What Is Overtime Pay And How To Calculate It

Coffee shop that offers overtime

When you’re first trying to get your payroll up and running — or if you’re revamping it to make it better — figuring out what is overtime and what isn’t can be a confusing job.

Regular payroll is hard enough, but if an employee works even just one hour over 40 in a week, things can get complicated really quickly.

It’s no wonder that many businesses hire a professional to run payroll and calculate overtime for them. But that doesn’t mean you can’t do it yourself. With a little research and practice, you may be able to calculate overtime pay like a pro.

In this article, we answer the question, “What is overtime?” and explain how it works in a variety of situations.

Table Of Contents

What Is Overtime?

Business hours signs

In 1940, the federal government established the Fair Labor Standards Act (FLSA) in order to cut down on the overworking of the American labor force.

One of the primary things the FLSA did was establish a limit on the number of hours per week businesses could ask their employees to work. This set the standard for the 40-hour workweek that many industries still use to this day.

The FLSA also required that employers provide those who work more than 40 hours in a single seven-day period with extra compensation. The time above 40 hours is called overtime, and the extra compensation is called overtime pay.

The standard set down by the federal government for overtime pay is 1.5 times an employee’s regular hourly wage (a.k.a. their regular rate).

So, if employee A makes $10 per hour for a 40-hour workweek, if they work 41 hours during another workweek, you are legally obligated to pay them their overtime rate of $15 per hour ($10 x 1.5) for that extra hour.

We’ll discuss how overtime works in more detail later on in this article.

Where Does Overtime Pay Fit In Your Payroll Process?

Calculator next to coins

Before delving into the math that makes overtime work, it’s important to establish a number of key facts about the employee, your business, and the laws that apply where you live.

If you have any questions about payroll, overtime, or the FLSA, consult a qualified accountant or attorney who has knowledge of your industry.

The key facts you need to establish are:

  • Is the employee exempt or non-exempt (i.e., eligible for overtime pay)?
  • What is the employee’s regular rate?
  • How much do you pay for overtime work?
  • What are the federal, state, and local laws that regulate overtime for your business?

Eligibility

Businesses that pay their employees a salary (as opposed to an hourly rate) typically classify those employees as exempt — meaning that they’re not eligible for overtime.

Businesses that pay their employees by the hour typically classify those employees as non-exempt — meaning that they are eligible for overtime.

But even that general rule isn’t always true because some employees don’t qualify for overtime even if you pay them by the hour. It all depends on how you set up your business.

Overtime eligibility also depends on some new legislation passed in January 2020:

An employee paid $684 or more per week is not eligible to accumulate overtime hours. In addition, a “highly compensated employee” (HCE) who makes $107,432 or more per year is not eligible for overtime either.

It’s easy to see how trying to figure out what is overtime and what isn’t can be a confusing and difficult task. Talk to a lawyer or payroll professional if you’re unsure how to proceed.

Pay Rate

In regard to points two and three in the numbered list above, the overtime pay rate you set for your business has to be at least 1.5 times an employee’s regular pay rate (i.e., time-and-a-half).

Your business may choose to pay more, but the overtime rate can’t fall below time-and-a-half.

A common example of this is holiday pay. During major U.S. holidays (e.g., Christmas, Thanksgiving, and New Year’s Day), some businesses pay “double time” (or twice the regular rate) for those hours — even if the total hours for the week don’t exceed 40.

This extra pay is merely an incentive for working days that would usually be spent off.

Another point to keep in mind about your overtime pay rate is that it is based on an employee’s regular rate. We’ve mentioned that already, but it’s important to have that number on hand before trying to calculate overtime pay for specific employees.

How To Calculate Overtime: 4 Methods

Calculator and money on a desk

In this section, we’ll show you how overtime works for a hypothetical employee named Amanda.

Here is the information we’ll use:

  • Amanda is eligible for overtime
  • Amanda’s regular rate is $10 per hour
  • Normal work period is 40 hours per week
  • During a big project, Amanda worked 60 hours in one week
  • Your business’s overtime rate is the standard 1.5 x the hourly rate
  • There are no other federal, state, or local laws on overtime

With that in mind, here are several different methods for determining what is overtime and calculating what your business should pay for this time worked.

1) Regular Hours And Overtime Hours Separately

First, separate the total time worked into regular hours and overtime hours.

60 hours (total time) – 40 hours (regular work week) = 20 hours (overtime)

That calculation may seem very basic (which, in this case, it is), but it’s important to understand what’s going on because sometimes an employee will work 1 hour and 20 minutes or 2 hours and 32 minutes of overtime, and you won’t be able to do the calculation in your head.

Try to get into the habit of following the steps outlined here regardless of how easy the equations may seem at first, and you’ll have no problem with any of the numbers.

Next, calculate the dollar amount you pay for overtime.

$10 per hour (regular rate) x 1.5 (overtime rate) = $15 per hour (overtime pay)

With that number in mind, calculate the regular and overtime pay separately.

40 hours x $10 per hour = $400 (regular pay)

20 hours x $15 per hour = $300 (overtime pay)

Then, add the two together to get Amanda’s total pay for that week.

$400 (regular pay) + $300 (overtime pay) = $700 (total pay for the week)

Now that you’ve got that calculation under your belt, the next example will just have formulas.

2) Regular Hours And Overtime Hours Together

Keep in mind that this method is just another way to figure out what is overtime and what to write on the check come payday.

60 hours (total worked) x $10 per hour (base pay) = $600

$10 per hour (base pay) x 0.5 (overtime rate) = $5*
*Based on this method, all overtime hours will be paid at $5 per hour.

20 hours (overtime) x $5 = $100

$600 + $100 = $700 (total pay for the week)

You can see that you arrive at the same number regardless of the method you use. Choose the one that makes the most sense to you.

3) Differential Pay With Overtime

For this method, we’ll assume the same variables as the first two examples but add differential pay into the mix.

Here’s what we’re working with:

  • Amanda is eligible for overtime
  • Amanda’s regular rate is $10 per hour
  • Her normal work period is 40 hours per week
  • During a big project, Amanda worked 60 hours in one week
  • Your business’s overtime rate is the standard 1.5 x the hourly rate
  • There are no other federal, state, or local laws on overtime

Let’s say that 10 of those 20 hours of overtime were on the night shift for which your business pays a $2 per hour shift differential.

First, calculate Amanda’s regular pay.

40 hours x $10 per hour = $400 (regular pay)

Next, calculate Amanda’s overtime pay based on her regular rate of $10 per hour.

10 hours x $15 per hour = $150 (overtime pay)

Then, calculate Amanda’s shift differential overtime pay based on the increased pay rate.

$12 (shift differential pay rate) x 1.5 = $18 per hour

10 hours of overtime x $18 per hour = $180 (shift differential overtime pay)

Finally, add up Amanda’s regular pay, overtime pay, and shift differential overtime pay.

$400 (regular pay) + $150 (overtime pay) + $180 (shift differential overtime pay) = $730

4) Multiple Jobs At Multiple Rates

Calculating multiple jobs at multiple rates is very similar to calculating shift differential overtime pay.

In this example, Amanda worked 40 hours as a server at $10 per hour. From the examples above, we know her regular pay rate is $400 for the week.

But, let’s say that you called her in to work an 8-hour shift for a server who didn’t show and about halfway through, you needed her to cover for a hostess who called in sick (hostess rate = $13 per hour).

All eight hours of that shift are considered overtime, but four of them are at one rate and four of them are at another rate.

Here’s a rundown on the math for this example:

Amanda’s regular pay = $400

$10 per hour x 1.5 = $15 per hour (server overtime pay rate)

$13 per hour x 1.5 = $19.50 per hour (hostess overtime pay rate)

4 hours (as server) x $15 per hour = $60 (server overtime pay)

4 hours (as hostess) x $19.50 = $78 (hostess overtime pay)

$400 (regular pay) + $60 (server overtime pay) + $78 (hostess overtime pay) = $538

Keep in mind that the final number is gross pay. You’ll likely still need to calculate taxes and withholding before writing the check.

How To Reduce The Impact Of Overtime

counting overtime payment

Distribute The Schedule Early

One relatively easy way to reduce the impact of overtime on your business’s bottom line is to distribute your work schedule early — if possible, at least a month in advance.

With that much advance notice, employees will have plenty of time to switch work hours and find substitutes for shifts they can’t work.

That can help reduce the risk that you’ll have to ask an employee to work overtime to cover someone else’s hours.

Here’s a simple way to make this early distribution work for your team.

  • Build the schedule a month in advance and post it in the cloud (advanced scheduling apps like Inch make this super easy to do).
  • Give your team two weeks to ask for changes or to line up someone to work their shift if they find a conflict.
  • After two weeks, close the schedule, make your own changes, and repost the final version in the cloud or distribute via your regular method.

Giving your team at least a month’s lead time — and the opportunity to find their own substitutes — can make your job easier when it comes time for people to show up and do their work and reduces the chances that you’ll have to ask another employee to work overtime.

Review The Schedule For Potential Overtime

Another easy way to reduce the impact of overtime in your business is to review the schedule for potential overtime before you make everything official.

Take a few minutes to do a quick rundown on how many hours each team member is scheduled to work each week and perhaps rearrange things to reduce the likelihood that those closest will stray into overtime territory.

This may seem like stating the obvious, but you’d be surprised how many managers skip this step in a rush to get the schedule in their team’s hands.

If you use a workforce management app like Inch, take advantage of real-time labor cost tools to monitor how much each shift will cost your business.

In some cases, you can even set up alerts to notify you when an employee gets within a few hours of accumulating overtime hours.

Such real-time alerts and monitoring can help you arrange your schedule in such a way that you can avoid overtime whenever possible.

For more on how the scheduling process can affect your team and your business, take a few minutes to read this article from the Inch blog: How To Create An On-Call Schedule Everyone Can Agree On.

Maintain Time Clock Rules

what is overtime

If your business tracks time in order to calculate payroll, take the time to set and then maintain rules for the clock-in/clock-out process. Doing so communicates to your employees that your business is serious about how, where, and why it tracks time.

When your team understands the importance of keeping accurate numbers, they’ll be serious about the process as well.

It’s a good idea to post the rules near the time clock for all to see and for quick reference. It’s also extremely beneficial to include the rules — and all other information that governs the process — in your employee handbook.

That way, everyone has the same amount of access and can refer to the rules when they have a question.

For example, you may set and maintain the rule that all shifts start at the scheduled time (e.g., 9 a.m.) regardless of when they clock in — unless a manager has given an employee permission to come in early.

How does that help reduce the impact of overtime?

Some employees may like to arrive at work 10 or 15 minutes early so that they can start work on time.

There’s nothing wrong with that, but if you allow them to clock in early and clock out late — and you pay them for that time — they may accrue enough time to exceed the regular 40-hour work week by an hour or two.

That may not seem like a lot at first, but if they do that consistently for a full year, those costs can really add up.

And that’s just for one person. Imagine what it would cost your business if all your employees amassed one or two overtime hours every week.

Maintaining (and enforcing) time clock rules for your business can help you avoid the high labor costs that come with regular overtime hours.

Monitor Attendance

Attendance can play a powerful role in determining whether or not your business has to pay overtime. How so?

If an employee is consistently absent, that means that another team member has to fill in.

If the absent employee doesn’t give enough notice, you may have to ask a team member who’s already working a full shift to work extra to cover the vacancy. Such a situation can push some employees closer and closer to (or even into) overtime territory.

Monitoring and promoting good attendance can reduce the risk that these situations will occur and help you control overtime for the better.

Examples of good attendance strategies include:

  • Being realistic about when to permit absences
  • Creating an attendance policy
  • Enforcing the policy
  • Dealing with poor attendance immediately (and strictly)
  • Rewarding good attendance whenever possible

Cross-Train Your Employees

Cross-training your employees can also help your business reduce the impact of overtime on its bottom line.

For example, if you trained your part-time restaurant hosts in the skills necessary to be servers, if a full-time employee calls in sick a few hours before their shift, you can call one of your part-time hosts to come in instead of asking another full-time server to work extra.

If you get in the habit of reviewing the schedule for potential overtime before distributing it, there’s a high likelihood that your part-timers will have room in their weekly hours to work another shift without hitting the 40-hour threshold.

Thus, calling them in to work another shift won’t have as large a monetary impact on your business’s labor budget as calling in a full-time employee to cover the sick server.

Cross-training your employees gives you more options for who can work when and in what position. Such flexibility can help you control — and lower — the costs associated with overtime throughout your business.

Control Overtime With Inch

figuring out what is overtime with inch

When it comes to figuring out overtime, keeping a tight rein on employee work hours is key.

Inch can make it easier than ever to control who works when — so they don’t accumulate overtime hours — thanks to advanced features, such as:

The Inch software even allows you to export timesheets for streamlined regular wage and overtime payments every time (whether you do it yourself or outsource it to a payroll processing provider).

Bottom line: Learning what is overtime doesn’t have to be difficult. With a few simple formulas and the help of our workforce management software, you’ll be cutting checks like the pros in no time.

For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit TryInch.com today.

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