How to Calculate Overtime for Everyone on Your Team

Overtime pay is a crucial consideration for employers, ensuring fair compensation for employees who work beyond standard hours. Calculating overtime correctly is not only essential for complying with the law but also for maintaining positive employee relations. In the United States, the Fair Labor Standards Act (FLSA) governs overtime pay requirements, and the Internal Revenue Service (IRS) guides related tax implications. Here’s a comprehensive guide on how to calculate overtime for everyone on your team, including hourly and non-hourly employees, adhering to these guidelines.

1) How to Calculate Overtime for an Hourly Employee

For hourly employees, overtime is calculated at 1.5 times the regular rate of pay for hours worked over 40 in a workweek. Here’s an example:

Example:
An employee earns $15 per hour and works 45 hours in a workweek.
Regular pay = 40 hours x $15 = $600
Overtime pay = 5 hours x $22.50 ($15 x 1.5) = $112.50
Total pay = $600 (regular) + $112.50 (overtime) = $712.50

2) What Does the Regular Rate of Pay Have to Do with Overtime?

The regular rate of pay includes all compensation earned by the employee in a workweek, except for certain exclusions. To calculate the regular rate for different scenarios, consider the following examples:

Example:
An employee earns $25 per hour and works:

  • 40 hours in a workweek
    Regular pay = 40 hours x $25 = $1000
    Overtime pay = 0 hours x $0 = $0
    Total pay = $1000 (regular) + $0 (overtime) = $1000
  • 45 hours in a workweek
    Regular pay = 40 hours x $25 = $1000
    Overtime pay = 5 hours x $18.52 ($25 x 0.5 x 1.5) = $92.59
    Total pay = $1000 (regular) + $92.59 (overtime) = $1092.59
  • 50 hours in a workweek
    Regular pay = 40 hours x $25 = $1000
    Overtime pay = 10 hours x $25 ($25 x 1.5) = $250
    Total pay = $1000 (regular) + $250 (overtime) = $1250

3) Where Does the Fluctuating Workweek Method Fit In?

The fluctuating workweek method is a way to calculate overtime for employees with fluctuating work hours each week. Under this method, the regular rate is determined by dividing the total weekly earnings by the total number of hours worked. Overtime is then calculated at half this regular rate for hours worked over 40.

4) How to Calculate Overtime for 4 Non-Hourly Compensation Methods

4.1) Piece Rate Work

For employees paid by the piece or task completed, the regular rate is calculated by dividing total earnings by total hours worked, including overtime hours. Overtime pay is then calculated at 0.5 times this regular rate for hours worked over 40.

4.2) Non-Discretionary Bonuses

Non-discretionary bonuses, such as performance bonuses, are included in the regular rate calculation for the period to which they relate. This means they may increase the regular rate and, consequently, the overtime rate.

4.3) Commissions

Commissions are also included in the regular rate calculation for the period to which they relate. Like bonuses, they may increase the regular rate and, subsequently, the overtime rate.

4.4) Shift Differentials

Shift differentials, which are additional pay for working less desirable hours, are included in the regular rate calculation and can increase the overtime rate.

5) How the DOL’s Revised Regular Rate of Pay and Salary Threshold Impacts Overtime

The Department of Labor (DOL) revised the regular rate of pay and salary threshold for overtime eligibility. The new rules may impact how employers calculate overtime pay, particularly for employees near the salary threshold for exemption.

6) The Overtime Calculation in Action

Example:
Consider an employee who earns a salary of $800 for a 40-hour workweek.
Regular pay = $800
Overtime pay = 0 hours x $0 = $0
Total pay = $800 (regular) + $0 (overtime) = $800

Now, if the same employee works:

  • 45 hours in a workweek
    Regular pay = $800
    Overtime pay = 5 hours x $16 ($800 / 40 / 2) = $80
    Total pay = $800 (regular) + $80 (overtime) = $880
  • 50 hours in a workweek
    Regular pay = $800
    Overtime pay = 10 hours x $16 ($800 / 40 / 2) = $160
    Total pay = $800 (regular) + $160 (overtime) = $960

7) A Proposed New Overtime Rule by the DOL

The DOL has proposed a new rule that would update the salary threshold for exemption from overtime pay. If implemented, this rule could impact millions of workers, making them eligible for overtime pay.

In conclusion, calculating overtime correctly is crucial for complying with the law and ensuring fair compensation for employees. By understanding the guidelines and methods for calculating overtime pay, employers can avoid legal issues and maintain positive employee relations.