Learn how to avoid common mistakes when calculating overtime for your employees.
Here's what you need to know:
- Only non-exempt employees who work more than 40 hours a week can get overtime pay
- Overtime eligibility can vary from state to state
- The regular rate of pay for your employees is used to calculate overtime pay
The importance of accuracy when calculating overtime cannot be overstated. Inaccurate overtime calculations may inconvenience the employee, who was probably depending on the extra money for a specific financial purpose.
If you fail to resolve the issue satisfactorily with the employee, they can file a wage-and-hour complaint or a lawsuit against your company. If the employee wins the case, you may have to pay them unpaid overtime wages, liquidated damages, attorney’s fees, plus state-related penalties.
Therefore, it’s vital that your overtime calculations are correct. Below are tips to make this happen.
Know who’s eligible for overtime under federal law
Under the Fair Labor Standard Act (FLSA), employees who are not exempt from the Act’s overtime provisions are eligible for overtime pay. These employees are called “nonexempt.” To get overtime pay, they must work more than 40 hours in a workweek.
To get overtime pay, non-exempt employees must work more than 40 hours a week.
Conversely, employees who are excluded from the FLSA’s overtime pay provisions are not eligible for overtime pay. These employees are called “exempt.”
Determine overtime eligibility under state law
Many states have overtime statutes that differ from the FLSA’s overtime rules. For example, the state may require overtime for nonexempt employees who work more than a certain number of hours for the day. The state may also require double-time pay in specific cases. Moreover, some states have overtime exemption laws.
If a non-exempt employee is subject to both the FLSA and state overtime law, then the statute most beneficial to the employee applies.
Understand the different types of overtime, and their calculations
Next are the various types of overtime under the FLSA, and how to compute them.
Based on the standard overtime rule, non-exempt employees must receive overtime wages for hours worked beyond 40 in a workweek.
Calculation: Multiply hours worked over 40 for the workweek by 1.5 times the employee’s regular (hourly) rate of pay.
Weighted average overtime
If an employee works multiple jobs at different pay rates in the same workweek, then you must figure the weighted average for the different rates. This weighted average is the regular rate of pay.
Calculation: Add up the weekly wages earned from all jobs. Then, divide the total weekly wages by the total hours worked from all jobs for the workweek. The result is the regular rate of pay. To get the overtime rate, multiply the regular rate of pay by 1.5.
Fluctuating workweek method of calculating overtime
This is a special type of overtime for salaried, non-exempt employees whose work hours vary from week to week. It allows you to pay these employees overtime at a lesser rate. But to use this method, certain criteria must be met.
Calculation: Divide the employee’s fixed weekly salary by their total hours worked in the workweek to arrive at the regular rate of pay. Then, pay each hour worked over 40 at no less than 0.5 (instead of 1.5) times the regular rate of pay.
Calculating overtime for tipped employees
If you’re in the service industry and have tipped employees, then they are eligible for overtime when they work more than 40 hours in a workweek. Calculating overtime for tipped employees involves several steps. For details, see Tipped Employee Payroll Laws.
Factor in all “hours worked” when calculating overtime
Overtime pay is based on the employee’s total hours worked for the workweek. So, it’s important to know what constitutes “hours worked” when calculating overtime.
According to the United States Department of Labor (DOL), “hours worked” generally “includes all time an employee must be on duty, or on the employer’s premises or at any other prescribed place of work. Also included is any additional time the employee is allowed (i.e., suffered or permitted) to work.”
Hours worked refers to the hours the employee physically worked, not PTO, holidays, and sick days.
Note that “hours worked” refers to hours the employee physically worked. It does not include payments for time not spent working, such as paid vacation, holidays, and sick time.
You may also need to consider the following when determining hours worked and calculating overtime:
- Off-the-clock work
- Meal and rest periods
- Waiting time
- On-call time
- Sleeping time or other personal activities
- Lectures, meetings, and training programs
- Travel time
- Home to work travel
- Travel away from home community
- Travel that is all in a day’s work
- Home to work: Special one-day assignment in another city
Be mindful of what goes into the regular rate of pay
As indicated earlier, the regular rate of pay is used when calculating overtime rate. But how is it calculated? The formula is straightforward:
Total wages for the workweek (minus any statutory exclusions) ÷ total hours worked for the workweek = regular rate of pay for the workweek
However, it’s very important to take note of any statutory exclusions. If a statute says that a type of compensation should not be included in the regular rate of pay then you must exclude it from the regular rate of pay calculation.
In terms of the FLSA, exclusions from the regular rate of pay include the following:
- Gifts made on special occasions, including payments that are gifts in nature
- Paid time off (e.g., vacation or holidays)
- Reimbursable business expenses
- Show-up (or reporting) pay made infrequently or sporadically
- Discretionary bonuses
- Payments made to profit-sharing plans
- Premiums payments for non-FLSA overtime (e.g., hours worked on holidays or days-off)
Integrate time tracking with payroll
Automate time-tracking and payroll processes to eliminate errors.
When calculating overtime, mistakes are likely to occur if you perform the calculations by hand or via disparate time-tracking and payroll technologies. You can mitigate this risk by not only automating your time-tracking and payroll processes but also integrating them into one cohesive system.
For example, Zenefits platform integrates time tracking with payroll by digitally capturing employees’ time and transporting the data to the payroll module — thereby reducing data entry and room for mistakes. Zenefits also integrates time-tracking and payroll with HR and benefits, enabling across-the-board synchronization.
Take advantage of online resources
The DOL provides a range of tools to help employers comply with the FLSA’s overtime rules, including fact sheets and online advisors. See Overtime Pay to access these resources. The state labor office may have online resources for navigating overtime pay under state law.
There’s also the Zenefits Overtime Calculator, which you and your employees can use to calculate hourly and salary overtime pay.