How to calculate overtime pay

There’s more to calculating overtime pay than simply understanding the Fair Labor Standards Act (FLSA), which states that nonexempt, covered employees must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than time and one-half their regular rates of pay. This federal law may sound basic, but once all variables are considered – pay basis (i.e., hourly, salary, piece-rate, commission), flexible schedules, and other forms of compensation (i.e., non-discretionary bonuses, shift pay) – overtime calculations become a bit more complicated.

To make matters even more complex, businesses must comply with not only the FLSA, but also the wage and hour laws in state and local jurisdictions. When these regulations differ, employers have to apply the overtime pay rate that is most favorable to the employee.

What is overtime pay?

Under the FLSA, overtime pay is additional compensation (i.e., premium pay) that employers must pay to nonexempt employees who work more than 40 hours in a workweek. As previously stated, the federal rate is time and one-half the regular rate of pay, however, states that have their own laws may require daily overtime payments or double time premium pay.

What is the FLSA regular rate of pay?

The regular rate of pay is an employee’s average hourly rate. It’s calculated by dividing the total pay for employment in any workweek (except statutory exclusions) by the total number of hours actually worked.

How does overtime work?

Except for certain states that require premium pay daily, overtime is calculated by the workweek. According to the FLSA, a workweek is a fixed and regularly recurring period of 168 hours or seven consecutive 24-hour periods. It may begin on any day of the week and at any hour of the day and is not impacted by an employee’s pay frequency, e.g., bi-weekly, semi-monthly, monthly. Additionally, each workweek stands alone, which means that averaging hours worked over two or more workweeks is not permitted.

Consider, for example, a nonexempt employee who works eight hours on Monday, Tuesday and Wednesday, 10 hours on Thursday, and six hours on Friday. This worker would not meet the weekly overtime threshold of the FLSA, but could be eligible for two hours of overtime pay for the hours worked on Thursday, depending on applicable state labor law.

Employees exempt from overtime

Employees may be exempt from the FLSA and, thus, not entitled to overtime if they earn a salary that exceeds the FLSA minimum salary requirements and perform job duties that satisfy one of the established overtime-exempt roles. The most common exemptions include executive, administrative, professional, outside sales or computer-related jobs.

How to calculate overtime pay for hourly employees

Calculating overtime pay is usually easiest with hourly employees who have a single rate of pay and no additional compensation. Following FLSA rules, multiply the regular rate of pay by 1.5 and multiply the result by the total number of overtime hours worked.

Example:
A nonexempt, hourly employee earns $10 per hour and works 46 hours in a workweek. There is no additional compensation paid during the workweek and no applicable state law that imposes requirements in excess of FLSA. This worker’s total pay due, including the overtime premium, can be calculated as follows:

• $10 x 40 hours = $400 base pay
• $10 x 1.5 = $15 overtime rate of pay
• $15 x 6 overtime hours = $90 overtime pay
• $400 + $90 = $490 total pay

Calculating overtime for multiple pay rates

Sometimes nonexempt employees who are normally paid a fixed hourly rate work certain hours, usually at undesirable times, which grants them additional hourly pay. This practice is known as a shift differential. In such cases, employers must use the blended rate or weighted average of all rates paid in order to calculate the overtime premium due for hours worked over 40 in the workweek. Note that the FLSA has an exception to this rule that allows employer to pay overtime via the “rate in effect.” Most states, however, do not permit this method.

Example:
Over the course of a workweek, a nonexempt employee works 35 hours on the day shift at $12 per hour and another 10 hours on the overnight shift at $15 per hour in a state that follows the FLSA overtime rules. This employee’s total pay due, including the overtime premium, for the workweek can be calculated as follows:

• (35 hours x $12) + (10 hours x $15) = $570 base pay
• $570 / 45 total hours = $12.67 regular rate of pay
• $12.67 x 0.5 = $6.34 overtime premium rate
• $6.34 x 5 overtime hours = $31.70 total overtime premium pay
• $570 + $31.70 = $601.70 total pay due

Overtime pay calculation for nonexempt employees earning a salary

A salary is intended to cover straight-time pay for a predetermined number of hours worked during the workweek. Under federal law, to calculate a nonexempt employee’s regular rate of pay, divide the weekly salary by the total number of hours worked.

Note that certain states have different methods for calculating the regular rate of pay for nonexempt employees who are paid on a salary basis. Employers must review and adhere to the applicable state law.

Example:
A nonexempt employee earns a salary of $1,200 for an expected 40 hours of work per week. One week, the individual puts in an extra two hours to meet a deadline. The employee’s total pay due, including the overtime premium, for the workweek can be calculated as follows:

• $1,200 / 40 hours = $30 regular rate of pay
• $30 x 1.5 = $45 overtime premium rate of pay
• $45 x 2 overtime hours = $90 overtime premium pay
• $1,200 + $90 = $1,290 total pay due

Calculating overtime for a nonexempt employee that works a fluctuating workweek

As the previous example shows, calculating overtime for nonexempt employees with fixed workweeks is fairly basic, but what happens when the employee’s hours regularly fluctuate? The FLSA permits employers to compensate these workers for overtime hours at one half of their regular rate of pay if the following criteria¹ are met:

• The employer and the employees agree that their salaries are payment for all the hours worked each workweek
• The employees’ hours change on a weekly basis
• The employees receive their agreed-upon salaries even when they work less than their regularly scheduled hours
• The employees’ salaries are sufficient that the regular rate never falls below minimum wage
• The employees receive at least half time pay for every overtime hour worked

Note that certain states do not permit the fluctuating workweek calculation method. Employers must review and adhere to the applicable state law.

Example:
A nonexempt employee earns a salary of $900 per week regardless of how many hours are worked. If this individual works 55 hours in a workweek, the employee’s total pay due, including the overtime premium, can be calculated as follows:

• $900 / 55 hours = $16.36 regular rate of pay
• $16.36 x 0.5 = $8.18 overtime premium rate
• 15 overtime hours x $8.18 = $122.70 overtime premium pay
• $900 + $122.70 = $1,022.70 total pay due

Calculating overtime pay for non-hourly compensation

Overtime isn’t strictly based on an hourly or salary basis of pay. Certain types of other compensation, such as the following, must be included in overtime calculations.

Piece-rate work

It’s not uncommon for employers in manufacturing and certain other industries to pay their employees by the number of pieces they complete. For instance, an assembly line worker in a toy factory may be paid $2 per toy. Under normal circumstances, the employers simply pay the piece rate, but when overtime is worked, they generally must take these additional steps:

• Divide the piece rate earnings by the number of hours worked to get the regular rate of pay
• Multiply the regular rate of pay by 0.5 to get the overtime premium rate
• Multiply the overtime premium rate by the number of overtime hours worked
• Add the overtime premium pay to the piece rate pay to get the employee’s total pay

Note that certain states may have different methods of calculating overtime for piece-rate workers. Employers must review and adhere to the applicable state law.

Non-discretionary bonuses and commission payments

Under the FLSA, any non-discretionary bonuses or commission earned by a nonexempt employee must be factored into their regular rate of pay. The calculation method varies depending on if the bonus or commission payment is allocated by the workweek or some other frequency, e.g., monthly, quarterly, annually.

Note that certain states have their own methods for calculating the regular rate of pay for nonexempt employees who are paid a flat sum bonus. Employers must review and adhere to the applicable state law.

Overtime rules and regulations

Recall that the FLSA overtime calculation factor is 1.5 times the regular rate of pay for nonexempt employees who work more than 40 hours per workweek. Overtime requirements, however, vary in certain states. In California, for instance, nonexempt employees who work in excess of a certain number of hours in one workday are entitled to overtime at 1.5 times their regular rate of pay or two times their regular rate of pay, i.e., double time. Employers can reduce their risk by adhering to each state’s overtime requirements.

Keeping proper records for overtime pay

Overtime payments made to nonexempt employees are a type of payroll record and, thus, must be retained for at least three years in accordance with the FLSA. Additionally, the timesheets or other documents that show how the wages were calculated have to be saved for at least two years. Some states have their own payroll recordkeeping requirements, which may span longer time periods than those required by the FLSA.

Frequently asked questions about overtime pay

How do you calculate overtime per day?

In states that calculate overtime per workday, employers must apply the applicable overtime rate to each hour beyond what’s considered a regular workday, e.g., eight hours.

Is overtime calculated by day or week?

Federal overtime laws are based on a 40-hour workweek, but some states calculate overtime by the workday. Employers must adhere to the state-specific requirements.

What is the formula to calculate overtime pay?

According to the FLSA, the formula for calculating overtime pay is the nonexempt employee’s regular rate of pay x 1.5 x overtime hours worked. This calculation may differ in states that have requirements, such as double time, which are more favorable to the employee.

This guide is intended to be used as a starting point in analyzing overtime pay and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.

¹Department of Labor