Who is eligible for overtime pay?

Nonexempt employees are generally eligible for overtime pay for hours worked over 40 in a workweek; exemptions depend on salary basis and duties tests.

How do you calculate overtime pay when pay varies?

Compute the weekly regular rate by dividing total weekly earnings by total hours worked, then apply a 1.5 multiplier for each overtime hour or use the half-time premium method where appropriate.

How to Calculate Overtime Pay: More FLSA Rulest Explained

Calculating overtime pay begins with understanding the general rule: Nonexempt employees are generally entitled to overtime pay at one and one-half times their regular rate for all hours worked over 40 in a workweek. While that sentence captures the core principle, there is much nuance in the definition of these terms, what should be included in a regular rate and common exceptions. This overview takes you through each of those steps so that you can apply the rules confidently.

Step 1: Verify if the employee is eligible for overtime .

Overtime is not owed to every worker. First, determine if an employee is classified as nonexempt or exempt based on the rules that apply to your business. Exempt employees are paid a salary not eligible for overtime. Exempt workers are paid on a salary basis and satisfy certain duties tests that exempt them from overtime coverage. When determining how to calculate overtime, first verify the employee’s category and the workweek used.

Step 2: Specify the workweek and record hours

“Overtime” is computed for a “workweek,” meaning any fixed and regularly recurring period of 168 hours or seven consecutive 24-hour days. There is no such thing as collective workweeks with employees, although the employee may have individual workweeks of differing hours. To figure overtime correctly record the time worked in each workweek, not just scheduled to be worked, including all hours employees must be on the employer’s premises (on-duty and off-duty) or at a prescribed work place.

Step 3: Identify Regular Rate of Pay

The hourly rate to be used for computation of overtime premium is the regular rate. For regular hourly employees, the regular rate is typically the employee’s hours-driven wage. There are, however, numerous pay additives that can impact the regular rate. Nondiscretionary bonuses, shift differentials, piece rates, commissions and certain other additional pay have such a close relationship to hours worked or production that these payments must be included in the regular rate. Discretionary bonuses — those that an employer gives because they want to, and not as part of any prior offer or promise — generally are not included.

Example: If an employee is paid $15/hour, including a nondiscretionary bonus of $30 during the week in which the employee works 45 hours, that bonus should be allocated across all hours worked to calculate an increased regular rate for the week.

Step 4: Determine overtime pay for hours worked over 40

Once you have the regular rate, compute overtime pay: for each hour worked over 40 in the workweek, employees receive an amount not less than one and one-half their regular rates of pay. If the regular rate varies from one part of the week to another because of two different types of work at two different rates, then straight time is computed on all hours worked each day and your usual or established amount if worked 40 hours per week, plus time and a half for all hours worked in excess of 40 during the workweek.

Simple formula for a flat hourly wage:

OT weekly pay per overtime hour = regular hourly rate × 1.5
Total overtime pay = (overtime hours) x (regular hourly rate x 1.5)

When pay varies:

Regular rate for the week = total weekly earnings ÷ total hours worked
The overtime premium = the weekly regular rate × 0.5 × overtime hours

You may have to add some straight-time pay for overtime hours and the rate of premium for total earnings.

Step 5: Add pay types properly

The law specifically exempts from regular rate (and hence from overtime pay) certain payments and gifts: "no weight shall be given to `any.. bonuses or payment for occasional periods when no work is performed.'" The opposite is generally true for production-related compensation, attendance bonuses, nondiscretionary holiday bonuses, and mandatory uniform-maintenance fees. When in doubt, document liberally and pay your employees consistently for all portions of their pay.

Step 6: Deal with fluctuating workweeks and other arrangements

Some workplaces have other pay arrangements, such as the fluctuating workweek, which applies under certain conditions and can alter overtime calculations if those conditions are met: a fixed weekly salary covers all straight-time hours worked each week and a half-time premium is used when paying for overtime. Such setups must be done carefully and excellently documented. If another method applies, it must meet the standards for what is a reasonable means of computing overtime in an alternative manner.

Step 7: Recordkeeping and documentation

Maintaining accurate records is essential. Employers should keep records of hours worked, total weekly compensation, and how the regular rate was determined. Clear pay stubs or payroll reports showing base pay, overtime hours, overtime rate, and any bonuses help resolve disputes and ensure transparent calculations.

Common calculation examples

Example 1: Straight hourly wage:

Hourly rate: $20
Hours worked: 50
Overtime hours: 10
Overtime rate: $20 × 1.5 = $30
Overtime pay: 10 × $30 = $300
Total pay: (40 × $20) + $300 = $800 + $300 = $1,100

Example 2 : Weekly bonus included in regular rate:

Total earnings (including $50 nondiscretionary bonus): $900

Hours worked: 45
Regular rate = $900 ÷ 45 = $20
Overtime premium = $20 × 0.5 = $10 per overtime hour
Overtime pay = 5 × ($20 + $10) = 5 × $30 = $150 (or compute as 5 × $10 premium plus straight pay)

Tips for employers and employees

Consistency: Use consistent methods to calculate the regular rate and documentation on what is owed can be based.
Review the classifications: Regularly review whether workers are correctly classified as exempt or nonexempt.
Keep employees informed about payroll: Obvious pay statements and plain language decreases confusion and arguments.
Cry foul on uneven payments: “Before bonuses or special pay is issued, employers should ascertain if these amounts are discretionary or nondiscretionary and how they impact overtime.

Conclusion

The art of figuring overtime pay is a must-have skill for those who keep the books, and handy information that employees can use to crunch their own numbers. It begins with eligibility, followed by accurate time keeping, establishing the appropriate regular rate of pay and multiply your overtime by 40. Thorough record-keeping and precise payroll procedures can help to maintain compliance and prevent costly errors. When in doubt, examine the details of any unusual payments and deal with them openly to prevent overtime from being incorrectly calculated.