Calculate Overtime Pay for Hourly and Salaried Employees

The federal government (specifically the Department of Labor) assumes that all employees must be paid overtime if they work more than a certain number of hours in a week. Even some salaried employees must be paid overtime.

An Important Change in Overtime Regulations for Exempt Employees

The new Department of Labor rule, effective January 1, 2020. increases the salary level for exemption from overtime, from $455 a week to $684 a week. Employees paid less than $684 a week must have their hours tracked and must be paid if they work over 40 hours in a week. This change applies to all types of exempt employees: (executive, administrative, professional, outside sales, and computer employees).

The former requirement was that a salaried employee paid more $455 a week ($23,660 a year) or more was not subject to overtime. The increase means that an exempt employee who is paid $684 a week (the equivalent of $35,568 a year) or more would not be subject to overtime.

In addition, the total annual compensation level for "highly compensated employees (HCEs)" has been increased from the current level of $100,000 to $107,432 a year. To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $684 per week on a salary or fee basis (without regard to the payment of non-discretionary bonuses and incentive payments)..

How Overtime Works

If an employee works more than a specified number of hours in a week, the additional hours are called overtime. Pay for any hours worked as overtime are paid at a higher rate than regular hours. 

Overtime pay for hourly employees is the additional pay rate paid for working more than a specific number of hours in a week. The federal minimum for overtime for hourly employees is that the person ​must be paid one and a half times the regular hourly rate for work over 40 hours a week. For example, an hourly employee making $10 an hour and working 45 hours a week would be paid $10 for 40 hours and $15 an hour for each of the 5 hours of overtime. 

Salaried employees are typically exempt from overtime if their weekly income is over a specific amount. The new regulations, effective January 1, 2020, require that exempt employees paid less than $684 a week receive overtime pay. An employer can continue to include non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary threshold.

Employee Pay & Overtime Regulations

The Wage and Hour Division of the U.S. Department of Labor regulates overtime and other pay provisions through the Fair Labor Standards Act. In addition to overtime provisions, the Act regulates child labor and minimum wage activities of U.S. employer.

Some states have regulations for overtime and other labor laws that exceed those of the federal government. In this case, more strict regulations must be met. Check with your state's labor department to review state labor laws, or check with your employment attorney.

Calculating Overtime for Hourly Employees

Overtime pay is the amount of overtime paid to each employee in a pay period. Overtime pay is calculated: Hourly pay rate x 1.5 x overtime hours worked.

Here is an example of total pay for an employee who worked 42 hours in a workweek:

• Regular pay rate x 40 hours = Regular pay, plus
• Regular pay rate x 1.5 x 2 hours = Overtime pay, equals
• Total pay for the week.

A more detailed example: 

• An employee works 50 hours in a week.
• Her normal pay rate is $15 an hour.
• So she is paid $600 for her 40 hours at $15 an hour, plus $225 for her additional 10 hours of overtime (at $15 x 1.5 x 10 = $225).
• Her total pay for the week would be $825. 

Why Some Employees Are Exempt From Overtime

Because of the nature of their work, some employees are considered to be exempt from receiving overtime pay. In order to be classified as exempt, an employee must have specific types of job duties.

The Fair Labor Standards Act (FLSA) recognizes executive, administrative, professional, outside sales, and some computer employees as exempt. Exempt classification is on a case-by-case basis and is not based on the job title of the employee.

Calculating Overtime for Exempt Employees

As noted above, lower-paid exempt employees may be eligible for overtime. To calculate overtime for these employees, use the same overtime policy you have for hourly employees. Then you can use one of two methods:  

Method 1: It's assumed that an exempt employee's salary is based on 2080 hours of work per year (basically, 50 weeks of work and two weeks of vacation). Using that assumption, you can calculate the employee's hourly rate. Let's say the employee makes $31,000 a year. Dividing $31,000 by 2080 gives an hourly rate of $14.90. You can use that hourly rate to calculate overtime for a week of work. 

Method 2: Here's another way: Take the employee's pay for a week and divide it by the normal hours of work during that week. If the employee is paid $500 for a week and is expected to work 36 hours, the employee's hourly rate is $13.89 an hour.

Overtime usually begins at 40 hours, so if an employee works 45 hours in the week, they would be paid at the regular rate of $13.89 an hour for up to 40 hours, and at 1.5 x $13.89 for each of the additional 5 hours. 

The total pay for that employee for the pay period would be $13.89 x 40 = $555.60 plus 20.84 x 5 hours = $104.16 totaling $659.76. 

Overtime Record Keeping

The FLSA requires employers to keep records of payments to employees, including overtime pay. In the case of an audit, an employer must be able to prove payment of overtime that meets FLSA requirements.