How to Calculate Overtime Pay For Your Employees

If your business employs hourly workers, you’re already familiar with the concept of overtime. 

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But how, exactly, do you calculate overtime pay? What are the overtime rules? And how much more do you need to pay your workers per hour when they move past the 40 hours/week threshold? 

How to calculate overtime pay for hourly employees

Compensating your hourly employees with overtime pay when they work more than 40 total hours per week is more than just showing your team you appreciate their hard work—its federal law. Under the federal Fair Labor Standards Act (FLSA), employers are required to pay hourly employees at a rate of one-and-one-half times their regular rate of pay for any hours worked in excess of 40 hours each workweek.

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The first step in the process is figuring out their regular rate of pay. If your employee is strictly hourly, their regular hourly rate would also be their regular rate of pay. If their pay structure is more complex (for example, if they receive any nondiscretionary bonuses or commissions), you would need to include those factors in their total compensation when calculating their regular rate of pay.

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Once you’ve locked in your employee’s regular rate of pay, to determine the overtime calculation, you would multiply their regular rate of pay by 1.5. So, for example, let’s say you have an hourly employee who makes $20 per hour (and doesn’t have any additional factors to consider, like bonuses or commissions). Calculating their overtime pay rate would look like this:

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$20 (regular hourly rate) x 1.5  = $30

So, in that example, the employee’s overtime pay rate would be $30 per hour.

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The next step is calculating how much overtime pay you need to give your employees during any pay period. So, let’s say that same employee worked 45 hours in a workweek. Because they worked five hours above the 40 hours per week threshold, you’d owe them 5 hours of overtime pay, which would look like this:

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$30 (overtime rate) x 5 (number of overtime hours): $150

So, in addition to your employee’s regular pay, you’d owe them an additional $150 in overtime wages for the week.

How to calculate overtime pay for salaried non-exempt employees

It’s not just hourly employees that are entitled to overtime wages. If your business employs any salaried employees that are also non-exempt, you’ll need to pay them overtime as well.

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Under the FSLA, “The regular rate for an employee paid a salary for a regular or specified number of hours a week is obtained by dividing the salary by the number of hours for which the salary is intended to compensate. The employee is entitled to an additional one-half times this regular rate for each hour over 40, plus the salary.”

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So, for example, let’s say you have a non-exempt employee with a salary of $504 per week—and that salary is meant to cover 36 hours each work week.

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The employee’s regular rate would look like this:

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$540 (weekly salary) / 36 (hours the salary is intended to compensate each week) = $15

So, the employee’s overtime rate would be one-and-one-half times their regular rate, or:

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$15 x 1.5 = $22.50

So, if the employee worked 45 hours in a single workweek, even though their salary is meant to cover 36 hours, they would be entitled to their regular rate of pay for the first 40 hours—and then their overtime rate for the additional 5 overtime hours:

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$15 (regular rate) x 40 = $600

$22.50 (overtime rate) x  5 (overtime hours) = $112.50

So, the total compensation due to the employee for that workweek would be $712.50.

Calculating overtime pay in California

FLSA and the Department of Labor require you to pay overtime to nonexempt employees. But in addition to federal regulations, the state of California also has its own rules for overtime pay—and those rules are more robust than federal regulations.

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Under California state laws, you’re required to provide overtime pay at one-and-a-half times the hourly or nonexempt employee’s regular rate of pay for:

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• Anything over eight (but less than 12) work hours on any single day 
• Anything over 40 work hours in any single week
• The first eight work hours worked on the seventh day of consecutive work in a workweek

If your employee works beyond the aforementioned overtime hours, you’ll be required to pay that employee “double time.”

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Employers are required to pay out overtime at double the employee’s regular rate of pay for:

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• Anything over 12 work hours in a single day
• Any time beyond the first eight hours worked on the seventh day of consecutive work in a workweek

So, let’s say you have an hourly employee making $20 per hour, and that employee works 45 hours in a single work week—but on one of those days, they worked 13 hours. Calculating their overtime pay would look like this:

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$20 (regular rate) x 40 = $800

$30 (1.5 overtime rate) x 4 (hours worked above eight but below 12 in a single day) = $120

$40 (Double time rate) x 1 (hour worked about 12 hours in a single day) = $40

So, the total compensation due to the employee for that workweek would be $960.

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The different rules and regulations at the state and federal level can be confusing—but if your business operates in California, make sure you’re taking these state overtime laws into consideration when calculating overtime pay for your employees.

Additional opportunities to offer overtime pay to your employees

There are times when you’re required to give overtime pay to eligible employees, including when they work more than 40 hours per week or, in the state of California, when they work more than eight hours in a single day.

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But there are circumstances outside of the legal requirements when you may want to offer overtime pay to your employees.

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Many employers choose to offer overtime pay when employees work less-than-ideal shifts or dates. For example, you might offer your employees overtime pay (or even double time) for working holidays or overnight shifts. While this kind of overtime pay—known as shift differential pay—isn’t required by law, it does show your employees you care about them, their time, and their efforts and can go a long way in improving employee retention.

Demystify the payroll and overtime process with Hourly

Now that you know how to calculate overtime pay, you know exactly how to determine if and when your employees are eligible for overtime—and, if they are, how much you’ll need to pay them. But managing the payroll and overtime pay process can still be a hassle.

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At Hourly, we know how hard it is to keep track of work hours, payroll, and overtime pay. That’s why we set out to empower small businesses to take control of the payroll process with helpful, easy-to-use features like mobile time tracking, full-service payroll, and automatic overtime calculation. Want to learn more about how Hourly can help simplify your payroll process? Get started with a free trial today!