If you have an hourly or other non-exempt employee, in most cases you must pay them extra when they work more than 40 hours in a work week. This extra pay is called overtime.
And for some small businesses, overtime pay can be pretty hard to get right.
In this article, we’ll walk you through exactly how to calculate overtime pay rate and explain all the elements that go into the overtime definition and formula, including:
- the regular rate of pay
- the fluctuating workweek method, and
- the US Department of Labor’s (DOL) overtime rule
How to calculate overtime for an hourly employee
For an hourly employee who earns an hourly wage, calculating overtime should be pretty straightforward.
The Fair Labor Standards Act (FLSA) requires that you pay non-exempt employees one and one-half times the “regular rate” of pay for all extra hours worked beyond 40 in any given workweek. (We’ll get into regular rates in the next section.) Employees should also receive their overtime compensation in the pay period it was earned.
Overtime pay = Hourly rate x 1.5
Let’s say your employee earns $10 per hour. For any hours worked beyond 40, they would earn 1.5 times that hourly pay rate, or $15 per hour. This is commonly referred to as “time and a half.”
$15 per hour in overtime pay = $10 x 1.5
Double time is simply two times the hourly rate. This overtime wage is required for California employees that work more than 12 hours in a single day or more than eight hours on their seventh consecutive workday.
Keep in mind that state laws may be stricter than federal laws when calculating your employees’ overtime pay, so be sure to check labor laws with your state labor department or employment attorney.
What does the regular rate of pay have to do with overtime?
For anything other than a straight hourly rate, the math gets more complicated.
This is because the FLSA requires employees to receive overtime pay at their regular rate—not the rate for each role they’re doing when earning overtime.
The FLSA defines “regular rate of pay” as the weighted average of an employee’s hourly rate, which is calculated by dividing the total pay in any workweek by the total number of hours worked.
Who calculates overtime using regular hourly rates? Many businesses have employees that get paid multiple rates since they perform more than one job function. For example,at a bike repair shop where one person does sales and repairs, that person may be paid a different hourly rate for each job.
Let’s say you have a non-exempt employee who’s paid a weekly salary instead of an hourly rate. Their regular rate of pay is a floating target based on how many hours they work in any given workweek.
So if your employee earns a weekly salary of $1,000, their regular rate of pay would change as follows, depending on how many hours were actually worked:
- 40 hours at $25 per hour ($1,000 salary / 40 hours)
- 45 hours at $22.22 per hour ($1,000 salary / 45 hours)
- 50 hours at $20 per hour ($1,000 salary / 50 hours)
- And so on…
Therefore, the overtime rate you would owe that employee would also shift based on the number of hours of work they performed. In a 45-hour workweek, for example, the overtime rate would be $33.33 per hour, while in a 50-hour workweek, the rate would decrease to $30 per hour.
$22.22 x 1.5 = $33.33 per hour in overtime pay
$20 x 1.5 = $30 per hour in overtime pay
So, if our salaried non-exempt employee who is earning $1,000 per week works 50 hours in a workweek, you would actually owe them $1,300. This is the flat $1,000 salary plus 10 additional hours of overtime at $30 per hour (or $300 additional overtime hours).
Where does the fluctuating workweek method fit in?
If your employee works a different amount of hours every week, you may be able to use the fluctuating workweek method.
The fluctuating workweek method allows you to take a credit for the straight-time portion of the overtime. Straight time is time that is less than 40 hours but still more than an employee’s regular hours. This method means you’re only responsible to pay your employee half of the overtime premium for any overtime hours worked.
The FLSA specifically allows for the fluctuating workweek method if:
- The hours worked by your employee varies by week
- There’s a mutual understanding between you and your employee that their weekly salary compensates them for all straight-time hours (expected hours)
- Your employee’s salary is large enough to ensure that there will be no workweeks where their average hourly earnings from the weekly salary will fall below the minimum wage.
Using the fluctuating workweek calculation for a person earning a $1,000 weekly salary, the regular rate of pay would still be $20 in a 50-hour workweek. But, for the extra 10 hours of overtime, the employee would only be owed an additional $100, for a total weekly compensation of $1,100.
$10 ($20/2) x 10 hours of overtime = $100 in overtime pay
In this example, the fluctuating workweek would save you $200 in wages for the week. It’s easy to see why the fluctuating workweek is the preferred method for calculating overtime premiums for salaried non-exempt employees.
Moreover, per regulatory guidance published by the DOL in August 2020*, the calculation of an employee’s “regular rate” must also include any bonuses or other incentive-based pay, such as commissions or hazard pay.
For example, using the fluctuating workweek calculation for a person earning a $1,000 weekly salary plus a $100 production bonus, the regular rate of pay increases to $22 in a 50-hour workweek: $1,000 salary + $100 bonus / 50 hours = $22. But, for the extra 10 hours of overtime, the employee would only be owed an additional $110, for a total weekly compensation of $1,210.
$11 ($22/2) x 10 hours of overtime = $110 in overtime pay
These calculations, however, are just the tip of the overtime iceberg.
How to calculate overtime for 4 non-hourly compensation methods
An employee’s regular rate includes all compensation paid to them during a workweek.
This includes non-hourly compensation like:
- Piece rate, or piecework
- Non-discretionary bonuses
- Commissions
- Hourly compensation, like shift differentials
Each of these categories requires further explanation, which I’ll get into here.
1. Piece rate work
The “piece rate” and “piecework” definition can be confusing. It’s simply when you pay an employee a fixed amount for each “thing” completed, like houses serviced by a landscape architect or tables produced by a factory.
Industries that typically use piece rate pay include manufacturing, construction, landscaping, and others that pay employees for each “piece” produced.
With piece rate compensation, you can calculate overtime in two ways.
- You can simply add together the total piece rate earned by the employee during the week, divide by the number of hours worked to determine that week’s regular rate, and then multiply that regular rate by a multiplier of 1.5 to determine the overtime rate for that week.
- More simply, you could also choose to pay 1.5 times the piece rate for any pieces completed during overtime hours.
Using the first method, if an employee earns a piece rate of $1 per candle created, and makes 1,000 candles in a 50-hour workweek, they would earn $1,300 for that week.
$1,000 piece rate pay / 50 hours = $20 regular rate of pay x 1.5 = $30 overtime rate x 10 hours of overtime = $300 of additional overtime pay owed
To pay with the second overtime calculation, you and your employee must agree to do so beforehand. There is no requirement that it be a written understanding, but practically speaking, you should have it confirmed in writing so that there are no misunderstandings.
2. Non-discretionary bonuses
Non-discretionary bonuses, like yearly bonuses that are a part of an employee’s compensation package, are those that are required to be paid out if an employee meets specific criteria.
These bonus payments must be accounted for in an employee’s regular rate of pay for overtime purposes.
When calculating the regular rate of pay, the bonus doesn’t have to be included in its entirety in the week it is paid. Instead, you can apportion the bonus amount back over the weeks it was earned.
Your employee must then receive an additional amount of compensation for each week they worked overtime during the period. It has to be equal to one-half of the hourly rate of pay allocated to the bonus for that week multiplied by the number of overtime hours worked during the week.
If it’s impossible to allocate the bonus, an employer can select some other reasonable method of allocation. If a bonus payment already accounts for the overtime premium, then no additional payment is required.
For example, a bonus plan may pay, as a bonus, a 10% premium of an employee’s total compensation, including overtime premiums. In this case, the payment already covers overtime, so no additional overtime pay is required.
Some payroll providers can handle employee bonuses for you, which can take out some of the confusion.
3. Commissions
Like non-discretionary bonus payments, commissions must also be accounted for in an employee’s regular rate of pay for overtime purposes.
4. Shift differentials
A shift differential is a premium rate paid to an employee as extra compensation for working a less desirable shift.
This can happen if you ask employees to work second or third shifts, weekends, or holidays. For example, a company might pay its employees an hourly rate of $10, and add a shift differential of an additional dollar per hour for any hours worked between 5 pm and 5 am, or on a Saturday or Sunday.
Those premium rates must be added into the regular rate calculation, and overtime must be paid based on the regular rate with the shift differential factored in.
How the DOL’s revised regular rate of pay and salary threshold impacts overtime
As if all these rules are not complex enough, in 2020*, the DOL changed the rules on calculating the regular rate of pay and the minimum salary threshold for an employee to qualify as an exempt employee.
First, the regular rate excludes seven categories of compensation from the definition of “regular rate”:
- Wellness programs
- Payments for unused paid leave
- Reimbursed expenses
- Reimbursed travel expenses
- Discretionary bonuses
- Benefit plans
- Tuition
Secondly, the DOL increased the minimum salary necessary for an employee to qualify as exempt from $455 per week (equivalent to an annual salary of $23,660) to $684 per week (equivalent to an annual salary of $35,568).
The overtime calculation in action
Now let’s test your knowledge with a hypothetical example.
Suppose you pay an employee a weekly salary of $769.23. You have no agreement to pay them through a fluctuating workweek calculation.
- During week one, your employee completes a 40-hour workweek, and earns a $200 commission with no bonus.
- During week two, your employee works 47 hours and earns no commission or bonus, but a $5 per hour shift differential for one eight-hour overnight shift worked.
- During week three, your employee worked 50 hours and earned a $300 bonus for the three weeks of work.
What is your employee’s pay for each of the three weeks?
- Week one: Your employee earns $969.23 ($769.23 + $200 commission; they don’t earn overtime because they only worked 40 hours that week).
- Week two: Your employee earns 989.97. Their regular rate of pay for the week is $17.21 per hour ([$769.23 salary + $40 shift differential] / 47 hours). Therefore, the overtime rate for that week is $25.82 per hour. The employee worked 7 hours of total overtime, equaling an additional $180.74 in overtime for the week, which gets added to the salary and the shift differential.
- Week three: Your employee earns $1,029.93. Their regular rate of pay for the week is $17.38 per hour ([$769.23 salary + a prorated $100 dollars of the total $300 non-discretionary bonus] / 50 hours). Therefore, the overtime rate for that week is $26.07 per hour. The employee worked 10 total hours of overtime, totaling an additional $260.70 in overtime for the week.
As you can see, understanding the regular rate of pay and fluctuating workweek method are key for calculating overtime work correctly. For any business owner, it’s much simpler to learn how to calculate overtime correctly before running payroll, than trying to fix it after the fact.
A proposed new overtime rule by the DOL
In August of 2023, the Department of Labor (DOL) announced a new proposed rule on overtime. This rule has not passed yet and is not yet in effect so keep in mind that the following will only happen if the rule goes into effect.
So what’s in the proposed rule? Here’s a summary:
- Lower-paid salaried workers would receive overtime protections: Currently, many low-paid workers (who are salaried) are not eligible for overtime. The proposed rule would change this.
- The salary threshold of employees who are exempt from overtime would be raised significantly: The proposed rule intends to raise the salary threshold of those exempt from overtime from $684 per week to $1,059. This means that in order to be exempt from overtime, a worker must earn $55,068 or more.
- Salary threshold to be updated every three years: In order to reflect inflation and current income data, the salary threshold for overtime would be refreshed every three years.
- Equal protections for workers in the U.S. territories: The rule intends to ensure that workers throughout the U.S. territories are subject to the same overtime rule as those living within the U.S.
If the proposed rule passes and goes into effect, we’ll keep you posted!