Overtime compensation rules are among the many labor regulations established by the Fair Labor Standards Act (FLSA) designed to protect workers. Calculating overtime pay may seem like a no-brainer, but actually, overtime pay calculations can be tricky. It can be more complicated than a simple time and a half calculation, and there are a number of FLSA rules that need to be considered when calculating overtime or you could find yourself the target of a Department of Labor investigation and liable for back pay, damages, and penalties.
Here are some of the fundamental FLSA rules and calculations to help you ensure you are paying employees correctly and protecting your business.
The FLSA defines overtime as all hours in excess of 40 worked in a single workweek. The first 40 hours are referred to as regular time and any hours beyond 40 are considered overtime. It also defines a workweek as a regularly recurring period of seven consecutive days.
All employees who are not specifically exempted by the Act must receive overtime pay at a minimum of one and one-half times their regular pay rate, even if they are paid on a salaried basis. FLSA regulations define whether or not a worker can be considered exempt from overtime.
Overtime must be paid to salaried non-exempt employees even when a fixed salary for a regular workweek in excess of 40 hours has previously been established.
Compensatory (comp) time is not allowed in lieu of overtime pay for non-exempt private sector employees covered under the FLSA. Under certain conditions, state and local government agencies can satisfy overtime payments by granting comp time equal to one and one-half times the overtime hours. See the U.S. Wage and Hour Division of the Department of Labor Fact Sheet #7 for details.
Only hours actually worked are counted in the overtime calculation. Paid hours that are not worked, like vacation and sick time, are generally not included.
Overtime hours must be calculated for each workweek, not by pay period.
If an employee completes two or more types of work for which different pay rates have been set, a weighted average must be employed to determine the regular pay rate for that week in order to calculate overtime pay.
Premium pay must be included in the calculation of regular time pay for purposes of determining overtime pay. Shift-pay, holiday pay, weekend pay, discretionary bonuses, etc. need to be added into the computation for the regular pay rate before determining the overtime pay.
Employers are not allowed to waive overtime pay. Previous arrangements with employees, announcements regarding whether or not overtime is allowed, or other methods do not negate the obligation by the employer to pay for overtime worked.
Examples of overtime calculations.
ABC Company pays employees on a biweekly schedule and pays time and one-half for overtime worked. Darnell’s regular pay rate is $20 per hour. In the first week of this pay period he worked 56 hours; in the second week he worked 26 hours and took two vacation days at 8 hours each. What is Darnell’s total gross pay for this pay period?
Week 1 Regular pay: 40 hours x $20 = $800, Overtime Pay: 16 hours x 1.5 x $20 = $480
Week 2 Regular pay: 26 hours x $20 Vacation pay: 16 hours x $20 = $320
Total gross pay for this pay period: $800 + $480 + $520 + $320 = $2,120
Although total hours paid in week 2 exceed 40, total hours worked did not; therefore no overtime pay is due to Darnell in week 2.
Mary is a non-exempt employee who receives a fixed salary of $500 per week based on a 50-hour workweek. Does she receive overtime pay? If so, what is her gross pay for a week in which she worked 50 hours?
Yes, Mary receives overtime pay as she is a non-exempt employee.
Average hourly rate for earnings: $500 / 50 hours = $10
Overtime pay: 10 hours x 1.5 x $10 = $150
Total gross earnings: $500 + $150 = $650
Stephen works two different jobs at The BIG Corporation as a janitor and as a shipping clerk. He receives a regular rate of $12 per hour for his janitorial duties and $16 per hour for his work as a shipping clerk. This week, he worked 26 hours doing janitorial work and 28 hours in the shipping department. How should his total gross pay be calculated?
Regular earnings for janitorial duties: 26 hours x $12 = $312
Regular earnings in shipping department: 28 hours x $16 = $448
Total regular earnings: $312 + $448 = $760
Weighted average of earnings: $760 / 54 hours worked = $14.07
To arrive at total gross pay, the number of overtime hours is multiplied by one-half times the weighted average of earnings and added to total regular earnings because the regular earnings calculation already includes straight-time pay for hours of overtime worked.
Total gross pay: (14 hours x $14.07 x .5) + $760 = $858.49
Although FLSA regulations are in effect across the United States, some states have laws that may supersede FLSA overtime rules. Links to information regarding individual state labor laws can be found through the DOL website.
Overtime calculations can be highly complex and may depend on factors such as state or local laws and regulations; corporate or union agreements; or special rules for businesses like restaurants where it is common for employers to apply a tip credit to employees’ pay, adding another layer of complexity to the calculations. Consult with your CPA for help navigating overtime rules for your business’ specific needs.
The U.S. Department of Labor (DOL) website provides additional overtime calculation examples.