How To Calculate Overtime Pay?
Failing to pay employees correctly for their overtime hours can lead to severe repercussions for any business. Although calculating overtime might seem straightforward, many nuances can lead to costly errors in practice. To help you avoid these mistakes, we've compiled a concise but comprehensive guide on how to calculate overtime pay correctly.
In this article, you'll learn:
- The basics of overtime pay and who's eligible
- How to calculate overtime for both hourly and salaried employees
- The impact of state laws on overtime calculations
- The role of time tracking in ensuring compliance
- How Timeero can simplify your overtime management
Important Employer Alert: The U.S. Department of Labor's critical overtime regulations are now in effect as of July 1, 2024. The salary threshold for overtime eligibility has increased to $844 per week, making more employees eligible. It will further increase to $1,128 per week on January 1, 2025. Ensure your business is compliant by proactively reviewing your employee classifications and payroll systems to avoid potential fines and legal issues.
What Is Overtime Pay?
The Fair Labor Standards Act defines overtime pay as additional compensation (overtime premium pay) guaranteed to all nonexempt employees for any extra hours worked over 40 in a workweek.
For overtime calculations under the FLSA, a workweek is defined as a fixed 7 consecutive 24-hour period (168 hours) that repeats regularly. It's important to note that the workweek doesn't always align with the calendar week.
The FLSA also requires companies to keep track of employees' hours of work and maintain relevant and accurate records. Accurate and relevant data is the key to paying employees adequately and complying with legal requirements.
Employers can choose which time-tracking model they'll use: a time-tracking app, paper-based timesheets for manual tracking, or timesheet software.
Under the law, which method they choose is irrelevant as long as the records are compliant.
But for an employer, such a decision can be crucial - not all these methods can provide complete and accurate records based on verifiable and relevant data. Furthermore, some methods are easily subjected to human error and can be tampered with or exploited.
PRO TIP: Accurate timekeeping is crucial for complying with overtime regulations. A GPS-based time-tracking app like Timeero can ensure precise records, accurate overtime calculations, and compliance with relevant laws.
How Much Is Overtime Pay?
The federal rate for overtime compensation is time and one-half the employee’s regular rate.
In addition to the FLSA, some states have their own labor laws that govern overtime, minimum wage, and employee classifications.
These laws often exceed federal regulations and may require daily overtime or double-time compensation.
Understanding State Labor Laws
State laws vary significantly and sometimes provide greater worker protection than federal laws. Let's see some examples:
Employers must be aware of these differences to ensure compliance with the overtime pay regulations.
Please note that this table provides a simplified, exemplary overview of several state laws across the U.S. Always consult official state labor department resources for the most up-to-date and comprehensive information.
The main points for employers to consider:
- Minimum Wage. Many states have set their minimum wage rates higher than the federal minimum wage of $7.25 per hour. For example, the basic minimum wage in California is $16.00 per hour, while in the District of Columbia, it is $17.00 per hour. Employers must pay the higher state minimum wage where applicable.
- Overtime Pay. States may have different thresholds for when overtime pay kicks in, such as daily overtime or double-time rates. Always refer to your specific state’s labor department for detailed overtime laws.
- Exempt Employee Standards. Each state defines the criteria for exempt employees differently, often setting higher salary thresholds than the federal standards. Employers must meet the stricter federal or state requirements when classifying employees as exempt.
- Local Laws. Some cities and counties have labor laws, including higher minimum wages and additional overtime requirements. Local laws, in addition to state and federal regulations, are essential to consider.
For example, let’s consider a non-exempt employee who works 8 hours on Monday, Tuesday, and Wednesday, 10 hours on Thursday, and only 6 hours on Friday.
This worker's total number of hours for the week (40) would not trigger overtime under federal law. However, under state law, they may be eligible for two hours of overtime pay for the extra hours worked on Thursday.
Do you need state-specific overtime information? Our resources cover overtime laws in California, Texas, Illinois, Florida, Arizona, and New York.
Who Is Eligible For Overtime Pay?
To calculate overtime pay, first, you must determine which workers are eligible to receive overtime paychecks.
As an employer, you are responsible for any overtime hours that are not adequately compensated. To prevent negative consequences, you must be careful when determining whether your employee is exempt or non-exempt.
The Fair Labor Standards Act grants that most workers in the US receive at least the federal minimum wage for all hours they've worked. It also guarantees overtime pay of at least 1.5 times the standard pay rate for each hour over 40 in a workweek.
However, some employees are exempt from these requirements, such as:
- Executives
- Professionals
- Administrative employees
- Outside sales personnel
- Certain computer employees
Hourly workers are always entitled to overtime pay. Salaried employees may be exempt or non-exempt based on their job duties and salary level.
You can classify employees exempt if they meet specific Fair Labor Standards Act criteria. These criteria are:
- Being on a salary
- Earning more than $844 per week (or $43,888 annually)
- Working in an administrative, executive, professional, or outside sales role, as defined by the FLSA.
Certain blue-collar workers, first responders, paralegals, and practical nurses are always eligible for overtime, regardless of salary. As these professions are likely to endure long hours, the law protects them from being underpaid or overworked by guaranteeing overtime pay for any extra hours.
When calculating overtime pay, it is best to approach each potentially exempt employee individually. To classify your employee as an exemption, check the FLSA requirements and determine whether they match the above criteria.
PRO TIP: One of the biggest mistakes employers can make is assuming that salaried employees or those with specific job titles are not entitled to overtime pay. Always determine overtime eligibility based on actual job duties and salary levels, not just job titles. Misclassifying employees can lead to costly fines and legal issues.
How Do You Calculate Overtime Pay?
To calculate overtime pay accurately, you must first determine the employee's regular hourly rate.
Once you've done that, the rest should be pretty straightforward.
Here are the steps for different scenarios when calculating overtime pay for both hourly employees and salaried ones.
How to Calculate Overtime Pay For an Hourly Worker?
The regular pay rate is the worker's average hourly rate. The federal minimum wage for non-exempt workers is $7.25 per hour, but state laws may set higher rates.
Scenario 1. Single Hourly Rate Overtime Calculation
Let's take Noah, for example. He lives in Illinois and works daily shifts at Barka Inc. for a minimum wage. Last week, Noah checked in for 50 hours. Noah's overtime pay is based on the Illinois overtime law, as the minimum wage is set at $14 per hour, higher than the federal.
- Regular pay: 40 hours x $14 = $560
- Overtime pay: 10 hours x $21 (1.5 times the regular rate) = $210
- Total weekly paycheck: $770
Scenario 2. Multiple Hourly Rates & Weighted Average Overtime Calculation
Noah could also have worked two jobs at Barka Inc. at two different rates. In addition to 20 hours on a job paid $14 per hour, Noah clocked in 30 hours at a $20 hourly rate.
Noah's standard pay rate will be the weighted average of the two hourly rates, and calculating overtime will look like this:
Calculate the total regular pay for both jobs:
- 20 hours x $14 = $280
- 30 hours x $20 = $600
- Total regular pay: $280 + $600 = $880
Calculate the weighted average hourly rate:
- Weighted average rate: $880 / 50 hours = $17.60 per hour
Calculate regular and overtime pay:
- Regular pay for 40 hours: 40 hours x $17.60 = $704
- Overtime pay for 10 hours: 10 hours x $26.40 (1.5 times the weighted average rate) = $264
- Total weekly paycheck: $704 + $264 = $968
How to Calculate Overtime Pay for Salaried Employees
As mentioned above, some of your lower-paid exempt workers who receive less than $844 per week may be qualified for overtime pay.
To calculate overtime in such situations, use the same overtime procedure for your hourly workers.
Start with determining employees' standard hourly wage rate. You can calculate it by dividing an employee's total wage in a workweek by the number of hours the wage is reimbursed.
As there are four possible scenarios for salaried employees, your calculations will differ from this moment.
Situation 1: 40 hours fixed workweek
Let's say Noah is a salaried employee at Barka Inc., working for $500 per week. Last week, he worked an additional 10 hours. If the wage is intended to compensate Noah for the standard 40-hour workweek, and he earns $500 per week, his standard hourly rate is $12,50.
- Calculate the regular hourly rate
Weekly salary: $500
Standard workweek hours: 40
Regular hourly rate: $500 / 40 = $12.50 per hour
- Calculate the total pay
50 hours x $12.50 standard pay rate = $625
10 hours x $6.25 overtime pay rate (additional 0.5 times regular rate) = $62.50
Total weekly paycheck: $625 + $62.50 = $687.50
Situation 2: More than 40 hours of the fixed workweek
In this example, Noah's fixed workweek is 50 hours, and his weekly pay is $500. If this is the case, his standard hourly rate is $10. So, how do you calculate overtime pay in such a situation?
Noah's overtime hours - those 10 hours over 40 hours per week - have already been paid $10 per hour on his salary. Still, Noah is still underpaid in terms of overtime pay - he should receive $15 per hour instead of $10.
Thus, his overtime hours should be multiplied by one-half the standard pay rate when calculating overtime pay.
You can best see it in the following formula:
Total Salary: (Weekly Wage) + ((Standard Pay Rate x 0.5) x Overtime Hours between 40 and 50)
So, if Noah works exactly 50 hours:
- Overtime for hours 40-50: 10 hours x $5 (additional 0.5 times regular rate) = $50
- Total pay: $500 + $50 = $550
But let's say Noah has been very busy. He has worked 60 hours during his fixed 50-hour workweek on a $500 wage. How should we calculate overtime pay if this is the case?
Total Salary: (Weekly Wage) + ((Standard Pay Rate x 0.5) x Overtime Hours between 40 and 50)) + ((Standard Pay Rate x 1.5) x Overtime Hours over 50))
If Noah works 60 hours, the calculation may look like this:
- Overtime for hours 40-50: 10 hours x $5 = $50
- The number of overtime hours over 50: 10 hours x $15 (1.5 times regular rate) = $150
- Total pay: $500 + $50 + $150 = $700
Situation 3: Less than 40 hours of the workweek
Noah might also be working 35 hours a week for $500. The previous week, he had 50 working hours. How do you calculate overtime pay?
In this case, not all 15 extra hours he clocked in are calculated as overtime work. The first five additional hours, up to 40 hours of a standard workweek, are calculated at the regular pay rate.
Noah worked 10 hours over the standard 40 hours, which is calculated as overtime using the overtime pay rate. Thus, Noah's standard pay is 14.29.
So, we will use the calculation below:
Total Salary: (Weekly Wage) + (Standard Pay Rate x Unpaid Standard Hours) + ((Standard Pay Rate x 1.5) x Overtime Hours)
- Total Salary: $500 + ($14.29 x 5) + (($14.29 x 1.5) x 10)
- Total Salary: $500 + $71.45 + $214.35
- Total Salary: $785.80
Situation 4: Fluctuating Workweek
Noah works flexible hours, and his salary compensates for the entire workweek, regardless of the number of hours worked. This means his regular rate of pay, and thus the overtime pay rate will vary each week based on the hours he works.
- Calculate the regular hourly rate
Weekly salary: $500
Hours worked: Variable (changes each week)
Regular hourly rate: Weekly salary / Hours worked
- Calculating the pay
If Noah works fewer hours, the regular hourly rate increases.
If Noah works more hours, the regular hourly rate decreases.
Overtime is paid for hours worked over 40 hours a week at 1.5 times the regular hourly rate.
Example A: Noah works 45 hours in a week:
- Regular hourly rate: $500 / 45 = $11.11 per hour
- Regular pay for 40 hours: 40 hours x $11.11 = $444.40
- Overtime pay for 5 hours: 5 hours x $16.67 (1.5 times the regular rate) = $83.35
- Total salary: $444.40 + $83.35 = $527.75
Example B: Noah works 30 hours in a week:
- Regular hourly rate: $500 / 30 = $16.67 per hour
- No overtime since he worked less than 40 hours.
- Total salary: 30 hours x $16.67 = $500
Example C: Noah works 50 hours in a week:
- Regular hourly rate: $500 / 50 = $10 per hour
- Regular pay for 40 hours: 40 hours x $10 = $400
- Overtime pay for 10 hours: 10 hours x $15 (1.5 times the regular rate) = $150
- Total salary: $400 + $150 = $550
While overtime pay increases your employees' earnings, it's important to understand how this additional income is taxed. Check out our article to learn whether overtime also means higher taxes.
Does PTO Count Towards Overtime?
According to the FLSA, employers do not have to count paid time off, vacation, holidays, or personal and sick leave toward overtime. These hours are not actually "worked."
However, while there is no obligation, an employer may include paid time off when calculating overtime pay.
PRO TIP: You should know that substituting employees' overtime pay with paid time off is not legal in the private sector.
Timeero: Your Partner for Precise Overtime Management
Calculating overtime can be complex, especially with varying pay rates, diverse state laws, and the inclusion of bonuses or commissions.
Timeero simplifies this process with its comprehensive features, which are designed to ensure accurate overtime payments and maintain compliance with labor laws.
Here's how Timeero can streamline your overtime management:
Automatic Overtime Calculations
Timeero eliminates the guesswork in overtime calculations. The platform automatically factors in regular pay rates, overtime rates, and other relevant rules to ensure precise calculations for each employee.
For businesses operating in California, Timeero offers specialized features to address the state's unique overtime regulations. With a dedicated "California Overtime" setting, Timeero automatically calculates overtime and double-time pay based on the state's specific requirements, including daily overtime thresholds. This simplifies compliance and reduces the risk of errors or penalties.
Customizable Overtime Rules
Timeero allows you to easily customize overtime rules to align with your specific requirements, whether daily overtime, weekly overtime, or even complex scenarios involving multiple pay rates.
GPS-Based Time Tracking
Timeero's mobile app uses GPS technology to accurately track employee hours, including overtime. This eliminates the need for manual timesheets and ensures that overtime is calculated based on actual work hours.
Break Tracking and Compliance
Besides overtime compliance, Timeero helps you comply with meal and rest break laws, which are often tied to overtime eligibility. The Timeero app lets employees log their required breaks easily and alerts them of potential violations.
Integration with Payroll Systems
Timeero seamlessly integrates with popular payroll software, saving time and reducing errors. With Timeero, you can confidently manage overtime, pay your employees accurately, and maintain compliance with labor regulations.
How to Calculate Overtime Pay: Key Takeaways
Overtime calculations may seem complex but can be a breeze with the right knowledge and tools. Remember these key takeaways:
- Stay informed about the latest federal and state overtime regulations.
- Be thorough in your employee classifications.
- Use technology like Timeero to automate calculations and ensure accuracy.
By taking these steps, you'll protect your business from legal complications and foster a culture of trust and fairness within your workforce.
Ready to simplify your overtime calculations and ensure compliance? Explore Timeero's comprehensive time-tracking solutions today and experience the difference for yourself. Your employees – and your bottom line – will thank you.
Disclaimer: This article provides general information about overtime pay and is not intended as legal advice. Laws and regulations can vary, so always consult with a qualified professional for guidance specific to your situation.
