What is overtime pay?

According to the Fair Labor Standards Act (FLSA), non-exempt employees who work more than 40 hours per week can receive overtime pay. The rate for overtime hours is at least one and a half times the regular hourly wage ($10.88 per hour), also known as “time-and-a-half.” That means an hourly employee who works 42 hours per week at $12 an hour would be paid $12/hour for 40 hours and $18/hour for two hours of overtime.

The number of overtime hours is not limited by the FLSA, meaning eligible employees could receive overtime pay for any and all hours worked in excess of 40 hours per workweek.

Who is eligible for overtime pay?

Eligibility for overtime pay depends on weekly earnings and the number of hours worked. According to rules effective January 2020, employees who usually earn less than $684 a week and work more than 40 hours are eligible to receive overtime pay at a rate of not less than one and one-half times their regular pay.

Some nondiscretionary bonuses, commissions and incentive payments can count towards 10% of an exempt employee’s standard salary level ($68.40 per week). So, if an exempt employee earns $616 per week (which would qualify them for overtime pay), but receives an annual bonus of $3,800, they will not be entitled to overtime pay.

There are exemptions to FLSA rules that exclude some employees from eligibility for overtime pay and the minimum wage. For example, employees who work as administrative, executive, sales, creative, computer or learned professionals are generally not entitled to overtime pay.

In some states, there may be local rules that supplement FLSA rules. To check compliance, verify local regulations with your state department or labor office.

Read more: The Difference Between Exempt vs. Non-Exempt Employee

What is considered compensable working time?

Before you can calculate overtime pay, it’s important to understand what the FLSA considers compensable working time. In general, working time includes all the time an employee is required to be on a job site or on duty.

Additionally, compensable working time could include any hours an employee works beyond their regular shift hours to complete an assignment, task or project — regardless of whether or not it was pre-approved by a supervisor or manager.

Time a non-exempt employee spends traveling (beyond their normal commute) is also generally considered compensable work time and could be subject to overtime regulations.

Other time that may be considered working time according to the FLSA includes:

• Break periods that last 20 minutes or less
• Attendance at job-related lectures, meetings or training programs
• On-call time, as long as it’s on the employer’s premises
• On-duty waiting time

How to calculate overtime pay

How do you calculate overtime? Follow these steps to accurately calculate overtime hours in compliance with the FLSA’s rules:

1. Verify that the employee is non-exempt and qualifies for overtime

To qualify for overtime pay under the FLSA, an employee’s weekly salary should be under $684, and their profession should not be administrative, executive or fall into another exempt category. To qualify for overtime, hours worked must exceed 40 hours per workweek. The FLSA defines this as “any fixed and regularly recurring period of 168 hours – seven consecutive 24-hour periods.” (Note: Some states also require daily overtime if an employee works over eight hours in a 24-hour period.)

When calculating an employee’s regular rate, certain types of compensation should be excluded such as: parking benefits, wellness programs, unused paid leave, cell phone plan reimbursement, gifts, profit-sharing, etc. That means if someone earns $12 an hour, but also receives benefits like a parking pass or complimentary coffee and snacks, their regular rate is still $12 an hour.

Example: Sasha, a non-exempt retail associate, works 45 hours per week in January. Her usual weekly salary is $600, or $15 per hour.

To calculate the weekly salary, assume Sasha works 40 hours a week on average.

$15 x 40 = $600

In this case, Sasha qualifies for overtime pay.

2. Calculate overtime hours

Overtime hours are any hours worked over 40 in a single work week. Note that a weekly calculation is required no matter if the employee is paid daily, weekly, biweekly or monthly.

Example: At 45 hours for the week, Sasha worked five overtime hours in total.

3. Calculate overtime pay

Apply your overtime rate to calculate the amount of overtime to pay your employees. The minimum rate under the FLSA is 1.5, so multiply the standard salary amount by 1.5 to calculate the overtime rate. Some companies pay “double time” (twice the normal pay rate) but that’s up to you.

Example: Sasha’s standard hourly salary is $15. Calculate the overtime salary: $15 x 1.5 = $22.5 per hour.

4. Calculate the total salary

Add the overtime pay to the employee’s standard pay. Note that the employee should receive the total payment on their usual payday.

Example:

1. Calculate the standard weekly pay: Number of regular hours x standard hourly rate: 40 x $15 = $600
2. Calculate the overtime pay: Number of overtime hours x overtime hourly rate: 5 x $22.5 = $112.50
3. Calculate the total pay for the week: Standard weekly pay + overtime pay: $600 + $112.50 = $712.50

Sasha’s total pay for this week would be $712.50.

Related:What is Competitive Pay?

Purpose of overtime pay

Overtime benefits both employees and employers. For employees, when an increased workload requires them to work longer hours, extra pay is fair compensation that keeps employees motivated and invested in their jobs.

For employers, overtime can be a solution during busy seasons when hiring more employees may not be feasible or cost-efficient.

Tips for managing overtime more effectively

Here are some ways to efficiently manage overtime so you’re not going over-budget, but still complying with FLSA regulations and getting work done:

• Keep track of your employees’ work hours: Overtime pay can affect your payroll budget, and monitoring work hours and overtime pay can help employers better plan expenses and identify patterns. Check out our weekly timesheet sample here.
• Communicate: Overtime hours can help when teams are short-staffed or a project is more demanding than expected. Communicate regularly with your team to understand if periods of occasional overtime is expected or if you should consider hiring more employees or changing work processes. Additionally, ensure that non-exempt employees know that they should receive permission from their supervisor before working any overtime.
• Implement cross-training: Train teams in multiple roles and spread the workload. This will decrease the need for overtime and help team members maximize their potential.
• Classify employees correctly: Evaluate employee tasks, pay rates and relationships to your company. Verify if employees are non-exempt according to the FLSA criteria. If you’re unsure about employee classifications, consult an HR professional or attorney.