Overtime is a common situation in a modern office workplace. But when it occurs, the company must properly calculate overtime pay. Keep reading the article to find out more about the topic.
Understanding Overtime Pay
Businesses often work on projects with strict deadlines. Sometimes it’s impossible to meet the deadline, so employees must work overtime. But if that’s the case, then employees’ overtime is subject to overtime rules.
These rules state that employers must pay a non-exempt employee an overtime rate which is equal to their normal pay rate, plus time and a half. These rules were enforced to prevent employers from exploiting their employees.
The federal law states that everything over 40 hours a week is extra time, and employers must pay accordingly. But state laws may add some regulations. In California, working over 8 hours in 1 day requires an overtime pay rate even if an employee doesn’t go over 40 hours a workweek.
It’s also worth mentioning that overtime laws don’t consider multiple week periods, but some exceptions occur (i. e., police officers). But overall, the rule applies only to a pay period of one workweek.
How Overtime Works?
When employees work more than a standard accepted number of hours in a week, extra hours are referred to as overtime. Pay for extra hours worked must be higher than when working standard hours.
Overtime payment for hourly employees is the additional payment rate paid for working extra hours in a workweek (40 hours). The federal and state minimum paid to hourly employees must be equal to standard pay increased by 1.5 times.
For instance, if an hourly employee makes $30 as standard pay and works 45 hours per week, they would be paid $30 for 40 hours and $45 for each extra hour. In this case, it’s $1,200 + 225 = $1,425.
Salaried employees also get overtime pay, but there are exceptions if an employee gets a weekly income that is over a specific amount. Note that employers may decide to pay their employees at a higher rate, but not lower than a minimum.
However, the Department of Labor doesn’t require employers to apply overtime payments for the night, holiday, or weekend work since the union contracts or employer determines these rates.
The Department of Labor regulates extra time and other payments through the FLSA (Fair Labor Standards Act). Additionally to overtime resources, the FLSA regulates child labor and minimum wage calculations used by US employers.
Some states have laws applied to overtime and other labor laws exceeding federal government regulations. In this case, it is the employer’s duty to meet these strict regulations.
Research your state’s labor department laws or consult an attorney to make sure your business pays enough for the work of every employee when they work extra time.
Who can Get Overtime Pay?
Usually, employees who earn hourly pay (are not salaried) earn overtime pay. But salaried employees also may get overtime pay. If a person receives a salary, but their income is lower than $47,476 annually, they may expect extra pay.
Types of Employees Exempted From Receiving Overtime Payment
In some cases, the type of work people do makes them exempt from receiving extra time pay, like employees who earn more than $47,476 annually.
Exempt employees typically do some white-collar job related to administrative tasks or professional duties. The FLSA recognizes exempt employees as those who are involved in executive, professional, administrative, outside sales, and computer jobs.
How to Calculate Overtime?
The very first step is to determine whether your employees are eligible to receive extra pay when working over standard time. If they aren’t exempt, then use the following estimates.
Salaried Employees Calculation
As mentioned, if an employee works longer than 40 hours a week, it’s overtime. Use the following formulas to determine salaried employee pay.
Normal hourly rate:
- Yearly salary / 52 (weeks in a year) = weekly salary
- Weekly salary / 40 (or average hours worked per week) = normal hourly rate
You also need the following formulas:
- Standard hourly rate x 1.5 = overtime hourly rate
- Overtime hourly rate x number of hours worked over 40 hours = overtime wages (or compensation).
Here’s an example. Suppose the employee makes $45,000 annually:
- Determine employee’s normal hourly rate. Divide the weekly salary by the number of hours an employee works per week. Here’s an example: an employee works 40 hours per week, their weekly salary is $865.3, their hourly rate is $865.3 / 40, which is $21,6 per hour. This is a normal hourly rate for this employee.
- Multiply the normal hourly rate by 1.5. Take the number from the previous example and multiply it by 1.5; it’s $21,6 x 1.5 = $32.4. This number reflects the hourly overtime rate.
- Calculate the total compensation. Use the overtime rate from the previous example and multiply it by the number of hours worked overtime. Let’s assume the employee worked 45 hours during a week, so it’s 5 extra hours: $32.4 x 5 = $162.
The compensation for extra 5 hours is $162, and the total weekly income, including overpay compensation, is $1,027.3.
Hourly Employees Calculation
You should use the following formula to determine the compensation for hourly employees:
Standard hourly rate x 1.5 x overtime hours worked = overtime compensation
This is an example of a total weekly wage for an employee who worked 42 hours:
- regular pay rate x 40 hours = normal weekly wage
- regular pay rate x 1.5 x 2 hours (since 40 hours normal rate, plus 2 hours extra) = overtime pay
Adding these two numbers result in a total pay for the week. Suppose, the employee has $25 regular pay rate, so the calculation looks as follows:
- $25 x 40 hours = $1,000
- $25 x 1.5 x 2 = $33
And the total weekly pay is $1,033.
Every employer has to research federal and state laws that protect employees. That way, employers can save themselves from strict IRS fines and keep their employees happy and eager to work. If you often work on projects that require working longer than standard hours, employees must know that their employer will be paid correctly.
Check the FLSA to determine what employees aren’t exempt from extra payments. Note that exempt employees are exempt only based on their duties, not on their title.
It means that if an employee has a specific title, but is involved in duties that aren’t exempt from overtime pay, then you should guarantee a standard pay, plus overtime on all extra hours. If you are only planning to launch a business, it’s best to consult an expert or do thorough research before hiring employees.
Author: Charles Lutwidge