How to Calculate Overtime Pay
Whether it’s due to seasonal fluctuations, an end-of-month rush, or a week when your team just can’t get everything done during business hours, employees may have to work overtime.
But, who is eligible for overtime pay and legally required to get it? How is it calculated? And what other information do employers need to know?
We’ve covered the highlights here.
What is overtime pay?
Overtime pay is the additional monies paid to certain employees when those employees work more than their agreed number of hours per day or per week, depending on the state in which the business operates.
The Fair Labor Standards Act (FLSA) makes it a requirement to pay overtime to non-exempt employees, although there are some exceptions for exempt employees.
Non-exempt employees are individuals who are paid hourly for the work they do, work for minimum wage, or above, and are entitled to overtime pay when they work more than 40 hours per week.
Exempt employees are salaried employees, paid above a certain level, who work in an administrative, executive, outside sales or some other professional role. These employees are exempt from the FLSA and therefore, typically ineligible for overtime.
How does overtime pay work?
Overtime pay is typically calculated by using the time and a half method. This simply means paying overtime rates of 1.5 percent of the typically hourly pay. Some states calculate overtime based on the number of hours worked in a day, while others use the number of hours in any given week. It’s important to check your state’s regulations before paying out overtime compensation.
Who is eligible for overtime?
In the majority of cases, non-exempt, hourly workers are the ones who are eligible for overtime. However, there is one caveat.
The Department of Labor requires any exempt, salaried worker, including managers, earning less than $35,568 per year to get overtime pay if they work more than their scheduled hours.
Salaried employees who earn more than $35,568 annually, contractors and freelancers are not eligible for overtime pay.
It is imperative that organizations have a clear understanding of which employees are eligible for overtime pay at the state and federal levels. Employers who don’t pay as required will be subject to fines that can run as much as two times the cost of the missed overtime pay
How is overtime pay calculated
There are a few different ways to calculate overtime pay. The most common way is by simply multiplying the number of extra hours worked by 1.5 the regular rate paid an hourly employee. Here’s the formula:
Base rate x 40 = Base pay
1.5(Base rate) x OT hours = OT pay
OT pay + base pay = Total pay
For example, if your employee makes $15 per hour, and has worked five overtime hours, the calculation will look like this:
$15 x 40 hours = $600 (Base pay)
$15(1.5) x 5 = $112.50 (OT pay)
$600 + $112 = $712 (Total pay)
To obtain a base pay or hourly rate for full-time salaried and exempt employees, simply divide their salary by 52 (as there are 52 weeks per year) to find their weekly pay. Then divide that weekly pay by the number of hours in a full-time work week, which is 40 to get their hourly rate.
So, a salaried employee making $30,000 per year would make $576.92 per week. Divide $576.92 by 40 hours to get to the hourly rate of $14.42.
Multiply $14.42 x 1.5 to obtain the overtime pay.
It’s important to note that regulations and the way overtime is calculated can vary from state to state. Some states and territories, like Alaska, California, Nevada and Puerto Rico, track overtime by day while the remainder of states track by week. In addition, some states require that hourly employees are paid overtime on certain federal holidays.
So, it’s critical to understand the specific requirements of the states in which your company operates, and manage overtime accordingly.
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