Not paying employees adequately for hours they've clocked in can have devastating consequences.
A Pennsylvania home care agency was recently ordered to pay $1.16 million in salaries and damages after a Department of Labor found it didn't correctly compensate its employees' overtime hours.
Besides not including employees' bi-weekly hazard pay bonus when calculating overtime, the agency failed to provide relevant and accurate records, as required by the law.
Although calculating overtime may seem pretty straightforward, quite a few issues may confuse and result in costly errors in practice. To help you prevent such undesirable outcomes, we've done thorough research and gathered our findings in this brief but essential guide on calculating overtime pay.
The Fair Labor Standards Act defines overtime pay as additional compensation guaranteed to all non-exempt workers for any extra hours worked over 40 hours in a workweek.
In addition to FLSA, some states have their overtime laws. These laws often exceed federal regulations and may require daily overtime pay or double-time compensation.
The FLSA also requires companies to keep track of employees' hours 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, it is irrelevant which method they'll choose, as long as the records are compliant.
However, for an employer, such a decision can be crucial. Unfortunately, not all of 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.
With a GPS-based time tracking app, you can ensure your timesheets are exact, overtime hours are adequately paid, and the records are compliant with all the relevant laws.
The federal rate for overtime compensation is time and one-half the regular hourly pay rate.
However, California overtime law, for example, sets a different overtime pay rate for those working more than 12 hours in one day and more than 8 hours on the seventh day of a workweek. In such cases, employers in California should compensate their employees' overtime hours no less than twice the standard pay rate.
To calculate the overtime pay, you should always check your state's labor laws, which are available at your state's Labor Departments. If the requirements set by the state's law are different from those in the federal, ensure you meet the stricter ones.
To know how to calculate overtime pay, first, you need to determine which of your workers are eligible to receive overtime paycheck. As an employer, you are responsible for any overtime hours that are not adequately compensated. To prevent negative consequences, you need to be very 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 the overtime pay of at least 1.5 of the standard pay rate for each hour over 40 in a workweek.
But this Act also sets exemptions from minimum wage and overtime salary. Exemptions include those working as bona fide executive, professional, administrative, outside sales, and certain computer employees.
For hourly workers, the case is straightforward - each one of them is entitled to overtime pay.
However, when it comes to salaried employees, they can either be exempt or non-exempt, depending on specific job responsibilities.
You can consider an employee exempt if they meet specific criteria set by the Fair Labor Standards Act. These criteria are:
If you are unsure how to calculate overtime pay, consider that exemptions set by this Act do not include salaried "blue-collar" or manual workers.
In addition, certain professionals, who would otherwise be regarded as exempt, such as paramedics, police, firefighters, and other first responders, paralegals, and practical nurses, are omitted from exemptions. As these professions are very likely to endure long hours, the law protects them from being underpaid or overworked by guaranteeing overtime pay for any extra hours.
The biggest mistake you can make is to decide that an employee is not entitled to overtime pay solely because they are salaried or by their job title.
When wondering how to calculate overtime pay, it is best to approach each potentially exempt employee individually. For classifying your employee as exempt, check the FLSA requirements and determine whether they match all the criteria mentioned above.
To accurately calculate overtime wage for an employee, you'll need to determine their regular hourly pay rate first. Then, the standard pay rate will be used for your further calculations. Once you've done that, the rest should be pretty straightforward.
The regular pay rate is a worker's average hourly rate. For non-exempt workers, the minimum wage at the federal level is $7.25 per hour.
But, as we've already mentioned above, most states also have their own minimum wage laws. In cases where an employee is covered both by the state and federal laws, they are entitled to receive a higher salary.
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 50 hours.
Noah's overtime pay is based on the Illinois overtime law, as the minimum wage is set at $12 per hour, higher than the federal.
Thus, his overtime rate is at least $6 per hour, in addition to the standard hourly rate.
The calculation of Noah's total weekly compensation for that week will be:
50 hours x $12 standard pay rate = $600
10 hours x $6 overtime pay rate = $60
Total weekly paycheck: $660
It is also possible that Noah works two different jobs at Barka Inc. at two different rates. Besides 20 hours on a job paid $12 per hour, Noah clocked in 30 hours at a $20 hourly rate.
If this is the case, the calculation will somewhat differ. For example, Noah's standard pay rate will be the weighted average of the two hourly rates, and calculating overtime will look like this:
$12 x 20 hours + $20 x 30 hours = $840
$840 / 50 hours = $16.8 (weighted average rate)
$16.8 x 1.5 (overtime rate) x 10 hours (overtime) = $252
$840 + $252 = $1092 (total)
As we've mentioned above, some of your lower-paid exempt workers who receive less than $684 per week may be qualified for overtime pay. To calculate overtime in such situations, use the same overtime procedure as for your hourly workers.
Start with determining employees' standard rate. You can calculate it by dividing an employee's total wage in a workweek by the number of hours the wage is intended to reimburse.
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, working in Barka Inc. for $500 per week. Last week he worked an additional 10 hours.
If the wage is intended to compensate Noah for the standard workweek of 40 hours, and he earns $500 per week, you will find his standard hourly rate is $12,5 by dividing 500 by 40.
Then, you will calculate Noah's overtime compensation as you do for your hourly employees.
50 hours x $12,5 standard pay rate = $625
10 hours x $6,25 overtime pay rate = $62,5
Total weekly paycheck: $687,5
Situation 2: More than 40 hours of the fixed workweek
In this example, Noah's fixed workweek is set at 50 hours, and the $500 wage is intended to reimburse it. If this is the case, his standard hourly rate is $10.
So how to 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. However, Noah is still underpaid when it comes to 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))
$500 + (($10 x 0.5) x 10h))
$500 + ($5x10h)
$500 + $50
Total salary= $550
But, let's say our Noah here has been very busy. He has clocked in 60 hours during his fixed 50-hour workweek on a $500 wage. How to 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))
The calculation may look something like this:
$500 + (($10 x 0.5) x 10h)) + (($10 x 1.5) x 10h))
$500 + ($5 x 10h) + ($15 x 10h)
$500 + $50+$150
Total salary = $700
Situation 3: Less than 40 hours of the workweek
Noah might also be working the 35 hours workweek 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. The first five additional hours, up to 40 hours of a standard workweek, are calculated at the regular pay rate. And the 10 hours Noah worked over the standard 40 hours are calculated as the overtime, using the overtime pay rate. We can determine Noah's standard pay is 14,30.
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 ))
$500 + ($14,3 x 5h) + (($14,3 x 1.5) x 10h))
$500+ $71,5 +$214.5
Total wage: 786
Situation 4: Flexible Workweek
Noah can also work flexible work weeks, and his salary compensates for the workweek no matter how many hours he works. If this is the case, his standard pay rate (and thus the overtime pay rate) will increase or decrease, depending on how many hours he clocked in each week.
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 decide to include paid time off when calculating overtime pay.
In addition, you should know that substituting employees' overtime pay with paid time off is not legal in the private sector.
For an employer, it's essential to be well aware of both the federal and state overtime laws when it comes to calculating overtime pay. They should also be highly cautious when classifying an employee as exempt and deciding not to compensate them for overtime hours.
Besides that, choosing a reliable time tracking solution can make all the difference in the relevancy and accuracy of your data, payroll, and record compliance.