HR Tip of the Week

Posted on  |  Pay

How to Calculate Overtime Pay

The federal Fair Labor Standards Act (FLSA) requires employers to pay non-exempt employees 1.5 times their "regular rate of pay" for all hours worked over 40 in a workweek. Some states require overtime pay in additional circumstances and at different rates. Below, we cover how to calculate overtime in accordance with federal rules.

Regular Rate of Pay:

To accurately calculate overtime pay, you must first determine the employee's regular rate of pay. An employee's regular rate includes their hourly rate as well as the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation.

Examples of Overtime Calculations:

Here are some examples of calculating overtime under federal law. Always check to ensure calculations comply with both federal and state law.

Example #1: Hourly Wage Only

A non-exempt employee is paid $20 per hour and receives no other forms of compensation. In one workweek, she works 50 hours. Under the FLSA, her overtime pay is calculated as follows:

$20 (regular rate) x 1.5 (OT premium) x 10 hours (OT hours worked) =  $300 in OT pay 


Example #2: Hourly Wage with a Nondiscretionary Bonus

A non-exempt employee is paid $12 per hour. In one workweek, he works 50 hours and receives a $100 nondiscretionary productivity bonus. Overtime is calculated as follows:

Step 1: Add straight-time hourly wages for all hours worked and bonus to determine total straight-time compensation.

($12 hourly rate x 50 hours worked) + $100 bonus =  $700 

Step 2: Divide total straight-time compensation by total hours worked to determine regular rate of pay.

$700 straight-time pay divided by 50 hours worked =  $14 

Step 3: Multiply regular rate of pay by .5 and then multiply by total overtime hours.

$14 regular rate of pay x .5 x 10 overtime hours =  $70 

Since the straight-time earnings have already been calculated for all hours worked (see Step 1), the employee is entitled to an additional 10 hours of overtime pay, calculated at one-half the regular rate of pay.

Step 4: Calculate total compensation.

$70 overtime pay + $700 straight-time pay =  $770 

State Law: Your state law may require a different formula. California, for example, requires a different methodology for calculating overtime when an employee receives a flat sum bonus.

Note: If the nondiscretionary bonus is earned over a single workweek, as is the case above, the bonus is added to the employee's regular earnings for that workweek when determining the regular rate of pay. However, if the bonus is earned over a series of workweeks, the prorated bonus must be included in the regular rate of pay in all overtime weeks covered by the bonus period.

 

Example #3: Multiple Rates of Pay

A non-exempt employee works for the same employer in two different jobs. In one workweek, the employee works 10 hours for $10 per hour and 40 hours for $20 per hour. When there are two or more rates of pay, the regular rate for that workweek is the weighted average. To calculate overtime:

Step 1: Calculate total straight-time pay.

($10 hourly rate x 10 hours) + ($20 hourly rate X 40 hours) =  $900 

Step 2: Divide total straight-time compensation by total hours worked to determine regular rate of pay.

$900 straight-time pay divided by 50 hours worked =  $18 

Step 3: Calculate overtime premium pay.

$18 regular rate of pay x .5 x 10 overtime hours =  $90 

Since the straight-time earnings have already been calculated (see Step 1), the additional amount to be calculated is one-half the regular rate of pay.

Step 4: Calculate total compensation for week.

$900 straight-time pay + $90 overtime pay =  $990 

State Law: For the purposes of determining the regular rate of pay, federal law also allows employers to use the hourly rate in effect when the overtime work is performed, as long as the employee agreed to this method in advance of performing the work and certain other conditions are met. These agreements should be in writing. Some states have different rules. Check your state law to ensure compliance.

 

Example #4: Tipped Employees

Background: The FLSA permits employers to pay tipped employees a direct cash wage as low as $2.13 per hour, provided the employee's direct cash wages plus tips equal or exceed the federal minimum wage (currently $7.25 per hour). In such cases, the employer then may take a tip credit toward its minimum wage obligation equal to the difference between the required direct cash wage and the federal minimum wage (or $5.12 per hour). When the employer takes the tip credit, overtime is calculated based on the full minimum wage, rather than the direct cash wage. However, the employer may be able to apply the tip credit to the overtime rate if it doesn't exceed the tip credit taken for non-overtime hours.

Let's look at an example. A tipped employee works 50 hours in a workweek. Let's assume the employee is subject to the federal minimum wage rather than a higher state or local minimum wage. The employee receives a direct cash wage of $3 per hour and her employer applies a tip credit of $4.25 per hour toward the minimum wage. Beyond tips and direct cash wages, the employee receives no other compensation during the workweek. To calculate overtime:

Step 1: Because the tip credit was taken, use the full minimum wage to calculate the overtime rate.

$7.25 x 1.5 =  $10.88 

Step 2: Subtract the appropriate tip credit from the overtime rate to achieve the adjusted overtime rate and multiply by the number of overtime hours worked that week. The tip credit generally cannot be greater than the one you applied to non-overtime hours.

$10.88 - $4.25 =  $6.63 

$6.63 x 10 overtime hours =  $66.30 

Step 3: Add the employee's straight pay to the overtime pay to calculate total pay that week.

40 hours x $3 =  $120 

$120 straight-time pay + $66.30 overtime pay =  $186.30 

Remember, this employee must also have received at least $212.50 in tips ($4.25 x 50 hours) for the employer to take the tip credit.

State Law: Some states have stricter rules related to tip credits or prohibit them altogether. Many states and local jurisdictions also have higher minimum wages. Check your state and local law for compliance requirements.


Example #5: Salaried Non-Exempt Employee with Fixed Schedule

A non-exempt employee with a fixed schedule earns a weekly salary of $400 and is expected to work 40 hours per week for that salary. In one particular workweek, the employee works 50 hours.

Step 1: Calculate total straight-time pay.

$400 salary divided by 40 hours =  $10 hourly rate 

50 hours worked x $10 hourly rate =  $500 

Step 2: Calculate regular rate of pay.

$500 straight-time pay divided by 50 hours worked =  $10 per hour 

Step 3: Calculate overtime pay.

$10 regular rate of pay x .5 x 10 overtime hours =  $50 

Since straight-time earnings have already been calculated (see Step 1), the additional amount to be calculated is one-half the regular rate of pay ($10 x .5 = $5).

Step 4: Calculate total compensation for week.

$500 straight-time pay + $50 overtime pay =  $550 

State Law: Under the FLSA, to calculate a salaried non-exempt employee's regular rate of pay, consider the number of hours the employer and employee understand the salary is intended to cover, which may be more than 40. For example, if the employer and employee understand the salary to cover 45 hours, then the employer may calculate the regular rate of pay by dividing the weekly salary by 45 hours. In this case, the overtime rate would be .5 x the regular rate for hours 40 to 45 and 1.5 times the regular rate for hours in excess of 45 under the FLSA. Some states have different rules and require that the weekly salary be divided by non-overtime hours worked only when determining the regular rate of pay. Check your state law to ensure compliance.


Example #6: Salaried Non-Exempt Employee with Fluctuating Schedule

Background: Federal rules include a special formula for calculating overtime for salaried non-exempt employees whose work hours fluctuate from week to week (known as the fluctuating workweek). To use this method (see also the State Laws and Other Caveats section below):

  • The employee's hours must fluctuate from week to week (both above and below 40 hours);
  • The employee must receive a fixed salary for whatever hours they're called upon to work in a workweek, regardless of how few or how many;
  • The employee and employer must have a clear mutual understanding in writing that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek;
  • The salary must be sufficient enough to pay the employee no less than the applicable minimum wage for every hour worked in the workweeks in which the number of hours worked is greatest; and
  • The employee must receive at least 0.5 times their regular rate of pay for overtime hours worked. Since the salary is intended to compensate for whatever hours are worked in the workweek, their regular rate will vary from week to week. To arrive at their regular rate, divide the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week.

Let's take a look at a salaried non-exempt employee, with a fluctuating schedule, who earns a weekly salary of $600. In the applicable workweek, the employee works 50 hours.

Step 1: Calculate regular rate of pay by dividing salary by total hours worked.

$600 salary divided by 50 hours worked =  $12 

Step 2: Calculate overtime pay by multiplying the hours of overtime worked by one-half the regular rate of pay.

10 hours of overtime x ($12 regular rate of pay x .5) =  $60 

Step 3: Add overtime time to salary to determine total pay.

$600 salary and $60 overtime pay =  $660 

State Law and Other Caveats: While the fluctuating workweek method can seem like an attractive option for reducing overtime costs when compared with the standard overtime calculation, there are some caveats to consider. First, some states, including California, expressly prohibit employers from using the fluctuating workweek method for paying overtime. Additionally, this method is also a common source of employee lawsuits. Employers should check their state (and local) law and consult legal counsel as necessary before using it.

Conclusion:

Review your pay practices to ensure that you are calculating and paying overtime in accordance with state and federal laws.

    Most popular