How to Calculate Overtime Pay
If you have non-exempt employees on your payroll that work more than 40 hours in a given workweek, you will need to pay them overtime. For hourly employees, overtime can be fairly simple. However, payroll can become difficult when working with different types of schedules and pay rates. Thankfully, the Fair Labor and Standards Act and new rulings from the Department of Labor (DOL) have covered a lot of ground in what constitutes overtime pay.
Who is Eligible for Overtime?
Overtime is only mandatory for non-exempt employees. According to the DOL, exempt employees typically make less than $684 each week or $35,586 per year at their position. Non-exempt employees are entitled to both a federal minimum wage and overtime pay. These workers typically make less judgement calls and often do repetitive tasks that require direct supervision instead. Exempt employees (including some teachers, professionals, and computer-based employees) are not entitled to overtime.
What is Overtime?
The FLSA states that overtime is the rate at which an employee must be paid after 40 hours in a given workweek. This rate is no less than 1.5 times the non-exempt employee’s regular rate of pay. You can envision the basic equation for overtime like this:
Regular Rate x 1.5 = Overtime Pay Rate per Hour
The Department of Labor also defines a few of these important terms which are essential to understanding overtime and total compensation.
The regular rate is defined by the DOL as “the employee’s total pay (except for certain statutory exclusions) in any workweek [divided by] the total number of hours actually worked in that week.” Because overtime is directly calculated from this number, it is the first important factor to understand.
For hourly employees, this rate is often fixed to a single amount. However, the regular rate may change with different payment methods, bonuses, or hourly agreements. In all cases, you can visualize it like this:
Total Weekly Pay ÷ Hours Worked = Regular Rate
A workweek is defined as “Any regularly recurring period of 168 hours” or “seven consecutive 24-hour periods.” This definition is important because it narrows the requirement of overtime to a strictly numerical threshold and allows for variety when jobs require different types of schedules. It also means that, weekends, holidays, and overnight shifts are not necessarily considered overtime unless the employee exceeds their 40 hours for that workweek during those times.
Calculating Regular Rate
Because overtime is in direct relation to the regular rate, you will want to calculate the regular rate of the employee first. This rate is calculated based on weekly pay. Depending on the payment rate and schedule, this can take a number of forms.
If an employee is paid by the hour, this hourly rate is often fixed at a specific amount. In this case, calculating overtime pay is simple. For example, let’s say this employee makes $10 per hour and worked 47 hours this workweek. Assuming this employee received no bonuses, regular rate is already fixed at $10. You can then calculate overtime like this:
Straight Pay: $10 per hour x 40 Hours = $400
Overtime rate: $10 per hour x 1.5 overtime rate = $15 per hour
Overtime Pay: $15 per hour x 7 hours = $105
Total Compensation: $400 Straight Pay + $105 Overtime Pay = $505
You can also calculate overtime pay separately (as an additional expense) by calculating the total number of hours worked at the regular rate first. Then, you simply multiply the overtime hours by the remaining .5 times the amount of the employee’s regular rate. You can visualize it like this:
Straight Pay: $10 per hour x 47 hours = $470
Extra Overtime Rate: $10 per hour x .5 = $5 per hour
Extra Overtime Pay: $5 per hour x 7 hours = $35
Total Compensation: $470 Straight Pay + $35 Extra Overtime Pay = $505
These methods both yield the same result with hourly workers, but using the second method becomes useful when calculating overtime with bonuses and for different types of employee schedules.
Fluctuating Workweek Method
The fluctuating workweek method is used for non-exempt employees with hourly schedules that vary for each week. In order for this method to apply, an employer and employee must agree to a fixed weekly salary regardless of the amount of hours worked.
Under this type of agreement, an employee may work 37 hours one week and 40 hours the next week. However, the employer will pay the employee the same weekly salary for both of these weeks. This rate may be any amount, as long as it does not force the employee below the federal minimum hourly wage.
As non-exempt employees, these workers are still entitled to overtime pay after 40 hours in a given workweek. However, due to the unique schedule and pay rate, business-owners have an advantage when calculating overtime for a fluctuating workweek.
For example, let’s say an employee’s weekly salary is agreed to be $650 for all workweeks 40 hours or less. One week, the employee works 47 hours.
First, you will need to calculate the regular rate per hour based on the FLSA definition. In a fluctuating workweek, this will change based on the total number of hours worked. Assuming this employee earned no bonuses, we can calculate the regular rate like this:
Regular Rate: $650 weekly Salary ÷ 47 hours worked = $13.83 per hour
If the same employee worked 52 hours, the regular rate would change like this:
Regular Rate: $650 Weekly Salary ÷ 52 hours worked = $12.50 per hour
Then, you will want to calculate the overtime and total compensation like this:
Straight Pay: $13.83 regular rate x 47 hours = $650.01
Overtime Rate: $13.83 x .5 = $6.92 per hour
Overtime Pay: $6.92 x 7 hours = $48.44
Total Compensation: $650.01 Straight Pay + $48.44 Additional Overtime Pay = $698.45
This method provides an advantage to the employer because it allows overtime rate to be calculated at .5 instead of 1.5. Because the employee earns a weekly salary regardless of hours worked, part of the overtime rate is absorbed when calculating the regular rate and straight pay amounts.For more information on new legislation for this method click here.
Some employees agree to be paid on a piece rate. This means that the employee’s total compensation is directly related to how many pieces or projects an employee completes in a workweek (i.e. $1.50 per piece). However, if this employee is required to work more than 40 hours in that workweek, you will still have to pay them overtime.
For example, let’s say this employee is a T-Shirt printer who gets paid $1.50 for each shirt printed. If this employee prints 405 shirts in one workweek and works 40 hours or less, the total compensation would be $607.50 ($1.50 per shirt x 405 shirts = $607.50).
However, if the employee prints the same amount of shirts (405) but it takes 45 hours to complete the production for the workweek, this employee’s total compensation would need to include overtime. Because the employee does not have a regular hourly rate, this will need to be recalculated based on the hours worked.
First, calculate the regular rate like this:
Regular Rate: $607.50 ÷ 45 hours = $13.50 per hour
Now, we can use the regular rate to calculate overtime pay and total compensation for this employee. However, it will be different from the fluctuating workweek. In this method, the weekly pay cannot absorb part of the overtime rate. Instead, overtime must be calculated as an additional hourly rate and added to what the employee already earned per piece. In other words, it must be calculated like this:
Straight Pay (Per Piece): $1.50 per Piece x 405 Pieces = $607.50
Overtime Rate: $13.50 Regular Rate x 1.5 = $20.25
Overtime Pay: $20.25 x 5 Hours = $101.25
Total Compensation: $607.50 Straight Pay + $101.25 Overtime Pay = $708.75
Depending on state law, you may need to calculate overtime per piece or weekly salary by 2 times the regular rate.
The DOL distinguishes between two different types of bonuses when calculating overtime. These are discretionary and non-discretionary bonuses.
Discretionary bonuses are given at the discretion of the employer for hard work or as a reward for meeting a subjective goal. It is important that the amount of a discretionary bonus not be disclosed prior to the employee receiving it. Since they are by definition unexpected gifts or rewards, discretionary bonuses are not factored into an employee’s regular rate. Recent legislation has expanded the definition of this kind of bonus to allow employers to give more of them without consideration to overtime pay. Click here to learn more about what is considered a discretionary bonus.
Non-discretionary bonuses are incentives promised for meeting a particular production or project-based goal. The amounts for these bonuses are (to some degree) expected and disclosed beforehand. Because of this, non-discretionary bonuses (including commissions) must be factored into the employee’s hourly rate.
Fluctuating Workweek with Non-Discretionary Bonus
In some cases, you may have a non-exempt employee with a fixed weekly salary who also receives a non-discretionary bonus for meeting a goal which was laid out beforehand. Assuming the fluctuating workweek method applies to the employee’s hourly schedule, calculating overtime only requires factoring in one extra number.
Let’s say this employee earns a weekly salary of $800. This week, they work 50 hours and also earn a $100 bonus for meeting a goal. You can first calculate the regular rate like this:
Total Week Pay: $800 Weekly Salary + $100 Non-Discretionary Bonus = $900
Regular Rate: $900 ÷ 50 hours = $18.00 per hour
You can then calculate total compensation like this:
Straight Pay: $18.00 x 50 hours = $900
Overtime Rate: $18.00 x .5 = $9.00 per hour
Overtime Pay: $9.00 x 10 hours = $90
Total Compensation: $900 Straight Pay + $90 Overtime Pay = $990
However, if this $100 bonus is gifted to the employee in appreciation for his or her proven hard work and dedication, this would most likely be considered a discretionary bonus. In this case, you would not need to factor in the $100 bonus. Instead, you could use the fluctuating workweek method to calculate overtime based on the regular weekly salary ($800 in this case).
Basic Hourly Rate with Non-Discretionary Bonus
Let’s look at a situation with an hourly-rate, non-exempt employee who also earns a non-discretionary bonus. In this instance, the employee makes $15 per hour. They also earn a $200 bonus for making the most boxes, and they worked for 50 hours this week. Even though the employee has a fixed hourly rate, the regular rate will change with this type of bonus. You can calculate it like this:
Total Week Pay: ($15 x 50 hours) + $500 = $1250
Regular Rate: $1250 ÷ 50 hours = $25 per hour
Now that we have the regular rate, we can calculate overtime pay and total compensation as usual:
Straight Pay: $25 per hour x 50 hours = $1250
Overtime Rate: $25 per hour x .5 = $12.50 per hour
Overtime Pay: $12.50 per hour x 10 hours = $125
Total Compensation: $1250 Straight Pay +$125 Overtime Pay = $1375
When calculating overtime for non-exempt employees, it is important to consider the different methods allowed for the employee’s salary. If you are ever in doubt about calculating overtime for this week’s payroll, be sure to consult the Department of Labor’s website and the FLSA for full details. These standards have been enacted to help both employers and employees with regard to fair compensation.