Calculate Overtime Pay for Hourly and Salaried Employees
NEW Regulations for Paying Overtime to Exempt employees
The federal government (specifically the Department of Labor) assumes that all employees must be paid overtime if they work more than a certain number of hours in a week. Calculating overtime for hourly employees is fairly simple, but some salaried employees also must be paid overtime. This calculation is a little trickier.
An Important Change in Overtime Regulations for Exempt Employees
The Department of Labor has issued changes to overtime regulations, effective January 1, 2020. that increase the salary level for exemption from overtime, from $455 a week to $684 a week. This change applies to exempt employees: (executive, administrative, professional, outside sales, and computer employees).
The former pay level was that a salaried employee paid more $455 a week ($23,660 a year) or more was not subject to overtime. The proposed change would mean that an exempt employee who is paid pay $684 a week ($35,568 a year) or more would not be subject to overtime.
In addition, the total annual compensation level for "highly compensated employees (HCEs)" has been increased from the current level of $100,000 to $107,432 a year.
How Overtime Works
If an employee works more than a specified number of hours in a week, the additional hours are called overtime. Pay for any hours worked as overtime are paid at a higher rate than regular hours.
Overtime pay for hourly employees is the additional pay rate paid for working more than a specific number of hours in a week. The federal minimum for overtime for hourly employees is that the person must be paid one and a half times the regular hourly rate for work over 40 hours a week. So, an hourly employee working 45 hours a week for $10 an hour would be paid $10 for 40 hours and $15 an hour for the 5 hours of overtime.
Salaried employees are typically exempt from overtime if their weekly income is over a specific amount. The new regulations, effective January 1, 2020, require that exempt employees paid less than $684 a week receive overtime pay. An employer can continue to include nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary threshold.
Paying Employees More Than Minimum Required Overtime
This article discusses the minimums for calculating and paying overtime, as required by federal and state laws. Your business must comply with these minimums, but you may decide to pay employees at a higher rate, and for overtime starting at lower hours per week.
Some employers, for example, pay "double time" (twice the normal hourly rate) for holidays. The Department of Labor does not require employers to pay overtime for night, holiday, or weekend work; these rates are determined by the employer or by union contracts.
Employee Pay & Overtime Regulations
The Wage and Hour Division of the U.S. Department of Labor regulates overtime and other pay provisions through the Fair Labor Standards Act. In addition to overtime provisions, the Act regulates child labor and minimum wage activities of U.S. employers.
The Fair Labor Standards Act requires that hourly employees who work more than 40 hours in a workweek must be paid at a higher rate for the overtime hours, at a minimum of 1 1/2 times the employee's regular pay rate.
State Overtime Regulations
Some states have regulations for overtime and other labor laws that exceed those of the federal government. In this case, more strict regulations must be met. Check with your state's labor department to review state labor laws, or check with your employment attorney.
Calculating Overtime for Hourly Employees
Overtime pay is the amount of overtime paid to each employee in a pay period. Overtime pay is calculated: Hourly pay rate x 1.5 x overtime hours worked.
Here is an example of total pay for an employee who worked 42 hours in a workweek:
- Regular pay rate x 40 hours = Regular pay, plus
- Regular pay rate x 1.5 x 2 hours = Overtime pay, equals
- Total pay for the week.
A more detailed example:
- An employee works 50 hours in a week.
- Her normal pay rate is $15 an hour.
- So she is paid $600 for her 40 hours at $15 an hour, plus $225 for her additional 10 hours of overtime (at $15 x 1.5 x 10 = $225).
- Her total pay for the week would be $825.
Why Some Employees Are Exempt From Overtime
Because of the nature of their work, some employees are considered to be exempt from receiving overtime pay. In order to be classified as exempt, an employee must have specific types of job duties.
The Fair Labor Standards Act (FLSA) recognizes executive, administrative, professional, outside sales, and some computer employees as exempt. Exempt classification is on a case-by-case basis and is not based on the job title of the employee.
Calculating Overtime for Exempt Employees
As noted above, lower-paid exempt employees may be eligible for overtime. To calculate overtime for these employees, use the same overtime policy you have for hourly employees. Then you can use one of two methods:
Method 1: It's assumed that an exempt employee's salary is based on 2080 hours of work per year (basically, 50 weeks of work and two weeks of vacation). Using that assumption, you can calculate the employee's hourly rate. Let's say the employee makes $31,000 a year. Dividing $31,000 by 2080 gives an hourly rate of $14.90. You can use that hourly rate to calculate overtime for a week of work.
Method 2: As suggested by Patriot Software, take the employee's pay for a week and divide it by the normal hours of work during that week. If the employee is paid $500 for a week and is expected to work 36 hours, the employee's hourly rate is $13.89 an hour.
Overtime usually begins at 40 hours, so if an employee works 45 hours in the week, they would be paid at the regular rate of $13.89 an hour for up to 40 hours, and at 1.5 x $13.89 for the additional 5 hours.
The total pay for that employee for the pay period would be $13.89 x 40 = $555.60 plus 20.84 x 5 hours = $104.16 totaling $$659.76.
Record Keeping of Overtime
The FLSA requires employers to keep records of payments to employees, including overtime pay. In the case of an audit, an employer must be able to prove payment of overtime that meets FLSA requirements.
Department of Labor. "Overtime Final Rule," Accessed Nov. 8, 2019.
Department of Labor. "Fact Sheet: Final Rule to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative and Professional Employees." Accessed Nov. 8, 2019.
U.S. Department of Labor. "Fact Sheet #23: Overtime Pay Requirements of the FLSA." Accessed Nov. 8, 2019.
U.S. Department of Labor. "Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer 7 Outside Sales Employees Under the Fair Labor Standards Act (FLSA)." Accessed Nov. 8, 2019.
U.S. Department of Labor. "Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA)." Accessed Nov. 8, 2019.