Overtime is an important part of calculating payroll. If you hire employees who are 16 or older, there is no limit on how many hours they can work in a workweek. However, you may have to pay them overtime at a rate of at least 1.5 times their regular pay for hours worked over 40 in a workweek. It seems simple enough, but there are a lot of exceptions and considerations when learning how to calculate overtime for your employees.
If your employees routinely work overtime and you need help with calculations, consider payroll software like Gusto. It houses all overtime rates, both federal and state, and will automatically calculate employee paychecks based on the time worked. It also updates all overtime rates within the system whenever the law changes so you don’t have to keep up with it. Try it free for 30 days.
Who Gets Paid Overtime?
The simplest answer is anyone working over 40 hours in a workweek is owed overtime. However, there are exceptions. As of January 2020, salaried employees who earn over $684 per week, or $35,568 annually, may be exempt from overtime requirements. Also, the threshold for highly compensated employees is now $107,432 (of which $684 must be paid weekly on a salary or fee basis).
To be exempt from overtime, your employee also needs to fit specific criteria based on his duties. State regulations may have different criteria as well. For example, California mandates overtime for workdays in excess of eight hours even if the person only works 40 hours that week.
Who Is Exempt From Overtime Pay?
In addition to meeting the minimum salary requirement, an employee may be exempt if their primary duties include any of the following:
- Executive: Managing two or more full-time employees
- Administrative: Office or non-manual work related to business operation
- Professional: Work requiring advanced knowledge
- Computer: Computer or program design
- Outside Sales: Selling products or services at the customer’s place of business or home
Contractors, too, are exempt from overtime pay, as are certain occupations. Check out our article on overtime exemptions to learn more.
Federal Overtime Pay Law
The Fair Labor Standards Act (FLSA) defines overtime pay for the nation, but states may have more stringent laws.
Federal law says that for hourly and non-exempt salary employees, you must pay 1.5 (time and a half) of the regular salary rate for hours worked over 40 in a workweek.
There’s a lot to unpack in this statement before you start doing payroll.
What Is a Workweek?
A workweek is defined by 168 consecutive hours (seven days). It can start at any time or day of the week. So, an employer may define a workweek as 8 a.m. Saturday to 7:59 a.m. the following Saturday, or it could be just after midnight Monday to just before midnight Sunday.
You can choose the workweek that best suits your needs. It can even differ between types of employees. However, once a workweek has been decided on, it should stay consistent.
If your employee works a fluctuating workweek, then you may make an arrangement concerning overtime for weeks when your employee regularly works over 40 hours. This often applies to police, fire, hospitals, and similar work. There are some stipulations, however. Check the FLSA guidelines for more information.
What Constitutes ‘Hours Worked’?
Principal work activities are considered part of hours worked, as are preliminary and postliminary activities if they are an indispensable part of the employee’s principal duties. For example, changing into protective gear to enter a workplace or start a specific duty would count in work time.
If you pay an employee to be on-call, then that pay must be considered in overtime, but not the hours on-call. So if Greg works 44 hours and is on-call for another 10, his on-call pay is included in the overtime pay calculations, but he still only gets compensated for four hours of overtime.
What Is not Included in ‘Hours Worked’?
When an employee is not “on duty,” the time is not counted. This includes paid time off, travel to and from work, clocking in and out, and breaks totaling over 20 minutes.
What Constitutes a ‘Regular Pay Rate’?
The regular pay rate is the number of earnings divided by hours worked. However, this is not just the salary or hourly rate. It includes any of the following:
- Non-discretionary or production bonuses
- Cost-of-living adjustments
- Shift premiums
- Retroactive compensation
- Non-cash compensation
Employers can exclude certain perks, however, such as:
- Parking benefits
- Wellness programs
- Employee discounts
- Gym access
- Unused paid leave
- Business expense reimbursements (cellphone, organization membership dues, travel expenses)
- Some sign-on or longevity bonuses
- Contributions to benefit plans for accidents, unemployment, legal services
Determining Regular Pay Rate From Multiple Pay Rates
Some employees may have different pay scales for different duties such as sales vs back room. In this case, you take the weighted average of the pay earned that workweek and use it to determine overtime, regardless of what pay schedule that overtime was done under.
Piece-rate work is when you pay an employee (not a contractor) a fixed amount for completing a job, like a landscaping project or building a website. They are also subject to overtime. See below for how to calculate overtime.
State Overtime Pay Laws
Many states have different overtime rules. These will exceed the federal rules on overtime pay, so if you follow them, you will be in compliance with federal law. Generally, you follow state overtime pay laws for states where the employee is doing the work, an important consideration when employing telecommuters.
State laws may have stricter rules that include:
- When to pay overtime, such as specific days of the week
- Overtime after eight hours in a day rather than 40 a week
- Who qualifies for overtime
- When to pay double time
- What businesses are exempt from overtime pay requirements
If you are not covered by FLSA, you may still have to follow state laws.
How to Calculate Overtime for Hourly & Salaried Employees
You can calculate overtime in the following steps:
- Determine the regular pay amount.
- Figure out the overtime pay rate.
- Determine total overtime hours worked.
- Calculate the overtime pay.
- Add the overtime pay to the regular pay along with any additional compensation.
Keep in mind that some states have different rules; here, we discuss the federal overtime only.
1. Calculate Regular Pay
For hourly employees, calculate the number of hours worked times the pay rate. Add any extra additional compensation (like bonuses), then divide that by the number of hours worked.
For salary employees, start by translating the salary into its workweek equivalent. You can do this by dividing the annual salary by 52. (Alternately, take the paycheck’s salary, multiply by the number of paychecks in a year, then divide by 52.) Then, take that amount, add any compensation for that week, and divide by the number of hours worked that week.
2. Check Overtime Rate
Check with your state to verify the overtime rate—is it 1.5 times regular pay for all hours worked over 40 in a week or more? Be sure to note whether you need to calculate the daily or weekly overtime, double time vs time-and-a-half, and the maximum number of hours worked before overtime applies. The overtime rate will be the regular rate times the overtime percentage, such as 1.5 or 2. You can always pay more than the legal minimum.
If you have payroll software like Gusto, it may already have those tables as part of its program, so you don’t have to do the research.
3. Determine Total Overtime Hours Worked
For anyone falling under the FLSA, you must count hours over 40 in a workweek, even if your state has a higher threshold. The higher number is for FLSA-exempt businesses still under state law. For example, Minnesota requires overtime for hours worked beyond 48 in a workweek. If FLSA applies to you, you must start overtime at 40+ hours. Otherwise, you may start at 48+.
4. Calculate Overtime Pay
Multiply all overtime hours worked by the overtime pay rate.
Under federal law, the total hours would be (regular pay rate x 40) + (extra hours x regular pay rate x 1.5).
5. Add Overtime Pay to Regular Pay Plus Other Compensation
Once you have the pay for the hours worked (including overtime), add the additional compensation, such as bonuses or commissions.
If you need help with other payroll calculations, check out our guide on how to calculate payroll.
How to Calculate Overtime for Piece-Rate Work (Federal)
When you pay employees by piece rate, you have two options:
- Add together the total piece rate earned by the employee, divide it by the number of hours worked to get the rate, then pay 1.5 times that rate for hours worked over 40.
- Pay 1.5 the piece rate for any pieces completed during overtime.
States may have variations on this rule.
Example: Calculating Overtime for Hourly Employee (Federal)
To calculate salary, add basic pay + overtime + additional compensation = pay for the week.
Jorge worked 50 hours last week, which includes 10 hours of overtime at $11 per hour, and earned an additional $200 in commissions.
His regular salary for the week is 50 x $11 = $550 + $200 = $750.
His regular salary rate is $750/50 = $15/hour
His overtime rate is $15 x 1.5 = $22.5
His overtime pay is $22.5 x 10 = $225
Thus, his salary for the week is: ($40 x 11) + $200 + $225 = $865
Example: Calculating Overtime for Non-Exempt Salaried Employees (Federal)
Moira makes $30,000 a year, which translates to $576.92 a week. Normally, she is paid monthly and is getting a bonus of $200 this month. Last week, she worked 45 hours. (Note: The numbers are rounded.)
First, we prorate the bonus to a weekly amount, since the bonus is for the entire month. $200/4 = $50.
Next, we determine her regular pay for the week: $576.92 + $50 = $626.92.
Her regular pay rate is $626.92/45 = $13.93.
Her overtime rate is $13.93 x 1.5 = $20.90.
Her overtime pay is $20.89 x 5 = $104.49.
Rather than calculating her salary for the week, we would add $104.49 overtime pay to her monthly paycheck (plus any overtime she earned in other weeks in that pay period).
Example: Calculating Overtime for Piece-Rate Work (Federal)
Jenny worked 50 hours to complete two websites, one at $600 and one at $400. She finished the $400 website during overtime.
Under the first option, her pay is $600 + $400 = $1,000. Her regular rate is $1,000/50 = $20/hour. Her overtime rate is $20 x 1.5 = $30/hour. Thus, her final pay is her piece rate pay plus overtime: $1,000 + ($30 x 10) = $1,300.
Under the second option, Jenny earns overtime for the $400 website, so $400 x 1.5 = $600. Her pay for the week is $600 + $600 = $1,200.
Frequently Asked Questions
Do I have to pay overtime for certain days of the week or holidays?
Not under federal law, but some states require it. (Learn more about holidays and holiday pay in our article.)
Can I limit hours worked to avoid overtime?
Only by careful scheduling. The FLSA does not allow employers to waive over time, either by agreement between employees not to pay overtime or to mandate in policy that only eight hours a day or 40 hours a week will count toward pay. It also does not allow employers to demand that overtime be approved in advance.
If a non-exempt employee works more than 40 hours in a week, they are entitled to overtime.
Is Holiday Pay the Same as Overtime Pay?
The concept of holiday pay is not the same as overtime pay; holiday pay is extra money you pay employees for working on designated holidays. It’s not mandated—you set your own holiday pay policy—and you can decide if and how much you want to pay, whereas employers are legally obligated to provide overtime at least the federal rate of 1.5 times the employee’s regular rate of pay. Calculating holiday pay is similar to calculating overtime pay, though. You just have to determine the holiday pay rate.
It’s important to understand and follow overtime rules for both the federal and state governments. If you do not pay accurate over time, you will need to pay it in back pay and may be subject to penalties as well. While the overall rule is simple, there are different exceptions and exemptions, and in some states, like California and Colorado, rules can get complex.
Most payroll software can handle overtime calculations and are usually updated with the latest rulings. Check out our guide on the best payroll software to find one that works for your business.