Calculating Overtime Pay: Tips, Tricks, and Mistakes to Avoid

Overtime pay is based on the idea that employees must be compensated for working more than the standard number of hours in a given week. It is required by federal law.

Unfortunately, there is more to calculating overtime pay than simply understanding federal laws. It can be a huge headache that can result in stress on payroll departments, not to mention unfair pay to employees if it is not tallied correctly.

The good news is that there are some tricks and tips you can employ to make your overtime payroll run as smoothly as possible. The recommendations below will help ensure that your employees are abying paid the accurate amount without too much hassle and stress on your accounting team.

What Is Overtime Pay?

According to the Fair Labor Standards Act (FLSA), a workweek is a fixed, recurring period of 168 hours, or seven consecutive 24-hour days. It can begin any day of the week and any hour of the day. Any work of an employee that goes beyond 40 hours in any given week is subject to overtime pay. 

There are exemptions that your accounting personnel should be aware of. These have to do with the position the employee holds, their responsibilities, how they are paid (salary vs. wages), and their level of pay.

Exemption standards also can vary from state to state. It is important to note that these are changing all the time, and your payroll system should be able to accommodate such shifts with minimal disruptions. Note that when federal laws regarding overtime pay conflict with state and local ones, employers must apply the rate that is most favorable to the employee

Several states have laws that pertain to per-day work. For instance, Alaska, California, and Nevada have laws that require premium pay after a certain number of hours are worked in a single day. This is regardless of how much or little an employee works in that same week.

How to Calculate Overtime Pay

In most cases, overtime pay is calculated as time-and-a-half or 1.5 times the regular rate of pay. For instance, if an employee makes $15/hour, their overtime pay rate would be $22.50/hour ($15 x 1.5).

So, if the employee works six overtime hours in a week, that rate would apply to those hours ($22.50 x 6 = $135), and you would add it to the base 40 hours at the $15/hour rate ($15 x 40 = $600). So their total pay that week would be $735 ($600 + $135 = $735).

Shift Differential

Sometimes employees make different rates for specific shifts. This is most often when doing work during less desirable hours, such as second and third shifts.

It could also be for distinct projects. For instance, an employee might make one rate for regular work for a company, but a special rate when working on a grant project. Whatever the reason for differences, overtime pay must reflect it.

This is done by calculating an “overtime premium rate” that applies to overtime hours. This is based on an “average rate of pay” for that particular week.

For example, say an employee works 30 hours a week on the day shift at $15/hour, and another 16 hours on the second shift at $20/hour. You would first calculate their base pay: ($15 x 30 = $450) + ($20 x 15 = $300) = $750. Then, you would divide the total overtime wages by the total hours to get the regular rate of pay per hour ($750 / 45 = $16.67).

To find their overtime premium rate, multiply that rate by 0.5 ($16.67 x 0.5 = $8.34). Then multiply that rate by the number of overtime hours they worked ($8.34 x 5 = $41.70) and add it to the base pay ($750 + $41.70 = $791.70) to get their total pay for the week.

Note that the FLSA affords exceptions to this standard that allows overtime pay at the “rate in effect,” which is the hourly rate the employee gets whenever the overtime work begins. For instance, if the employee above started the work week with the second shift and ended with the regular shifts, they would only be paid time-and-a-half for the five overtime hours based on their $15/hour rate. Note that most states do not allow this method though.

Overtime for Salaried Employees

Since “type of pay” is one of the FLSA standards, most people assume that overtime pay does not apply to salaried employees. This is incorrect.

Salary is based on the same assumption that an employee will be working a standard 40-hour week. This makes calculating their regular rate of pay pretty easy: simply divide their salary by 40. Time-and-a-half overtime pay is calculated by multiplying that rate by 1.5.

For instance, if a salaried employee makes $1,000/week, that is $25/hour ($1,000 / 40 = $25). Their overtime rate of pay would be $37.50/hour ($25 x 1.5 = $37.50).

States differ in how they calculate the regular rate of pay for nonexempt salaried employees. Payroll departments must abide by those regulations if they differ from those laid out by the FLSA.

Employees With Fluctuating Workweeks

For salaried employees that work fixed workweeks, calculating overtime pay is pretty straightforward. For employees who work different hours each week, the FLSA lays out different standards, namely that employees can compensate them one-half their regular rate of pay for overtime hours.

This does require that other criteria be met. One is that the employees are paid their base salary during weeks when they work less than the regularly scheduled 40 hours. Also, the regular rate of pay must never fall below the federal or state minimum wage.

Finally, the employee must receive at least half-time pay for the overtime hours worked, in addition to their regular salary. Keep in mind that, like with most other standards here, some states do not permit this fluctuating workweek calculation method.

Piece-Rate Work

In some jobs, employers pay workers for the number of pieces they complete, known as “piece-work.” This is common in manufacturing jobs, where workers are incentivized to complete certain tasks during a given shift.

Some people might assume that workers simply receive piece-rate pay for the number of items they finish, regardless of the hours they work. This is not the case. If an employee in such jobs works overtime, then they must be compensated for it.

This is calculated by diving the piece rate earnings by the number of hours worked. This gives you the regular rate of pay, which you then multiply by 0.5 to get the overtime premium rate of pay. That number is multiplied by the number of overtime hours worked in that week and added to the employee’s base pay.

Find the Best Overtime Pay Software

Now that you know tips and tricks to calculate overtime pay, as well as some mistakes to avoid, you can ensure that your accounting is up to speed. Note that one of the easiest ways to correctly calculate overtime pay is with employee time tracking software. It can alleviate the hassle of manually calculating each employee’s proper pay rate every week.

TimeTrakGo is a web-based timesheet software that is simple and easy to use. Our unique graphical employee time cards and straightforward user interface will save you time and money, while ensuring accuracy, in calculating pay. Read more about our time-tracking products or services online or reach out to us today to schedule a free consultation.