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Definition of Overtime Pay: A Guide for HR Professionals

Businesses must follow several federal, state and local regulations related to workplace compensation. When full-time employees work extra hours, they may be entitled to overtime pay. Learn the overtime pay definition and when it’s required, and get some answers to frequently asked questions.

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What is the definition of overtime pay?

Overtime refers to the hours an employee works in excess of their regular 40-hour workweek. It’s often paid at a standard rate of time and a half or 1.5 times the standard hourly rate.

Who is eligible to receive overtime?

Under the Fair Labor Standards Act (FLSA), employees can earn overtime pay, depending upon their classification and level of income:

  • Exempt employees receive a salary and are ineligible for overtime pay, regardless of hours worked. Generally, exempt employees hold executive, administrative and professional positions.
  • Nonexempt employees must receive overtime for any hours they work in excess of 40 hours per workweek.
  • Both exempt and nonexempt employees are eligible for overtime pay if they earn less than $35,568 per year. This rule went into effect on January 1, 2020.

Keep in mind that some local or state laws have additional requirements. Ensure that you check the requirements for your area.

Calculating overtime

To calculate the overtime rate and total compensation:

  1. Multiply the employee’s regular pay rate by 1.5 for time and a half.
  • If your company has a different overtime rate, multiply by that rate instead.
  1. Multiply the hours of overtime worked by the new overtime pay rate to get the total compensation.

Example:Your employee makes a normal wage of $15 per hour and works 10 hours of overtime. Your overtime rate is 1.5 times the regular wage. The overtime hourly rate and compensation before taxation is:

  1. Overtime hourly rate = $15 x 1.5
  2. Overtime hourly rate = $22.5

Overtime compensation prior to tax = $22.5 x 10

Overtime compensation prior to tax = $225

The real cost of overtime

Overtime costs more than just extra pay for employees. In addition to the overtime hourly rate, you also need to consider payroll taxes and any fixed costs, such as worker’s compensation and health insurance.

Here’s an example of an employee’s overtime costs:

Example: An employee’s usual rate is $20 per hour. The overtime rate is $30 per hour.

If the employee works 50 weeks per year and you pay one hour of overtime each week, this will cost an additional $1,500 per year.

In addition to overtime pay, you’ll incur payroll taxes and worker’s compensation insurance costs, which are approximately 15% of the hourly rate. For $1500, the additional cost would be $225, for a total of $1,725.

It’s a good idea to consider these extra costs. For instance, using the example above, an employer might weigh the revenue potentially gained by having the employee work that extra hour every week against the cost of overtime and its associated expenses.

Potential liabilities in cases of unpaid overtime

It’s essential for business owners to fully understand the definition of overtime pay and ensure all eligible workers receive the wages they’re entitled to. If an employee works excess hours that allow for overtime pay and isn’t paid accordingly, it can lead to wage and hour penalties for noncompliance on the employer’s end.

In many cases, unpaid overtime can easily be remedied by the employer paying the employee all entitled backpay. However, certain states may require additional interest payments, and the Fair Labor Standards Act (FLSA) allows employees to seek liquidated damages that can total double the amount of backpay owed.

If legal action is pursued by an employee, the employer has the opportunity to show that they acted in good faith and believed they were acting in compliance with the FLSA regulations. The best way for employers to avoid potential liabilities is to adhere to the requirements of the FLSA and the specific statutes and requirements for their state that define over time for nonexempt employees who work in excess of 40 hours per workweek.

The bottom line on overtime

Overtime laws are straightforward, with some exceptions based on local regulations. Pay attention to each employee’s job duties to make sure you classify employees correctly, and use time tracking and payroll systems to ensure employees are paid accurately and on time.

Employee workweeks are fixed, recurring periods of 168 hours or seven consecutive 24-hour days. Workweeks can begin any day of the week and at any hour.

FAQs about overtime pay

Explore frequently asked questions about overtime pay below:

Is overtime pay taxed differently?

Overtime compensation is taxed using the same rules as regular pay. However, overtime pay may be taxed at a higher rate if it pushes the employee into the next tax bracket. If this happens, only the pay within the higher tax bracket is taxed at a higher rate.

What is comp time?

Comp time is short for compensatory time. Instead of paying overtime, some employers allow employees to take extra time off and receive paid time off (PTO) to make up for overtime hours they worked on another day.

For example, if an employee stays four hours late one day during the week, that employee might only work four hours another day but still receive pay for a full day. This keeps their hours at or below 40 for the workweek.

While employees and employers both enjoy benefits—flexibility and lowered payroll—this practice may be illegal in some states, particularly for private, nongovernment and nonexempt employees. If you’re an employer, consult your local laws to be sure of your requirements.

Does overtime apply when working in excess of eight hours per day or in excess of 40 hours per week?

The Federal definition of overtime pay is hourly pay at time and a half when an employee exceeds 40 hours in any given workweek or when an employee exceeds eight hours in any given day. An eight-hour shift multiplied by five days (standard workweek) equals 40 hours, so if an employee works an extra hour during an eight-hour shift during a 40-hour workweek, they would qualify for overtime.

If an employee works only one or two eight-hour shifts per week and works an extra hour or two per shift, they would also be eligible for overtime.

Is the overtime pay definition different for union workers?

Union members are entitled to overtime pay per Federal wage and hour laws. However, certain union contracts may stipulate that workers can receive overtime after working fewer hours than Federal law requires. For example, a contract may state that employees are to receive overtime when weekly hours exceed 35 as opposed to 40. In this case, the stipulations of the agreement would supersede the Federal precedent.

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