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How is Overtime Calculated:
A Brief Guide

We have to admit: most overtime rules are too complex. Accountants and business owners are having hard time calculating overtime pay. Typically, people think about “time-and-a-half”, but there are still quite a few things to consider.

Let’s start with the basics and define what overtime actually is.

Generally, overtime begins when you work beyond the regularly scheduled amount of hours in a workweek. Workweek is the key word here – in most cases, overtime is calculated on a weekly basis.

Some regions follow a concept of daily overtime as well. Take the overtime law in California for example. Under California law, any time worked in excess of 8 hours per day is considered overtime.

The standard workweek length varies by country. It is 44 hours in Canada, 40 hours in the United States (and the majority of countries worldwide), 38 hours in the UK, and just 35 hours in France.

Employees can also work shifts, part-time, or have flexible schedule, but they are generally still entitled for an overtime pay (unless you work in the UK where paid overtime is close to becoming extinct).

Main Considerations for Overtime Pay

What you should consider when introducing an overtime policy:

  • Whether your employees are eligible for it;
  • How you pay your workers: is it a salary, an hourly pay, or a piece-rate pay;
  • What kind of work schedule your employees have: regular office hours, shifts, or flexible hours;
  • Whether you will offer any extra options for compensating overtime.

Overtime Eligibility

Some jobs or industries are not covered by the overtime pay. Since employers are liable for any unpaid overtime, they must carefully determine whether their staff is exempt or nonexempt from the overtime pay.

In the United States, an employee can be considered exempt if they meet certain criteria set forth in the Fair Labor Standards Act (FLSA). This is also known as a “white-collar” exemption.

So what exactly makes an employee exempt?

  • Being on a salary;
  • Working in a “white-collar” position (for example, administrative or executive);
  • Being paid more above the minimum threshold of $455 a week.

Unlike a common opinion, being a salaried worker alone doesn’t make you exempt from the overtime pay. All three criteria must be met.

Actually, many low-salaried workers don’t qualify for the overtime pay under the current legislation. That’s why the government committed to change the minimum salary threshold.

However, changes to the U.S. overtime law proposed by the Obama administration were put on hold. Both potential outcomes — huge rise in labor costs for businesses, or the need to cut work hours and employ part-time workers, — have generated much debate.

Now the new rules are expected to be in place by 2019, so employers will need to start planning their policies soon.

Pay Rate Calculations

Start with determining an employee’s regular rate. It will serve as a basis for any further calculations.

It doesn’t matter here whether an employee is hourly, salaried, or paid by commission, because overtime pay rate is always derived from the regular rate.

Let’s look at the most frequent scenarios.

  • Single hourly rate. If an employee is paid only one hourly rate, that rate will be the regular rate. The wage can also be a combination of hourly rate and bonuses — in this case, you will have to divide the resulting pay by the total number of hours.

  • Multiple hourly rates. When employees perform different duties at work, they can be paid at different hourly rates. To calculate a regular rate, take a weighted average of all rates used during the week.

  • Day rates. Sometimes, a worker is paid a lump sum for every day worked, regardless of the actual hours. To calculate a regular rate, take a total of their weekly earnings and divide by the hours actually worked.

  • Piece-rate basis. The principle is basically the same. When workers are paid per piece of production, you’d still have to track how many hours they put in. Add their weekly earnings for piece work and divide them by the total hours worked — that will be their regular rate.

  • Salary. The salary covers all hours worked during a 40-hour week. Anything above that is considered overtime. If an employee receives a monthly salary, convert it into a weekly payment first, then divide by the number of employee’s contracted hours to get the regular rate.

Time-And-A-Half or Double Time?

To make things worse, an employee can have more than one overtime pay rate.

Under some regulations, different rates apply starting from a certain amount of hours.

In California, employees working more than 8 and up to 12 hours per day get paid at a 1.5 rate. If an employee works 7 consecutive days in a week, the same rate applies to the 7th day of work.

Any hours worked above 12 per day are paid at a double rate. It also applies to any time worked above 8 hours on the 7th consecutive day of work in a week.

All this sounds like an accountant’s nightmare. Probably this is also the reason why other jurisdictions simplify the task by introducing a flat rate for any overtime, as in the Canadian province of New Brunswick.

Banked Overtime

You don’t always have to compensate overtime with extra money.

Another way of compensation is implementing a Time in Lieu policy. It allows employees to take paid time off instead of receiving overtime pay. Typically, a worker gets 1.5 hours of time off for every hour of overtime.

Keep in mind that this policy may have its own limitations. For instance, there can be a cap on accumulated lieu time, or it should be taken within 3 months after it has been earned.

Automating Overtime Calculations

To recap, first you have to define whether your employees are eligible for overtime pay.

Next, you should calculate the regular rate for those who are eligible.

Finally, you have to determine whether there is overtime or not. For this, you will need to know the total hours an employee worked in a week and compare them to their required hours.

Now you have a choice: stay with pen and paper or — if you are serious about reducing overhead — use special timekeeping software.

With a simple timesheet solution such as actiTIME, you can automate overtime calculations and get instant access to current data for each employee…

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Or run charts and reports, getting an overview of your team’s overtime hours and associated costs.

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Conclusion

The general principles of calculating overtime are pretty straightforward. But as always, devil is in the detail.

To ensure that your calculations are accurate, you have to keep in mind every little tidbit of information: who of the employees is actually eligible, what schedule and rate they have, and how much overtime they have earned over the pay period.

To ease this burden put on accountants, many businesses implement timekeeping software solutions. Many of them have built-in overtime calculation capabilities.

It is also essential to keep abreast of evolving overtime regulations and make your business compatible with upcoming changes.

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