Giving your employees the opportunity to log overtime hours enables you to meet the demands of busy periods and staff shortages without having to bring on extra staff. Your employees earn more, and you, as an employer, reap the benefits of higher workforce efficiency.
But administratively, overtime can be more complicated than it seems. It’s rarely a case of making a simple time-and-a-half adjustment to your workers’ compensation. There are a number of FLSA rules that you must consider when calculating overtime. Fail to abide by these regulations, and you could find yourself the target of a Department of Labor investigation and liable for back pay, damages, and penalties.
Overtime compensation rules are labor regulations established by the Fair Labor Standards Act (FLSA) designed to protect workers. The FLSA defines overtime as all hours in excess of 40 worked in a single workweek. The first 40 hours are referred to as regular time; any hours beyond 40 are considered overtime. It also defines a workweek as a regularly recurring period of seven consecutive days.
Some employees are exempt, such as commissioned salespeople, farm workers, and employees of seasonal businesses. All employees who are not specifically exempted by the Act must receive overtime pay at a minimum of one and one-half times their regular pay rate, even if they are paid on a salaried basis.
Overtime must be paid to salaried non-exempt employees even when a fixed salary for a regular workweek in excess of 40 hours has previously been established. By law, employers are not allowed to waive overtime pay, and no other agreement or arrangement between an employer and their employees negates this duty.
How Do I Calculate Overtime?
Overtime hours must be calculated for each workweek, not by pay period. Only hours actually worked are counted in the overtime calculation. Paid hours that are not worked, like vacation and sick time, are generally not included.
How To Calculate Overtime for Salaried Employees vs. Employees Paid Hourly
One of the most important things to remember about overtime is that it’s calculated differently for people on salary than for people paid hourly. Let’s take a look at a couple of example overtime calculations that illustrate the difference.
Overtime for an Employee Paid Hourly
Company X pays employees on a biweekly schedule and pays time and one-half for overtime worked. Donald’s regular pay rate for working as a security guard for Company X is $20 per hour. In the first week of this pay period, he worked 56 hours; in the second week, he worked 26 hours and took two vacation days at 8 hours each. What is Donald’s total gross pay for this pay period?
Week 1: Regular pay: 40 hours × $20 = $800; Overtime pay: 16 hours × 1.5 x $20 = $480
Week 2: Regular pay: 26 hours × $20 = 520; Vacation pay: 16 hours × $20 = $320
Total gross pay for this pay period: $800 + $480 + $520 + $320 = $2,120
Although the total number of hours paid in week 2 exceeded 40, the total number of hours worked did not; therefore, no overtime pay is due to Donald in week 2.
Overtime for a Salaried Employee
Mary is an assembly line worker who receives a fixed salary of $500 per week based on a 50-hour workweek. Does she receive overtime pay? If so, what is her gross pay for a week in which she worked 50 hours?
Yes, Mary receives overtime pay as she is a non-exempt employee.
Average hourly rate for earnings: $500/50 hours = $10 per hour
Overtime pay: 10 hours × 1.5 × $10 = $150
Total gross pay: $500 + $150 = $650
How To Calculate Overtime for Employees Completing Multiple Types of Work
If an employee completes two or more types of work for which different pay rates have been set, a weighted average must be employed to determine the regular pay rate for that week to calculate overtime pay. Take a look at this example to see how this kind of overtime is calculated.
Stephen works two different jobs at The BIG Corporation: he’s both a janitor and a shipping clerk. He receives a regular rate of $12 per hour for his janitorial duties and $16 per hour for his work as a shipping clerk. This week, he worked 26 hours doing janitorial work and 28 hours in the shipping department. How should his total gross pay be calculated?
Regular earnings for janitorial duties: 26 hours × $12 = $312
Regular earnings in shipping department: 28 hours × $16 = $448
Total regular earnings: $312 + $448 = $760
Weighted average of earnings: $760 ÷ 54 hours worked = $14.07 per hour
Total gross pay: (14 hours × 0.5 × $14.07) + $760 = $858.49
To arrive at the total gross pay, the number of overtime hours is multiplied by one and one-half times the weighted average of earnings and added to the total regular earnings. The regular earnings calculation already includes straight-time pay for hours of overtime worked.
How To Calculate Overtime With Premium Pay
Premium pay must be included in the calculation of regular time pay for purposes of determining overtime pay. Shift pay, holiday pay, weekend pay, discretionary bonuses, and other exceptions need to be added to the computation for the regular pay rate before determining the overtime pay.
Take a look at an example of an overtime calculation for an employee who also has premium pay considerations.
It’s the end of the year, and Patrice, a barista, has been working at a coffee shop in the lead-up to Christmas. Patrice worked 50 hours during the week at $18 per hour. She also worked 10 additional hours on the weekend, which included a special pay increase to $23 per hour. Patrice also won the shop’s Employee of the Year award, which comes with a $500 bonus.
Does Patrice receive overtime? If so, what does their total pay packet amount to when the various kinds of applicable premium pay are factored in?
Yes, Patrice receives overtime pay.
To calculate the overall amount due, first, we need to establish the regular pay and premium pay owed.
$18 per hour x 40 hours = $720
$23 per hour x 10 hours = $230
Total regular earnings:: $720 + 230 = $950
Total earnings with bonus: $950 + $500 (bonus) = $1,450
Weighted average of earnings: $1,450 ÷ 50 hours = $29/hour (regular rate)
Overtime pay rate: $29 x 0.5 = $14.50 (half-time premium pay rate because the straight-time hours are accounted for in the regular pay calculation, also as shown in a previous example)
Total Overtime pay: $14.50 x 10 overtime hours = $145
Total gross pay: $1,450 + $145 = $1,595
Can I pay Compensatory Time Instead of Overtime?
Compensatory (comp) time is not allowed in lieu of overtime pay for non-exempt private sector employees covered under the FLSA. Under certain conditions, state and local government agencies can satisfy overtime payments by granting comp time equal to one and one-half times the number of overtime hours. See the U.S. Wage and Hour Division of the Department of Labor Fact Sheet #7 for details.
Overtime calculations can be highly complex and may depend on factors such as state or local laws and regulations. They can also be affected by corporate or union agreements or by special rules for businesses like restaurants, where it is common for employers to apply a tip credit to employees’ pay. It all adds more complexity to your job when calculating overtime. Consult with your CPA for help navigating overtime rules for your business’s specific needs. Links to information regarding individual state labor laws can be found on the DOL website.
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