours and earns $15 an hour for hours 41 to 44. The extra pay is 4 × $15 minus 4 × $10, or $20, and that $20 is excluded. The other $40 for those hours stays in payroll (NCRB, Rule 2-C-2).

What counts as overtime

The same manuals define overtime as hours with an increased rate of pay for work beyond the hours normally worked, beyond 8 hours a day or 40 hours a week, or on Saturdays, Sundays or holidays. Under a guaranteed-wage agreement, only hours beyond the guaranteed number count (NCRB, Rule 2-C-1).

Some higher pay is not overtime:

• Shift differentials. A night-shift rate is premium pay for the shift, not overtime, so it is not excluded.
• Straight time over 40 hours. If an employee works more than 40 hours with no increase in the hourly rate, nothing is excluded.
• Production incentives within normal hours. An increased rate for exceeding a production standard during normal hours is not overtime.

The difference between a tip and a service charge decides the treatment. North Carolina's manual defines a tip as an optional payment where the customer sets the amount and can choose not to pay it. A service charge or automatic gratuity is a set percentage or fee that the customer cannot set or reduce. Tips are excluded; service charges and automatic gratuities received by employees are included (NCRB, Rule 2-B).

Pennsylvania and Delaware add a step for tipped staff. Any payment needed to bring an employee up to the federal minimum wage is included, and tips above that are excluded (PCRB Manual).

Bonuses are included in every manual above that uses payroll. North Carolina, New York and Wisconsin list "bonuses including stock bonus plans" (North Carolina: "bonuses and stock bonus plans") as remuneration, and California's WCIRB lists bonuses as payroll (NCRB, Rule 2-B, NYCIRB, Rule V, WCRB, WCIRB).

The exclusion depends on records, so set up payroll before the policy year, not at audit. California's Department of Insurance explains that final premium is calculated after the policy term ends and payroll is audited, and that insurers generally may audit during the policy period and for three years after it ends (California Department of Insurance, workers' compensation guide).

Ask your payroll provider for reports that show:

• Overtime premium as its own earnings code, by employee and totaled by class code. In California the total is by type of operation.
• Straight-time pay for all hours, so the premium portion can be subtracted.
• Shift differentials separately from overtime, because they are not excludable.
• Tips separately from service charges and automatic gratuities, with the customer-facing charge and the amount paid to staff.
• Each bonus type, with the period it was earned.

Then reconcile the totals with your quarterly payroll tax filings so the auditor can tie the categories together. Our workers' comp audit checklist lists the full set of records, and our seasonal staff guide covers payroll that swings through the year.

• Which state's manual applies to each location, and does it exclude the premium portion of overtime?
• Does our payroll report meet the "by employee and in summary by classification" requirement?
• How will automatic gratuities or service charges paid to staff be counted?
• If an included officer or owner has a payroll limit, is it applied after the overtime exclusion? North Carolina and New York apply limits after the overtime deduction (NCRB, Rule 2-D, NYCIRB, Rule V).

If you want help with the coverage questions behind your payroll, you can request coverage help from PolicyBenchmark.