How To Calculate Overtime Pay | ADP (2023)

There is more to calculating overtime pay than simply understanding the Fair Labor Standards Act (FLSA), which states that non-exempt and covered employees must receive overtime pay for hours worked over 40 in a workweek through a rate of not less than one and one-half hours of their regular rates of pay. This federal law may seem basic, but once all the variables are considered: base of pay (i.e. hourly wage, salary, piece rate, commission), flexible hours, and other forms of compensation (i.e. no bonus). discretionary, shift pay) - overtime the calculations get a little more complicated.

To further complicate matters, businesses must comply not only with the FLSA, but also with wage and hour laws in state and local jurisdictions. When these standards differ, employers must apply the overtime rate of pay that is most favorable to the employee.

What is overtime pay?

Under the FLSA, overtime pay is additional compensation (ie, premium pay) that employers must pay to non-exempt employees who work more than 40 hours in a workweek. As noted above, the federal rate is hourly and one-half the normal rate of pay, however states with their own laws may require daily overtime pay or double premium pay.

What is the regular FLSA rate of pay?

The standard rate of pay is the average hourly rate of an employee. It is calculated by dividing the total labor compensation for any work week (excluding legal exclusions) by the total number of hours actually worked.

How does overtime work?

Except in some states that require payment of a daily premium, overtime is calculated by work week. Under the FLSA, a workweek is a fixed, recurring period of 168 hours or seven consecutive 24-hour periods. You can start any day of the week and any time of the day and is not affected by the employee's pay frequency, such as bi-weekly, semi-annual, or monthly. In addition, each work week is separate, which means that averaging of hours worked over two or more work weeks is not permitted.

Consider, for example, a non-exempt employee who works 8 hours on Monday, Tuesday, and Wednesday, 10 hours on Thursday, and 6 hours on Friday. This worker would not meet the FLSA's weekly overtime limit, but may be eligible for two hours of paid overtime on Thursday, depending on applicable state labor law.

Employees exempt from overtime

Employees may be exempt from the FLSA and therefore not entitled to overtime if they earn wages that exceed the FLSA minimum wage requirements and perform job duties that satisfy one of the established overtime exemption obligations. . The most common exemptions include executive, administrative, professional, outside sales, or computer-related jobs.

How to Calculate Overtime Pay for Hourly Employees

Calculating overtime pay is often easier with hourly employees who have a single pay rate and no additional compensation. Following FLSA rules, multiply the regular rate of pay by 1.5 and multiply the result by the total number of overtime hours worked.

Example:
A non-exempt hourly employee earns $10 per hour and works 46 hours in a workweek. No additional compensation is paid during the workweek and there is no applicable state law that imposes requirements beyond the FLSA. The total pay owed by this worker, including overtime premium, can be calculated as follows:

• $10 x 40 hours = $400 base salary
• $10 x 1.5 = $15 overtime pay
• $15 x 6 hours of overtime = $90 overtime pay
• $400 + $90 = $490 total payment

Calculation of overtime for various rates of pay

Non-exempt employees, who are normally paid a fixed hourly rate, sometimes work certain hours, often undesirable hours, which entitle them to additional hourly pay. This practice is known as differential displacement. In such cases, employers must use the combined rate or the weighted average of all rates paid to calculate the overtime premium due for hours worked over 40 in the workweek. Note that the FLSA has an exception to this rule that allows an employer to pay overtime at the "established rate." However, most states do not allow this method.

Example:
Over the course of a work week, a non-exempt employee works 35 hours of the day shift at $12 an hour and another 10 hours of the night shift at $15 an hour in a state that follows the FLSA's overtime rules. The total pay due from this employee, including overtime pay, for the work week can be calculated as follows:

• (35 hours x $12) + (10 hours x $15) = $570 base salary
• $570 / 45 total hours = $12.67 regular pay rate
• $12.67 x 0.5 = $6.34 overtime premium rate
• $6.34 x 5 overtime hours = $31.70 overtime premium pay
• $570 + $31.70 = $601.70 total payment due

Calculating Overtime Pay for Non-Exempt Employees Earning Salary

A salary is intended to cover direct payment for a predetermined number of hours worked during the work week. Under federal law, to calculate a non-exempt employee's regular rate of pay, divide weekly wages by the total number of hours worked.

Note that certain states have different methods for calculating the regular rate of pay for non-exempt employees who are paid on a salary basis. Employers must review and adhere to applicable state law.

Example:
A non-exempt employee earns a salary of $1,200 for an expected 40-hour work week. In a week, the individual spends an additional two hours to meet a deadline. The total pay owed by the employee, including overtime pay, for the work week can be calculated as follows:

• $1,200 / 40 hours = $30 regular pay
• $30 x 1.5 = $45 overtime pay rate
• $45 x 2 hours of overtime = $90 overtime premium pay
• $1,200 + $90 = $1,290 total payment due

Calculating Overtime for a Non-Exempt Employee Working a Floating Workweek

As the example above shows, calculating overtime for non-exempt employees with fixed work weeks is pretty basic, but what happens when employees' hours fluctuate regularly? The FLSA allows employers to compensate these overtime workers at half their regular wages if the following criteria are met¹are fulfilled:

• The employer and employees agree that their wages are payment for all hours worked in each workweek
• Staff hours change weekly
• Employees receive their agreed wages even when they work less than normal hours
• Employee wages are sufficient so that the regular rate never falls below the minimum wage
• Employees receive at least half a pay period for each overtime worked

Please note that some states do not allow the floating workweek method of calculation. Employers must review and adhere to applicable state law.

Example:
A non-exempt employee earns a salary of $900 per week, regardless of how many hours they work. If this person works 55 hours in a workweek, the total pay due, including overtime premium, can be calculated as follows:

• $900 / 55 hours = $16.36 regular pay rate
• $16.36 x 0.5 = $8.18 overtime premium rate
• 15 hours of overtime x $8.18 = $122.70 overtime premium pay
• $900 + $122.70 = $1,022.70 total payment due

Calculation of overtime pay for non-hourly pay

Overtime is not strictly based on hourly pay or salary. Certain types of compensation, such as the following, must be included in overtime calculations.

piecework

It is not uncommon for employers in manufacturing and other industries to pay their employees by the number of parts they complete. For example, an assembly line worker at a toy factory may be paid $2 per toy. Under normal circumstances, employers simply pay by the piece, but when overtime is worked, they generally must take these additional steps:

• Divide the piece rate earnings by the number of hours worked to get the regular rate of pay
• Multiply the regular pay rate by 0.5 to get the overtime premium rate
• Multiply the overtime premium rate by the number of overtime hours worked
• Add the overtime premium pay to the piece rate pay to get the employee's full pay

Please note that certain states may have different methods for calculating overtime for piece rate workers. Employers must review and adhere to applicable state law.

Non-discretionary bonuses and commission payments

Under the FLSA, any non-discretionary bonuses or commissions earned by a non-exempt employee must be factored into their regular rate of pay. The calculation method varies depending on whether the bonus or commission payment is assigned per work week or some other frequency, eg, monthly, quarterly, annually.

Please note that some states have their own methods for calculating the regular rate of pay for non-exempt employees who receive a fixed amount bonus. Employers must review and adhere to applicable state law.

Overtime Rules and Regulations

Note that the FLSA's overtime calculation factor is 1.5 times the normal rate of pay for non-exempt employees who work more than 40 hours per week. However, overtime requirements vary in certain states. In California, for example, non-exempt employees who work more than a specified number of hours in a workday are entitled to overtime pay of 1.5 times normal wages or twice normal wages, that is, the double. Employers can reduce their risk by adhering to each state's overtime requirements.

Maintain proper records for overtime pay

Overtime payments made to non-exempt employees are a type ofpayroll recordand therefore must be maintained for at least three years under the FLSA. Additionally, time sheets or other documents showing how wages were calculated must be retained for at least two years. Some states have their own payroll record-keeping requirements, which may cover longer periods of time than those required by the FLSA.

Frequently Asked Questions About Overtime Pay

How to calculate overtime per day?

In states that calculate overtime per workday, employers must apply the applicable overtime rate to each hour beyond what is considered a normal workday, such as eight hours.

Are overtime calculated per day or per week?

Federal overtime laws are based on a 40-hour workweek, but some states calculate overtime per workday. Employers must meet specific state requirements.

What is the formula for calculating overtime pay?

Under the FLSA, the formula for calculating overtime pay is the non-exempt employee's regular rate of pay x 1.5 x overtime hours worked. This calculation may differ in states that have requirements, such as double shifts, that are more employee-friendly.

This guide is intended to be used as a starting point for discussing overtime pay and is not a complete requirements resource. It provides practical information on the subject and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.

¹work Department