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Calculating Overtime Pay: What Employers Should Know Before Payday

by Lauren Berard on Aug 11, 2022 11:06:06 AM

If you have employees working beyond their normal work week, ensuring proper payment of overtime wages is critical to avoid costly penalties. What do you need to know to steer clear of a violation? There are several steps to follow to get overtime pay right. We’ll explain the details here.

To help you understand what you need to do to calculate overtime pay, we’ll discuss applicable laws, who is covered, the rate, and other factors that impact what to pay your workers. After reading this, you’ll be prepared to accurately pay overtime.

What is overtime pay?

Overtime pay is pay for employees who work more than 40 hours in one workweek, or seven consecutive 24-hour periods; a workweek doesn’t have to coincide with the calendar week. It’s important to note that the FLSA doesn’t require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime is worked on such days.

Federal overtime provisions are contained in the Fair Labor Standards Act (FLSA), which request employees be paid at least 1.5 times their regular wage rate for overtime. There are also some state laws that differ from what the FLSA requires, such as greater overtime obligations. You can check your labor department’s website to see if you have a state law in place governing overtime. If your employees are subject to both the FLSA and state law, you’ll need to comply with whichever provisions are more generous to employees.

For the purposes of this article, we’ll focus on FLSA overtime rules.

Who is exempt from overtime pay?

Most employers are subject to the FLSA so odds are you need to comply with the law. Essentially, if you’re engaged in interstate commerce or have annual revenues of more than $500,000, you’re covered. Yet that doesn’t mean all your employees are eligible for overtime. Those who are exempt most commonly fall under one of the overtime exemption categories:

  • Administrative
  • Executive
  • Professional
  • Computer
  • Outside sales
  • Highly compensated individuals

However, lower-paid salaried employees, even if they fall within one of these categories, may still qualify for overtime if they are paid less than $684 a week and they track their hours. We’ll discuss later how to calculate overtime pay for these employees.

How is overtime calculated?

As we mentioned earlier, the FLSA requires that employees be paid at least one and a half times the regular wage rate for all hours worked over 40 in one workweek. We’ll break down how to calculate overtime for both hourly and exempt employees.

Hourly Employees

When determining overtime, an employee’s “regular wage rate” generally includes all compensation, with a few exceptions. So things like piece rate or bonus pay are also taken into account. After calculating total compensation, divide it by all the hours worked during the workweek to determine an employee’s regular wage rate.

To figure out the hours an employee worked, you need to consider all compensable time, which can even include: 

  • Unauthorized work time if the employer knows or has reason to know and would benefit from it 
  • Time an employee is not able to effectively use for their own purposes 
  • Time an employee spends on preparatory and concluding activities like putting on and taking off gear 
  • Travel time other than normal commuting to and from work 
  • Job-related meetings and training 
  • Other time spent at the employer’s request or discretion

Now that we have all the factors needed to run a calculation, let’s look at an example. Say an employee worked 44 hours in the workweek. To calculate overtime, and total pay, follow these steps:

  • Multiply regular pay rate x 40 hours = regular pay
  • Multiply regular pay rate x 1.5 x 4 hours = overtime pay
  • Add these two amounts together to get the total pay for the week

In addition to this more straight-forward calculation, keep in mind that you may have certain employees you pay a shift differential. And calculating overtime for these workers requires a different calculation.

Instead of calculating overtime at a straight 1.5 times a worker’s hourly rate, if you also pay them a shift differential, you’ll need to calculate that into their regular rate first. That’s because the law considers shift differential pay to be part of an employee’s regular pay rate. Here’s an example from the Department of Labor (DOL).

A personal care assistant at an assisted living facility is paid $8 an hour and overtime for hours worked over 40. She also receives a $1 shift differential for each hour she works on an evening shift. In a given week, she works 3 8-hour day shifts at $8 an hour and 3 8-hour evening shifts at $9 an hour.

Straight-time Computation

3 days x 8 hours/day x $8/hour

$192

3 evenings x 8 hours/evening x $8/hour

$192

3 evenings x 8 hours/evening x $1/hour (shift differential)

$24

Total Straight-time Earnings

$408

Regular Rate and Half-time Premium Computation

$408 (total straight-time compensation) / 48 hours

$8.50 (regular rate)

$8.50 (regular rate) x ½ (premium)

$4.25 (half-time)

$8.50 (regular rate) + $4.25 (half-time premium) 

$12.75 (overtime rate)

Total Compensation Calculation

40 hours x $8.50 (regular rate)

$340 (straight-time earnings)

8 overtime hours x $12.75 (overtime rate)

$102 (overtime earnings)

Total Earnings

$442

 

Exempt Employees

As we discussed earlier, some lower-paid exempt employees can also be eligible for overtime. To calculate overtime pay for these workers, there are two methods you can use:

  1. Since an exempt worker’s salary is based on 2080 hours, you can calculate the employee’s hourly rate based on that. So if the employee makes $31,000 a year, you’ll divide $31,000 by 2080 hours, giving you an hourly rate of $14.90 that you can use to calculate overtime.
  2. You can also take the employees pay for a week and divide it by the normal hours worked in that week. So if they’re paid $500 a week and is expected to work 36 hours, their hourly rate would be $13.89 an hour.

Like hourly workers, overtime for exempt employees begins at 40 hours.

When does overtime need to be paid?

Normally, overtime pay earned in a particular workweek must be paid on the regular pay day for the pay period in which the wages were earned. So if you pay weekly, then it must be paid weekly. If your payroll is bi-weekly, then you’ll pay it bi-weekly, although the amount is still based on a 40-hour workweek.

What are the consequences of FLSA overtime violations?

If you’re found to have incorrectly calculated overtime or not paid overtime when it was due, you have to pay back wages for the time worked. If you neglect to pay overtime properly and a complaint is filed with the DOL, you’ll pay damages, penalties, and a fine. You may also face additional damages if you violate state laws.

How to Ensure Correct Overtime Calculations

Calculating overtime isn’t as straightforward as it may initially seem, especially if you have to take into account other factors like shift differentials. Yet with the DOL cracking down on labor law violations, it’s critical to get calculations right to avoid enforcement action. But that’s not all you need to worry about. The DOL isn’t just looking at payroll records during an audit – they’ll also look for compliance with other aspects of the FLSA as well as proper exempt/non-exempt determinations, notice postings, and more. To find out how to stay compliant with the FLSA overtime provisions, read our next article on overtime rules.

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