How to Calculate Overtime Pay: A Guide for Beginners

Overtime is one of the costliest labor expenses a business can have. Overtime hours, mandated by the Fair Labor Standards Act (FLSA) to be paid at a rate of at least one and a half times an employee’s regular rate of pay, can quickly add up. 

Furthermore, failing to be accurate when it comes to tracking overtime hours leaves you legally liable, since the FLSA requires employers to maintain accurate records of all employee time worked and wages paid.

In this guide, we’re going to teach you how to calculate overtime pay accurately, including steps you can take to streamline the process for greater ease and speed.

What is overtime pay?

Overtime pay is compensation due to employees for any time worked in excess of 40 hours in a workweek. The FLSA defines overtime pay as being at a minimum of one and a half times an employee’s regular rate of pay.

Scheduling employees to work Saturdays, Sundays, holidays, or on regular days of rest does not automatically fall under requiring overtime pay. Neither does working nights. This type of scheduling would only require overtime pay if the hours worked at these irregular periods counted as overtime hours.

One common misconception is that working more than eight hours in a workday automatically makes an employee eligible for overtime. However, the eight-hour workday limit is not actually stipulated under federal law, though some states have passed laws making this so. 

In states where these laws are not in place, employers are capable of scheduling employees in unconventional ways while remaining in compliance with overtime laws (for example, scheduling employees for 10-hour days, but only requiring them to work four days a week, equalling 40 hours total).

How does overtime work?

There are a few definitions to understand before we get into describing how overtime works:

• Workweek: The FLSA defines a workweek as a period of 168 hours during 7 consecutive 24-hour periods.
• Hours worked: Hours worked includes all time that an employee is on duty.
• Regular rate of pay: The regular rate of pay for an employee is the amount of money an employee makes per hour for non-overtime hours worked. 

If your employees make a flat rate per hour worked and receive no tips or bonuses, calculating overtime pay is simple. They make 1.5x their regular rate of pay, so if they make $10 per hour, their overtime rate of pay is $15 per hour.

However, if your employees receive other forms of compensation like bonuses or tips, if they’re paid in less-conventional ways such as per piece rather than per hour, or if they receive variable rates for working different roles or shifts, calculating the employee’s regular rate of pay becomes more complicated.

We’ll walk through how each of these scenarios impact the regular rate of pay in the “How to calculate overtime pay” section below.

What types of employees are exempt from overtime pay?

There are two types of employee categories under federal law when it comes to overtime: exempt and nonexempt employees.

Exempt employees are generally salaried workers who make the same amount of money every week regardless of how many hours they work (though there can be some exceptions, discussed below). Exempt employees do not fall under the rules outlined in the FLSA, meaning they do not have to be paid overtime.

Nonexempt employees are workers whose pay is based on the number of hours they work or salaried employees who do not meet the specific salary and role conditions set by the U.S. Department of Labor. Nonexempt employees must be paid overtime rates for any hours worked in excess of 40 hours per week.

There are some cases where salaried employees are required to be designated as non-exempt. The classification is tied to both the amount of money the employee makes per week and the specific responsibilities of their role. Here’s a page from the U.S. Department of Labor explaining what criteria qualifies an employee as exempt or non-exempt.

It’s important to fully understand which category your employees fall under, as that has major implications for how you need to calculate wages.

How to calculate overtime pay

Calculating overtime pay can be a pain, which is why we’re going to provide examples of some of the most common types of overtime your business may encounter. Ideally, you’ll be able to plug in your own data figures into the models to make sure you’re going through the calculations correctly for each scenario.

For hourly employees

To calculate overtime pay for hourly employees, simply take their hours worked in excess of 40 hours in a workweek, then calculate their overtime rate of pay (take their regular rate of pay and multiply it by 1.5). Then, multiply their overtime hours by this overtime rate of pay to determine their overtime pay.

Example

Let’s say you have an employee, Trisha, who works as a cashier in your retail store. She’s paid $15 an hour. Your business was experiencing increased traffic for the holidays, so she ended up working 44 hours. Here’s how you can determine how much she’s due to be paid:

1. Calculate the base pay by multiplying her hourly rate by the standard 40-hour workweek: $15 x 40 = $600 base pay.
2. Calculate her overtime pay rate by multiplying her hourly rate by 1.5: $15 x 1.5 = $22.50.
3. Multiply the overtime rate by the total number of overtime hours worked: $22.5 x 4 = $90.
4. Add the base pay to the overtime pay to get the total pay due to Trisha: $600 + $90 = $690 total pay.

For salaried, nonexempt employees

Salaried, non-exempt employees must also be paid overtime at a rate of at least 1.5 times their regular rate of pay.

To calculate overtime pay in this scenario, divide the employee’s weekly salary by 40 to get their regular rate of pay. Then, multiply that figure by 1.5 to get their overtime pay rate. Next, take the overtime rate of pay and multiply it by the number of overtime hours worked, and then add that to their weekly salary to get their total pay due.

Example

Let’s look at an example with a salaried receptionist named Brad, who gets an annual salary of $35,000 and recently worked 50 hours in a single week.

1. If you don’t already know Brad’s weekly salary, you can figure it out by dividing his annual salary by 52 (the number of weeks in a year): $35,000/52 = $673.08.
2. Next, you can divide Brad’s weekly pay by 40 to get his regular hourly rate of pay: $673.08 / 40 = $16.83.
3. Calculate the overtime pay rate by multiplying the regular hourly rate of pay by 1.5: $16.83 x 1.5 = $25.25.
4. Multiply the overtime pay rate by the total number of overtime hours worked: $25.25 x 10 = $252.5.
5. Add the base pay to the overtime pay to get the total pay due to Brad for the week: $673.08 salary + $252.5 overtime premium pay = $925.58 total pay.

For variable pay rates

If you have employees who get paid different amounts for different jobs or roles (such as prevailing wage jobs or differential pay shifts), the FLSA recommends taking the weighted average of the pay rates and dividing it by the total number of hours worked at all jobs. This weighted overtime is sometimes also called blended overtime.

Example

Let’s say you’re a gym owner who has an employee, Chris, who does janitorial work for $10 an hour. However, he occasionally takes over at the reception desk and is paid $15 an hour for that work. Let’s see how much he would be paid after working 44 hours in a week, working 30 hours on the floor, and 14 hours as a receptionist.

1. Calculate his earnings at both jobs in straight time, ignoring (for now) that some of the hours are actually overtime hours. He worked 30 hours on the floor earning $10 an hour (30 x $10 = $300), and then he worked 14 hours as a receptionist making $15 an hour (14 x $15 = $225). Add those together to get his total straight time earnings: $300 + $225 = $525.
2. Take the total straight time earnings and divide them by the total hours worked to get the weighted average regular rate worked: $525 / 44 hours worked = $11.93 weighted average regular rate.
3. Since we’ve already calculated his straight time, we’re only missing the calculation to meet the time and a half pay requirement for overtime hours. Therefore, we need to calculate half-time by multiplying one half times his weighted regular rate: $11.93 x 0.5 = $5.97 half-time rate.
4. Multiply the half-time rate of the weighted regular rate by the total amount of overtime hours Chris worked (4 hours): $5.97 x 4 = $23.88.
5. Finally, add the half-time sum to the straight time earnings to get Chris’ total pay: $525 + $23.88 = $548.88.

For piece-rate employees

Piece-rate pay means that employees are paid for the number of goods produced or services rendered. It is also known as “output work,” because employees are compensated by the measure of their output. 

Piece work employees are still required to be compensated for any overtime hours they work. This is still calculated as time and a half.

Example

Let’s look at an example of a piece rate worker named Paddy, a factory worker who is paid per widget completed. Paddy worked 52 hours in a week, and earned $520 on a piecework basis in straight time.

1. Calculate the regular rate of pay for that week by dividing Paddy’s total pay by how many hours she worked: $520 / 52 = $10 per hour.
2. Since the above includes Paddy’s straight time earnings, all that’s left is to calculate the remaining half time to figure out the total time and a half pay owed to Paddy. You do this by taking the regular straight time pay rate and multiplying it by 0.5 to get her half time overtime pay rate: $10 x 0.5 = $5.
3. Take this figure and multiply it by the total amount of overtime hours the employee worked to get their total half overtime wages due to be added to their total straight time: $5 x 12 = $60.
4. Add this figure to the straight time amount to get the total pay due to Paddy: $520 + 60 = $580 total pay.

Alternatively, the FLSA allows you to compensate pieceworkers by paying 1.5 times the piece rate for each piece produced during overtime hours. However, the rate must be enough to yield at least minimum wage per hour. 

For employees who receive tips

For employees who receive tips, calculating overtime is partially influenced by whether you’re using tax credits. Employers can claim a tip credit of up to $5.12 to pay employees towards the minimum wage. 

How much of a tip credit an employer claims impacts their overtime calculations for tipped employees, who are meant to be paid based on the regular minimum wage, tip credit, and overtime hours worked.

Example

Let’s say you have a waiter, George, who you pay a direct cash wage of $2.13 per hour. He works 50 hours in a single week. Let’s go over how you’d calculate his overtime wages.

• In this example, you’re using the full tip credit to bring George’s pay up to the federal minimum wage (currently $7.25/hour). So start there and multiply it by 1.5x to determine his overtime pay rate: $7.25 x 1.5 = $10.88.
• Subtract the tip credit from the overtime rate to calculate the adjusted overtime rate per hour: $10.88 – 5.12 = $5.76.
• Multiply this figure by the total amount of overtime worked: $5.76 x 10 overtime hours = $57.60.
• Add the employee’s overtime pay to their straight pay to determine their total pay: 40 hours x $2.13 = $85.20.
• Add the straight pay to the overtime pay to get the total pay owed: $85.20 + $57.60 = $142.80.

Keep in mind that George would also have to have received at least $256 in tips ($5.12 x $50) while working these 50 hours to meet the federal minimum wage minimum for you to apply the tip credit based on FLSA regulations. 

For employees who receive bonuses or commissions

Some employees are paid a combination of regular wages and commissions/bonuses. The FLSA has strict rules determining when workers paid in commissions are exempt or nonexempt from overtime and minimum wage rules: 

• Discretionary bonuses: Discretionary bonuses do not need to be factored into an employee’s regular rate of pay when calculating overtime pay. These are generally bonuses that an employee does not have reason to expect and are made at the sole discretion of the employer. 
• Nondiscretionary bonuses: Nondiscretionary bonuses do need to be factored into an employee’s regular rate of pay when calculating overtime pay. These are bonuses employees expect to receive as part of their salaries, such as sales commissions.

First, you need to determine whether the bonuses an employee received were discretionary or nondiscretionary. If they were nondiscretionary, they need to be calculated into the employee’s overtime pay.

Example

Let’s say you have an employee, Sarah, working as a telemarketer making $20 per hour, and she earned $100 in commission for the week for signing a customer up for a premium service. Additionally, she worked 45 hours that week.

1. Calculate the weighted regular pay by multiplying Sarah’s hours worked by her pay per hour, then add her commission: $20 x 45 = $900 + $100 in commissions = $1,000 straight time earnings.
2. Calculate the weighted regular rate of pay by dividing the total pay by the hours worked: $1,000 / 45 = $22.22.
3. Calculate the missing half time rate by multiplying the regular weighted rate of pay by 0.5: $22.22 x 0.5 = $11.11.
4. Multiply the half time rate by the total number of overtime hours worked: $11.11 x 5 overtime hours worked = $55.55.
5. Add this number to the straight time amount to get Sarah’s total pay: $1,000 + $55.55 overtime = $1,155.55 total pay.

An easier way to calculate overtime pay

As you saw in the examples above, calculating overtime pay is complicated, and doing it manually is incredibly time consuming. In most cases, you’re much better off using a time tracking app like Buddy Punch that tracks employees’ hours and calculates regular pay, overtime, and overtime pay for you automatically.

With Buddy Punch, you can set up your rules for overtime and your employees’ overtime pay rates, and it will automatically calculate their regular pay, overtime pay, and total pay for you. And if you want to avoid employees working overtime, you can set up overtime alerts to get a notification when employees are nearing overtime.

When it’s time to run payroll, you can pay your employees through Buddy Punch, or you can integrate with popular payroll systems like QuickBooks, ADP, Paychex, Gusto, and more to send your time and pay data to payroll in seconds.

Common mistakes to avoid when calculating overtime

Here are a few errors you want to avoid when jumping into calculating overtime.

Refusing to pay unauthorized overtime

Sometimes, employers are completely caught by surprise when their team members begin to work overtime hours. Maybe it was something you did not discuss with your workers, maybe you underestimated the amount of time it would take them to finish up tasks during a busy week. 

The idea of paying time and a half, when you were caught off guard by this occurrence, can make a business owner want to outright refuse to pay.

However, this is expressly forbidden under the FLSA. You have to pay overtime, regardless of whether it was authorized, so long as your employees are nonexempt. In order to avoid occurrences of unauthorized overtime, you want to make sure you have a solid handle on timekeeping in your workplace.

Improperly classifying employees

Are your employees exempt or nonexempt? Paid by salary or hourly wage? Understanding the fine details of each employee’s employment situation is critical to remaining in compliance with the FLSA’s rules for calculating overtime.

Not counting all hours worked

Failing to properly account for your employees hours worked can cause you to constantly bleed money due to overtime pay rates. Keeping track of the time your employees work is the responsibility of business owners under the FLSA, but it’s also a helpful process to follow. 

The better you can track employee hours, the better you can manage and possibly even reduce the need for overtime in your workplace. Ensuring hour calculations are accurate also allows you to make sure employees are properly compensated for their work, which helps keep employee morale high.

Calculating overtime based on hourly rate alone

The problem with calculating overtime based solely on hourly rate is that it excludes the other factors that impact overtime pay. Business owners usually make this mistake by assuming that regular rate of pay is equivalent to hourly rate. 

In reality, factors such as bonuses, tips, and shift differentials drastically impact how overtime is meant to be calculated.

Improperly using the fluctuating workweek method

Some employees have work schedules that vary from week to week, resulting in what the FLSA defines as “fluctuating workweeks,” when the hours an employee works varies greatly from week to week.

Under the U.S. Department of Labor’s fluctuating workweek method, overtime pay is based on the average hourly rate multiplied by the number of hours actually worked in a specific workweek. Using this method, the average hourly rate will change from week to week depending on how many hours the employee actually worked.

This method can only be used if the employer and employee both agree on the set salary compensation for hours worked each workweek, whether they work more or less hours. Also, their hours have to actually change on a week-to-week basis.

Neglecting state laws

The FLSA has strict guidelines when it comes to remaining in compliance with overtime, but your journey with the law doesn’t end there. There are state laws that you also have to factor into your calculations, depending on where your business operates and where your employees live. 

For example, overtime is only defined in the FLSA as an employee working more than 40 hours in a workweek. But a few states, such as Alaska, California, and Nevada have an additional rule for daily overtime, denoting that working more than 8 hours in a single workday makes an employee eligible for overtime for the additional hours worked. 

Meanwhile, Colorado has a labor law that sets the daily overtime threshold at 12 hours of work.

It can be a hassle making sure you’re in compliance with federal and state laws, but it’s absolutely critical to ensure you’re never legally liable for miscalculating employee wages.

Sticking to manual methods

As we’ve outlined in this post, there are a lot of moving parts when it comes to calculating overtime pay. While it can be worthwhile learning how to do these on your own to know what’s going on in overtime, sticking to manual methods of calculating this week after week is a slow, tedious process, with plenty of room for human error. 

That’s why we highly recommend that business owners upgrade to more efficient ways of calculating overtime, such as making use of time-tracking software like Buddy Punch.

The bottom line

Calculating overtime pay is a process that has a lot of moving parts to it, which creates plenty of opportunity for a business owner or HR administrator to make a costly mistake that leaves you legally liable. 

This is why it’s so important to fully understand the impact of federal and state laws on overtime, as well as to foolproof the process as much as possible. 

Making use of time-tracking software with automatic features to enforce compliance is one of the best ways to make calculating overtime easier.

Frequently asked questions

Can I pay less than time and a half for overtime?

No, time and a half is the minimum rate that overtime can be. However, you can go over this amount. For example, there are some union contracts that stipulate an employer has to pay more (for example, 2x overtime over 12 hours of work, or 2.5x overtime for holiday work).

If I have employees work 9 hours in a workday, are they eligible for overtime?

It depends on your state and whether this ninth hour of work means that your employees are working more than 40 hours in that week total. 

It is a common misconception that working more than 8 hours in a single workday automatically means overtime under the FLSA. In truth, federal law only cares about the workweek, not the workday, as it pertains to overtime law — but a few states have their own rules that are stricter.

For equations, when do I use time and a half times pay (1.5), and when do I use half times pay (0.5)?

You use time and a half times pay (1.5x) to figure out overtime pay if there are no additional factors to take into account for tracking employee hours, such as bonuses, tips, or fluctuating workweeks. 

Otherwise, you need to use an equation making use of average hourly rates to ensure accuracy when it comes to overtime payment, which involves first calculating straight time (1.0x) for all hours worked and then factoring in half time (0.5x) for overtime hours.