18: Overtime Pay Calculation

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FLSA requires the payment of overtime to nonexempt employees.

The FLSA requires you to pay overtime wages at the rate of one and one half times the regular rate of pay to nonexempt employees who work more than 40 hours in a week.

In order to calculate the overtime due you have to know these 3 things

1. How many hours were worked

2. What the workweek is

3. The regular rate of pay

STEP 1 – Determine the hours worked

We will learn the details surrounding this in another episode. There is too much important information to be able to pack it into this episode.

STEP 2 – Establish the Workweek

The workweek is a fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods. It can begin on any day and at any hour of the day. But you have to have a defined workweek ahead of time and you have to track the hours worked within it.

Overtime is calculated on a workweek basis, So for a semi-monthly pay period it takes extra work to calculate the overtime because you have to look at the hours worked across the full workweek which will inevitably include days not included in the pay period.

My recommendation – never pay non-exempt employees on a semi-monthly basis. It’s too confusing, especially for your employee.

You can’t average the hours over two or more weeks in order to avoid paying overtime.

Overtime pay earned in a particular workweek must be paid on the regular pay day for the pay period in which the wages were earned.

STEP 3 – Calculate the Regular Rate of Pay 

If you pay an employee hourly, then the regular rate of pay is the hourly rate.

However, if you pay them pice-rate, commissions, salary or some or on other basis then you have to calculate their average hourly rate by taking into consideration all earnings – including such things as board (as in room and board), lodging, housing and meals.

But, the regular rate does not include payments that are defined as “statutory exclusions”. – these are things like amounts paid as gifts, travel expenses, service recognition payments, and so on…

Click here for Statutory Exclusions

Coming up with the “RRP” is easy if you pay an hourly rate but once you start getting into salaries, production bonuses, shift differentials, and varying rates based on the type of work being performed, things can get complicated.

For example, the reasonable cost or the fair value of the lodging you furnish must be added to the employee’s earnings before determining the regular rate.

No matter how you pay a nonexempt employee, you still have to track their hours worked

The regular rate is the average hourly rate

And that is calculated by dividing the total pay in the workweek by the total number of hours actually worked. This is pretty straightforward in most scenarios but it get’s complicated for salaried nonexempt employees.

To calculate OT for a salaried nonexempt employee you need to know if the salary is paying for all hours worked of for an agreed upon number of hours per week.

Did you hire an employee to work 50 hours a week for $1,000? If so, that the is called “fixed number of hours”.

Or, did you hire the employee to work an undefined number of hours for $1,000 a week. We call this the “all hours worked”.

So using these two examples lets calculate the overtime using a 47 hour workweek.

  • For the fixed number of hours the OT is $70.00
  • For the all hours the OT is $74.48

The Department of Labor has an online calculator to help you calculate overtime and I recommend you run a few of your own scenarios through it to get a better understanding of the process.

Click here for the DOL overtime calculator

A lot of employers think that they can avoid overtime by having a policy that says overtime will not be paid unless it is approved in advance. But you can’t. That policy doesn’t hold water.

Conclusion

You owe your nonexempt employees overtime pay at the rate of 1.5 times their regular rate of pay for hours worked in excess of 40 per workweek. Some states have more stringent requirements, like CA, of course, where OT is due for any hours over 8 in a day.

To calculate OT you need to know the hours worked -something we’ll get into in another episode. You need to define the workweek and you need to calculate the regular rate of pay (each week).

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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