If you’re starting a business and expecting to hire employees, payroll is a complex business function that you’ll need to tackle sooner or later. Part of that process is paying overtime to employees.
Knowing when you have to pay overtime hours and how to calculate it will help ensure happy employees and a solid financial footing for your business. Lucky for you, this guide lays out all you need to know to correctly calculate overtime pay.
What Is Overtime Pay?
The Fair Labor Standards Act (FLSA) requires that employees who work more than 40 hours in a week are paid at least 1.5 times their normal pay rate for any hours over 40. Some states have even stricter laws, such as double the normal pay rate for overtime, or requiring overtime pay for any time worked beyond 8 hours in a day.
Salaried employees who meet certain conditions are exempt from overtime pay. The salaried individuals, under the law, must be paid at least $684 per week.
Here is how the federal law regarding overtime is stated:
The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.
However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $684* per week. Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis, to satisfy up to 10 percent of the standard salary level. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.
If your business has a two-week pay period, you cannot take the average number of hours worked by an employee over the course of the two weeks. Federal law states that overtime applies to any employee who works more than 40 hours in any work week as defined within the pay period.
If the pay period is from Monday to the second Sunday after, for instance, a single work week runs from Monday through Sunday. Thus, if an employee works more than 40 hours in either Monday through Sunday period, they receive overtime pay.
Federal law does not require overtime for hours worked on Saturdays, Sundays, or holidays unless the hours are over the 40-hour limit.
Your state’s laws may be even more strict, so you’ll need to be aware of and abide by those rules. Not paying overtime correctly can result in major fines and penalties at the federal and state levels, so make sure you follow the laws to the letter.
Calculating Overtime Pay
To calculate overtime pay, simply take the number of hours over 40 that the employee worked and multiply by 1.5 times the employee’s regular hourly rate.
For example, if Jane makes $15 an hour and works 44 hours in a week, meaning that she has 40 normal working hours and four overtime hours, her pay would be calculated as follows.
Regular wages: 40 hours x $15 = $600
Overtime wages: 4 hours x $22.50 ($15 x 1.5) = $90
Total pay: $600 + $90 = $690
Now let’s say your state requires double time for hours worked over 12 hours in one day, and Jane worked a 14-hour day within that 44 total hours.
Regular pay: 40 hours x $15 = $600
Regular overtime pay: 2 hours x 22.50 = $45
Double overtime pay: 2 hours x $30 ($15 x 2) = $60
Total pay $600 + $45 + $60 = $705
Some state laws regarding overtime pay are complex, so the calculations can be complicated.