How to Calculate Overtime Pay for Hourly and Salaried Employees

Written by Asim Qureshi
By Asim Qureshi, CEO Jibble

October 8th 2024

Calculating overtime pay doesn’t have to be rocket science.

According to the Fair Labor and Standards Act (FLSA), employees are entitled to overtime pay when they work more than a certain number of hours per week. But the specific provisions of overtime pay may vary based on employment classification, with hourly and salaried employees typically treated differently.

In the following sections, I will break down the steps to calculate overtime pay for both hourly and salaried employees, providing practical examples to illustrate each scenario. Whether you’re a business owner seeking to maintain compliance with labor regulations or an employee wanting to ensure you’re fairly compensated, this comprehensive guide will provide you with the necessary tools and knowledge to navigate overtime pay with confidence.

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Calculating overtime. Photo by Bench Accounting on Unsplash

What is Overtime Pay?

Overtime pay refers to the additional compensation provided to an employee for working beyond their regular working hours, which are typically set by labor laws or the employer. It is a form of financial incentive aimed at compensating employees for their extra effort and dedication when they work more than the standard number of hours in a workweek or workday.

The overtime pay rate is usually higher than the regular pay rate. Under FLSA, overtime pay is set at time-and-a-half their regular pay rate, for any hours they work over 40 in a workweek. For instance, if an employee’s regular hourly wage is $15, they must receive $22.50 per hour for overtime work.

Almost all states in the US follow FLSA regulations regarding overtime except for those that have their own state overtime law like California and Montana. These states still adopt some provisions from FLSA but they’ve also added their own regulations.

The purpose of overtime pay is twofold. Firstly, it motivates employers to manage their workforce better by hiring more staff when needed, instead of overworking current employees. Secondly, it ensures that employees are compensated fairly for the extra time they dedicate to their jobs.

Which Employees Are Exempt from Overtime Pay?

It’s important to note that overtime pay eligibility varies by state, industry, and job classification. Not all employees are entitled to overtime pay, and the specific rules governing it may differ. 

The Fair Labor Standards Act (FLSA) has certain exemptions from minimum wage and overtime pay for specific types of employees. These exemptions include executive, administrative, professional, outside sales, and certain computer employees.

To qualify for these exemptions, employees must meet certain criteria related to their job duties and be paid a salary of at least $684 per week. Bonuses and commissions can be used to satisfy up to 10 percent of the salary requirement.

Job titles alone do not determine exempt status; it depends on the specific job duties and salary. Each category of exemption has its own set of tests that need to be met.

  • Executive Exemption: The employee must manage the enterprise or a recognized department, supervise at least two full-time employees, and have authority in hiring, firing, or making significant decisions about other employees.
  • Administrative Exemption: The employee’s primary duty must involve office or non-manual work related to management or general business operations, and they must exercise discretion and independent judgment on important matters.
  • Professional Exemption (Learned): The employee’s primary duty must require advanced knowledge in a field of science or learning, obtained through specialized intellectual instruction.
  • Professional Exemption (Creative): The employee’s primary duty must involve work in a recognized artistic or creative field that requires invention, imagination, originality, or talent.

Outside sales employees are exempt if their primary duty is making sales or obtaining orders away from the employer’s place of business.

Highly compensated employees earning at least $107,432 annually (including $684 per week) may be exempt if they perform at least one of the duties of an exempt executive, administrative, or professional employee.

How to Calculate Overtime Pay For Hourly Employees

Calculating overtime pay for hourly employees is relatively straightforward. Hourly employees receive a fixed hourly rate for the hours they work up to the standard workweek, but they are entitled to overtime pay when they work more than the specified hours in a workweek. Here’s how to calculate overtime pay for hourly employees:

Step #1 Determine the Regular Hourly Wage and Overtime Threshold

Find out how much the employee earns per hour for their normal working hours (regular hourly wage). Also, check the number of hours they need to work in a week to qualify for overtime pay (overtime threshold). In the US, overtime pay starts after working more than 40 hours in a week.

Step #2 Calculate the number of overtime hours worked

Subtract the standard workweek hours from the total hours worked by the employee in a workweek to determine the number of overtime hours. For example, if the employee worked 45 hours in a week, the overtime hours would be 45 – 40 = 5 hours.

Step #3 Determine the overtime rate

The standard overtime rate is usually 1.5 times the regular hourly wage. However, again, check local labor laws or company policies to confirm the correct rate. Some situations may have double time (2x) pay, such as holidays or specific workdays.

Step #4 Calculate the overtime pay

To calculate overtime pay, multiply the number of overtime hours worked by the overtime rate. Use the formula:

Overtime Pay = Overtime Hours x Overtime Rate.

Step #5 Add overtime pay to regular pay

Add the calculated overtime pay to the employee’s regular weekly pay to get their total gross earnings for that week. Gross earnings are the amount an employee earns before taxes and other deductions.

Sample Overtime Calculation for Hourly Employees

Let’s say an employee earns $15 per hour, and the overtime rate is 1.5 times the regular hourly wage. During a particular 40-hour workweek, the employee works 45 hours.

  • Regular hourly wage: $15
  • Overtime rate: $15 x 1.5 = $22.50 per hour (overtime rate)
  • Overtime hours: 45 – 40 (overtime threshold) = 5 hours
  • Overtime pay: 5 hours x $22.50 = $112.50

The total gross earnings for the week would be:

Regular pay (40 hours x $15) + Overtime pay = $600 + $112.50 = $712.50

Keep in mind that overtime pay is subject to taxes and other deductions, so the actual amount the employee receives in their paycheck may be lower than the gross earnings.

How to Calculate Overtime Pay For Salaried Employees

Calculating overtime pay for salaried employees can be a bit more complex than for hourly employees. Salaried employees receive a fixed salary, regardless of the number of hours they work. However, they might still be eligible for overtime pay under certain circumstances, especially if they are classified as non-exempt employees according to labor laws.

Here’s how to calculate overtime pay for salaried employees:

Step #1 Determine the standard workweek

The standard workweek as per FLSA is 40 hours. If the standard workweek for the company is different, make sure to use that specific value.

Step #2 Calculate the regular hourly rate

To calculate overtime pay for salaried employees, you need to find their regular hourly rate first. This is done by dividing their weekly salary by the number of hours in the standard workweek.

For example, if the weekly salary is $800 and the standard workweek is 40 hours, the regular hourly rate would be $800 / 40 = $20 per hour.

Step #3 Determine overtime hours

Subtract the standard workweek hours from the total hours worked to find the number of overtime hours.

For instance, if the employee worked 45 hours in a week, the overtime hours would be 45 – 40 = 5 hours.

Step #4 Calculate overtime pay

To calculate overtime pay, multiply the number of overtime hours by the regular hourly rate and then apply the overtime pay rate. Unless your state has its own overtime laws, overtime pay is usually 1.5 times the regular hourly rate.

Step #5 Add overtime pay to the salary

Finally, add the calculated overtime pay to the employee’s weekly salary to determine their total earnings for that week.

Sample Overtime Calculation for Salaried Employees

Suppose we have a salaried employee named Sarah, who earns $800 per week and is classified as a non-exempt employee. The company’s standard workweek is 40 hours, and overtime pay is calculated at 1.5 times the regular hourly rate.

  • Calculate the Regular Hourly Rate

Sarah’s weekly salary is $800. To find her regular hourly rate, we need to divide this amount by the standard workweek hours:

Regular Hourly Rate = Weekly Salary / Standard Workweek Hours

Regular Hourly Rate = $800 / 40 hours = $20 per hour

  • Determine Overtime Hours

Let’s assume Sarah worked 48 hours in a particular week.

Overtime Hours = Total Hours Worked – Standard Workweek Hours

Overtime Hours = 48 hours – 40 hours = 8 hours

  • Calculate Overtime Pay

Since Sarah’s regular hourly rate is $20 per hour, we can calculate her overtime pay as follows:

Overtime Pay = Overtime Hours x (Regular Hourly Rate x Overtime Pay Rate)

Overtime Pay = 8 hours x ($20 x 1.5) = 8 hours x $30 = $240

  • Total Earnings for the Week

To find Sarah’s total earnings for the week, we add her weekly salary to the calculated overtime pay:

Total Earnings = Weekly Salary + Overtime Pay

Total Earnings = $800 + $240 = $1,040

In this example, Sarah’s total earnings for the week, considering she worked 48 hours, would be $1,040, which includes her regular weekly salary and the overtime pay for the additional 8 hours worked.

Special Considerations for Piece-Rate Employees

Piece-rate employees are workers who are compensated based on the number of units or pieces they produce rather than on an hourly or salaried basis. Calculating overtime pay for piece-rate employees requires specific considerations due to the nature of their compensation structure.

Unlike hourly employees, piece-rate workers’ earnings fluctuate depending on their productivity. To calculate overtime pay for piece-rate employees, you must first determine their regular rate of pay. Divide their total earnings, including piece-rate earnings, by the total number of hours worked during the workweek. This regular rate will be used as the base for calculating overtime pay.

Once you’ve determined their regular hourly rate, you can follow the rest of the steps for calculating overtime pay for hourly employees.

How You Can Manage Overtime More Effectively

Managing overtime effectively is crucial to maintaining a balanced and productive work environment. Firstly, it’s essential to assess whether overtime is truly necessary. Encourage employees to prioritize tasks and delegate effectively to avoid overburdening individuals. When overtime is unavoidable, set clear guidelines for overtime approval and communicate them transparently to the team.

Consider implementing a time clock software. These tools can provide valuable insights into how time is being utilized across various tasks and projects. It allows for accurate overtime calculation, identifying recurring patterns, and promoting transparency and accountability. With real-time data, supervisors can intervene promptly and make informed decisions to ensure better workload management and employee well-being.

By fostering open communication and optimizing workload distribution with the help of time clock software, you can ensure that overtime is managed efficiently and that employees feel supported and valued.