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The top ten wage and hour lawsuits in 2017 cost a total of $2.72 billion. Needless to say, overtime hour miscalculations and lacking accurate timekeeping records are expensive mistakes, but they are preventable.
So what does it take to stay on top of overtime calculations? A few things to consider are
- Correctly classifying an employee as exempt or non-exempt
- Accurately tracking total hours worked
- Accurately recording overtime hours worked
- Calculating wage at the regular rate of pay
- Calculating an employee’s overtime pay
As outlined in the Fair Labor Standards Act (FLSA), employees who work above 40 hours in a workweek must be paid at one-and-a-half times their regular rate of pay unless they qualify for overtime exemption which is determined on a case-by-case basis. If an employee is earning an hourly wage you immediately know they will not be exempt from overtime but if they are salaried you must see whether they pass the exemption tests outlined by the FLSA.
Below we will go over some general formulas and examples for calculating overtime pay in three different categories of pay type;
1. hourly employees with a single pay rate
2. hourly employees with multiple pay rates
3. non-exempt salary employees.
Hourly Employees with a Single Pay Rate
For the single wage rate employee, the equation generally used in calculating overtime wages is:
(Total hours worked x Hourly wage)
+ Commissions and bonuses
– Exclusions (e.g. discretionary bonuses)
————————————–
= Compensation to calculate pay rate
÷ Total hours worked
————————————–
= Regular Pay Rate
x 1.5 overtime premium
————————————–
= Overtime Pay Rate
x Weekly overtime hours (any hours worked above 40)
—————————————
= Overtime pay for the week
+ (Regular pay rate x 40 hours)
————————————–
= Total compensation for the week
The equation may also be done in the following way.
(Total hours worked x Hourly wage)
+ Commissions and bonuses
– Exclusions (e.g. discretionary bonuses)
————————————–
= Compensation to calculate pay rate
÷ Total hours worked
————————————–
= Regular Pay Rate
x 0.5 overtime premium
————————————–
= Overtime Pay Rate
x Weekly overtime hours (any hours worked above 40)
—————————————
= Overtime pay for the week
+ (Regular pay rate x Total hours worked)
————————————–
= Total compensation for the week
Both equations are correct and will give you the same answer. This is because all overtime hours will be paid at the straight, or regular rate plus the overtime premium (half of the straight-time rate). The equation used is a matter of preference to either the person doing the calculation or the software that is calculating the overtime pay for you.
Example 1: So let’s look at a very simple example using the first equation. Darren earns a regular hourly wage of $12 per hour. He doesn’t earn any commissions in this example and this is a calculation for a pay period with no bonuses. This week he worked 50 total hours.
(50 Total hours worked x $12 Hourly wage)
————————————–
= $600
÷ 50 Total hours worked
————————————–
= $12 per regular hour
x 1.5 overtime premium
————————————–
= $18 per overtime hour
x 10 Weekly overtime hours
—————————————
= $180 Overtime pay for the week
+ ($12 Regular pay rate x 40 hours)
————————————–
= $660 Total compensation for the week
Example 2>: In this example, Darren worked 45 hours, still earns $12 per hour but earned $150 in commission this week. There are no bonuses to this week’s pay.
(45 Total hours worked x $12 Hourly wage)
+ $150 commission
————————————–
= $690
÷ 45 Total hours worked
————————————–
= $15.33 per regular hour
x 1.5 overtime premium
————————————–
= $22.99 per overtime hour
x 5 Weekly overtime hours
—————————————
= $114.99 Overtime pay for the week
+ ($15.33 Regular pay rate x 40 hours)
————————————–
= $728.19 Total compensation for the week
Example 3: In this example, Darren reached the year mark for working with the company so he gets a $200 bonus. He is still earning $12 per hour and has a commission again of $150 and he worked 50 hours.
(50 Total hours worked x $12 Hourly wage)
+ $150 Commission + $200 Bonus
————————————–
= $950
÷ 50 Total hours worked
————————————–
= $19 per overtime hour
x 1.5 overtime premium
————————————–
= $28.5 per overtime hour
x 10 Weekly overtime hours
—————————————
= $285 Overtime pay for the week
+ ($19 Regular pay rate x 40 hours)
————————————–
= $1045 Total compensation for the week
Hourly Employees with Multiple Pay Rates
For employees who work jobs with different pay rates, overtime will be calculated using the method agreed upon by the employer and employee before the employee begins their work. One method is the weighted average of the two pay rates to find the overtime rate. The other is to pay the employee overtime using the rate for the department they were in at the time they reached overtime. In that case, you would use the overtime premium calculation above for the department they were in at the time they crossed 40 hours. Either method is legal as long as it is agreed upon at the beginning of the employment. Since all hours are paid at straight-time, you multiply the weighted average hourly rate by 0.5 so that time is not paid for twice.
(Hours in Job 1 x Hourly wage for Job 1)
+ (Hours in Job 2 x Hourly wage for Job 2)
————————————–
= Straight-time Compensation
÷ (Hours in Job 1 + Hours in Job 2)
————————————–
= Weighted Average Hourly Rate
x 0.5 overtime premium
————————————–
= Weighted Average Overtime Pay Rate
x Weekly overtime hours (any hours worked above 40)
—————————————
= Overtime pay for the week
+ Straight-time compensation
————————————–
= Total compensation for the week
Example: Let’s say Sally works 35 hours as a receptionist at $10 per hour and 10 hours as a janitor for $8.50 per hour. Her weighted average overtime is calculated using the following steps.
(35 Hours receptionist x $10 per hour)
+ (10 Hours janitor x $8.50 per hour)
————————————–
= $435 Straight-time compensation
÷ 45 total hours worked
————————————–
= $9.67 Weighted Average Hourly Rate
x 0.5 overtime premium
————————————–
= $4.83 Weighted Average Overtime Pay Rate
x 5 Weekly overtime hours
—————————————
= $24.17 Overtime pay
+ $435 Straight-time compensation
————————————–
= $459.17 Total compensation for the week
Salary Non-Exempt Employee Overtime Pay
If your salaried employee either does not pass the duties test or does not make above the salary threshold needed for overtime exemption, you will need to pay them at the overtime rate for any time they worked above 40 hours in the week. With salaried employees, the amount of overtime pay is contingent upon the agreement between the employer and employee for the number of hours the base salary is intended to cover (e.g. it is agreed that the employee is paid a $30,000 annual salary for 35 hours of work each week).
Example 1: Salary is based on a 40-hour workweek. Joe is paid an annual salary of $40,000 per year on the agreement that this salary is based on 40 hour workweeks. This week he worked a total of 50 hours.
$40,000 Annual salary
÷ 52 weeks per year
————————————–
= $769.23 Weekly salary (guaranteed minimum)
÷ 40 Hours per week
————————————–
= $19.23 per hour
x 1.5 overtime premium
————————————–
= $28.85 Overtime pay
x 10 Weekly overtime hours
—————————————
= $288.46 Overtime pay for the week
+ $769.23 Weekly salary
————————————–
= $1057.69 Total compensation for the week
Example 2: Salary is based on over 40 hours in a normal work week
If the agreed upon salary amount is agreed to cover more than 40 hours worked on the normal work week (e.g. a $769 weekly salary is agreed to be paid for 50 hours each week), no additional straight-time pay is required for that week because those are already covered in their salary but they will be paid an overtime premium for the overtime hours worked.
$769 weekly salary/50 hours per week = $15.38 per hour
$15.38 per hour x .5 = $7.69 per overtime hour
($7.69 per hour premium x 10 hours overtime) + $769 weekly salary = $776.69 Compensation
Conclusion
It doesn’t take long to see how quickly overtime calculations become complicated, and why so many business managers unknowingly introduce errors when processing payroll. Time clock software, like TimeClick, offers reassurance in knowing that the calculations based on the correct number of straight-time and overtime hours, and that you’ll retain your employment records beyond the minimum three year requirement of the Department of Labor.