Operating a business means spending a lot of time calculating employees’ salaries or wages. The task becomes even more complicated if employees work overtime since extra work is paid differently.
Calculating overtime depends on different factors, such as the state, industry, type of employees, etc. But it’s critical to meet all the Fair Labor Standards Act (FLSA) standards to avoid trouble.
This guide focuses on all details you need to know about overtime pay and how to calculate it. Moreover, the article describes potential penalties for not calculating overtime properly.
What Is Overtime Pay?
Overtime (OT) pay is additional payment employers owe to their employees when they work more than usual or agreed upon. A worker can work for a maximum of 40 hours a week, and extra time should be paid as extra time. If an employee works 50 hours, an employer should pay 10 extra hours at an overtime pay rate.
Overtime payment is always more than regular pay. Typically, overtime is 1.5 times the base pay rate, known as time and a half. If an employee makes $22 an hour, then their overtime rate is $22 x 0.5 = $11, so $22 + $11 = $33. Suppose an employee works 48 hours, so their pay, including overtime, should be:
- $22 x 40 = $880 (base pay)
- $33 x 8 (extra time) = $264
So, the total amount an employer should pay is $1144. But let’s dive into the details and potential exemptions.
How Does Overtime Work?
When employees work more than a regular number of hours during a week, they must be compensated at a different rate as they work overtime. Pay for overtime work is always higher than regular pay. Moreover, there is a minimum amount an employer must pay, but they can offer even better conditions to attract valuable employees.
In the US, when it comes to hourly employees, the federal minimum for overtime must be paid 1.5 times the base hourly rate whenever an employee works over 40 hours a week. However, salaried employees also may expect overtime payment, even though typically they are exempt.
If a salaried employee makes less than $684, they can receive overtime pay. Employers can include bonuses and incentive payments to meet the 10% of salary threshold.
Calculating Overtime Pay
There are several different methods to calculate OT pay. The method depends on the employee: whether they are salaried, get hourly pay, or are paid at a different rate. Let’s check all these methods with examples below.
Hourly Wage
Overtime pay for hourly workers is calculated differently. Here are all calculations you have to do to calculate OT:
- Base rate = regular pay rate x 40
- OT pay = overtime pay rate x number of overtime hours
- Total pay = OT pay + base rate
A person needs the regular pay rate, number of hours worked, overtime pay rate, and number of overtime hours to calculate total pay for hourly employees. Let’s take a look at calculation examples.
It’s relatively easy to calculate overtime pay (hourly wages). Before making any calculations, make sure to check whether your state counts overtime daily or weekly.
Suppose the employee worked a 46-hour week. A regular pay rate is $17, overtime is 6 hours. Now let’s determine the total amount owed:
- $17 x 40 hours = $680
- $17 x 1.5 x 6 hours = $153
- 680 + 153 = $833
An employer owes $833 to their employee.
Salaried Employees
It’s slightly more complicated to calculate overtime when it comes to salaried employees, but it’s possible with the aid of examples.
Typically, the first step is to figure out what the salaried employee makes per hour. Determine the weekly salary and divide it by hours worked per week. Let’s take a look at the example.
Look at the example. Suppose Emily has a fixed schedule, and typically, she makes $530 a week while working 40 hours. But during one week, she worked more than 40 hours — 47 hours.
An accountant calculating overtime has to divide the weekly pay by the number of hours worked in a week. The accountant has all the data needed:
- overtime hours — 7 hours
- regular weekly pay — $530
The accountant has to calculate the hourly rate:
$530 / 40 = $13.25
The regular pay rate is $13.25, so now the accountant can calculate total pay by doing these simple calculations:
- 7 OT hours x $13.25 = $92,75
- $92,75 + $530 = $622,75
The overtime pay is $92,75, and the total amount owed is $622,75.
Multiple Pay Rates
It’s common for some employees to commit to two different roles. If that’s the case, they qualify for multiple rates. If a worker is doing two types of work with different compensation and works overtime, the regular rate is the calculated median.
Suppose Irene works 47 hours a week, so 7 hours overtime. But she works 7 hours at a rate of $12 an hour and 40 hours at $25 an hour. But Irene worked 7 hours overtime at the second rate ($25). So, here’s how an accountant should calculate Irene’s total pay:
- 7 x $12 (the first rate) = $84
- 40 x $25 (the second rate) = $1000
- $84 + $1000 = $1084
Now the accountant should estimate how much Irene makes per hour:
$1084 / 47 = $23
Irene is compensated at an average rate of $23 an hour. An accountant must multiply $23 by 0.5 (overtime compensation). Now let’s see the overtime pay calculation:
$23 x 0.5 = $11.5
Irene’s OT is an extra $11.5 per hour above her average hourly wage. Now the accountant should multiply $11.5 by 7 (OT) to determine her overtime pay:
$11.5 x 7 = $80.5
So, 47 hours enables Irene to make $80.5 + $1084 = $1164.5
Who Are Exempt From Overtime Pay?
Some employees are exempt from receiving overtime pay because of the nature of their work. Typically, an employee has to be strictly classified as having a special job or duties.
The Fair Labor Standards Act (FLSA) differentiates the following types of jobs as exempt:
- executive;
- specific computer work;
- administrative;
- professional;
- outside sales.
Note: exemptions are based on the type of job an employee is doing. If an employee has a title classified as an exemption, but they do a job that requires overtime pay, then an employee must pay OT.
Calculating Overtime Pay For Exemptions
As mentioned, exempt employees who make less than $684 can expect overtime pay. But how do you calculate this pay? Choose one of these methods.
Method 1
Typically, salaried employees work 2080 hours per year. It includes 50 weeks of work plus two weeks of vacation. Accountants can calculate the employee’s hourly rate according to hours of work.
Suppose Mark gains an income of $25,000 annually. Divide $25,000 by 2080 to get an hourly rate of $12. Use this hourly rate to calculate OT pay.
Suppose Mark works 45 hours per week. So, their base pay is 40 x $12 = $480. Then overtime pay is $18 ($12 x 0.5 = $6 extra, so $12 + $6 = $18). Employee’s 5 hours of overtime cost $18 x 5 = $90. So, total weekly pay is $570, and a monthly salary is $2280.
Method 2
There’s one more option to calculate overtime. Take a worker’s pay for a week and divide it by the typical work hours during that week.
Suppose Emily is an office worker, and she makes $520 a week. Emily works 43 hours a week instead of the traditional 40, so her hourly pay is $520 / 40 = $13 an hour.
Emily works 3 hours of overtime. Overtime is $19.5, so her compensation is $19.5 x3 = $58.5, and her total weekly income is $58.5 + $520 = $578.5. Emily’s monthly salary is $2314 if she continues to work three hours overtime.
Penalties For Not Paying Overtime
It’s true that calculating overtime can be complicated, but it’s important to pay employees according to FLSA requirements. If the agency audits your company or an employee reports you’re not paying enough, your company may get into trouble.
Not meeting FLSA makes a company liable to pay for those unpaid overtime hours. Moreover, the company will face strict penalties from the state or FLSA. The penalty may include liquidated damages to employees and civil penalties.
Typically, employers also have to pay for employee bills incurred as a result of seeking legal advice. And if an employer keeps breaking the rules, they will face criminal charges. The key takeaway is that it’s cheaper to calculate overtime accurately, and pay employees on time, than having to deal with lawsuits.
