When you’re first trying to get your payroll up and running — or if you’re revamping it to make it better — figuring out what is overtime and what isn’t can be a confusing job.
Regular payroll is hard enough, but if an employee works even just one hour over 40 in a week, things can get complicated really quickly.
It’s no wonder that many businesses hire a professional to run payroll and calculate overtime for them. But that doesn’t mean you can’t do it yourself. With a little research and practice, you may be able to calculate overtime pay like a pro.
In this article, we answer the question, “What is overtime?” and explain how it works in a variety of situations.
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What Is Overtime?
In 1940, the federal government established the Fair Labor Standards Act (FLSA) in order to cut down on the overworking of the American labor force.
One of the primary things the FLSA did was establish a limit on the number of hours per week businesses could ask their employees to work. This set the standard for the 40-hour workweek that many industries still use to this day.
The FLSA also required that employers provide those who work more than 40 hours in a single seven-day period with extra compensation. The time above 40 hours is called overtime, and the extra compensation is called overtime pay.
The standard set down by the federal government for overtime pay is 1.5 times an employee’s regular hourly wage (a.k.a. their regular rate).
So, if employee A makes $10 per hour for a 40-hour workweek, if they work 41 hours during another workweek, you are legally obligated to pay them their overtime rate of $15 per hour ($10 x 1.5) for that extra hour.
We’ll discuss how overtime works in more detail later on in this article.
Where Does Overtime Pay Fit In Your Payroll Process?
Before delving into the math that makes overtime work, it’s important to establish a number of key facts about the employee, your business, and the laws that apply where you live.
If you have any questions about payroll, overtime, or the FLSA, consult a qualified accountant or attorney who has knowledge of your industry.
The key facts you need to establish are:
- Is the employee exempt or non-exempt (i.e., eligible for overtime pay)?
- What is the employee’s regular rate?
- How much do you pay for overtime work?
- What are the federal, state, and local laws that regulate overtime for your business?
What Is Overtime Eligibility?
Businesses that pay their employees a salary (as opposed to an hourly rate) typically classify those employees as exempt — meaning that they’re not eligible for overtime.
Businesses that pay their employees by the hour typically classify those employees as non-exempt — meaning that they are eligible for overtime.
But even that general rule isn’t always true because some employees don’t qualify for overtime even if you pay them by the hour. It all depends on how you set up your business.
Overtime eligibility also depends on some new legislation passed in January 2020:
An employee paid $684 or more per week is not eligible to accumulate overtime hours. In addition, a “highly compensated employee” (HCE) who makes $107,432 or more per year is not eligible for overtime either.
It’s easy to see how trying to figure out what is overtime and what isn’t can be a confusing and difficult task. Talk to a lawyer or payroll professional if you’re unsure how to proceed.
What Is Your Overtime Pay Rate?
In regard to points two and three in the numbered list above, the overtime pay rate you set for your business has to be at least 1.5 times an employee’s regular pay rate (i.e., time-and-a-half).
Your business may choose to pay more, but the overtime rate can’t fall below time-and-a-half.
A common example of this is holiday pay. During major U.S. holidays (e.g., Christmas, Thanksgiving, and New Year’s Day), some businesses pay “double time” (or twice the regular rate) for those hours — even if the total hours for the week don’t exceed 40.
This extra pay is merely an incentive for working days that would usually be spent off.
Another point to keep in mind about your overtime pay rate is that it is based on an employee’s regular rate. We’ve mentioned that already, but it’s important to have that number on hand before trying to calculate overtime pay for specific employees.
How To Calculate Overtime: 2 Methods
In this section, we’ll show you how overtime works for a hypothetical employee named Amanda.
Here is the information we’ll use:
- Amanda is eligible for overtime
- Amanda’s regular rate is $10 per hour
- Normal work period is 40 hours per week
- During a big project, Amanda worked 60 hours in one week
- Your business’s overtime rate is the standard 1.5 x the hourly rate
- There are no other federal, state, or local laws on overtime
With that in mind, here are several different methods for determining what is overtime and calculating what your business should pay for this time worked.
1) Regular Hours And Overtime Hours Separately
First, separate the total time worked into regular hours and overtime hours.
60 hours (total time) – 40 hours (regular work week) = 20 hours (overtime)
That calculation may seem very basic (which, in this case, it is), but it’s important to understand what’s going on because sometimes an employee will work 1 hour and 20 minutes or 2 hours and 32 minutes of overtime, and you won’t be able to do the calculation in your head.
Try to get into the habit of following the steps outlined here regardless of how easy the equations may seem at first, and you’ll have no problem with any of the numbers.
Next, calculate the dollar amount you pay for overtime.
$10 per hour (regular rate) x 1.5 (overtime rate) = $15 per hour (overtime pay)
With that number in mind, calculate the regular and overtime pay separately.
40 hours x $10 per hour = $400 (regular pay)
20 hours x $15 per hour = $300 (overtime pay)
Then, add the two together to get Amanda’s total pay for that week.
$400 (regular pay) + $300 (overtime pay) = $700 (total pay for the week)
Now that you’ve got that calculation under your belt, the next example will just have formulas.
2) Regular Hours And Overtime Hours Together
Keep in mind that this method is just another way to figure out what is overtime and what to write on the check come payday.
60 hours (total worked) x $10 per hour (base pay) = $600
$10 per hour (base pay) x 0.5 (overtime rate) = $5*
*Based on this method, all overtime hours will be paid at $5 per hour.
20 hours (overtime) x $5 = $100
$600 + $100 = $700 (total pay for the week)
You can see that you arrive at the same number regardless of the method you use. Choose the one that makes the most sense to you.
Control Overtime With Inch
When it comes to figuring out what is overtime and what isn’t, keeping a tight rein on employee work hours is key.
Inch can make it easier than ever to control who works when — so they don’t accumulate overtime hours — thanks to advanced features, such as:
The Inch software even allows you to export timesheets for streamlined regular wage and overtime payments every time (whether you do it yourself or outsource it to a payroll processing provider).
Bottom line: Learning what is overtime doesn’t have to be difficult. With a few simple formulas and the help of our workforce management software, you’ll be cutting checks like the pros in no time.
For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit TryInch.com today.