When people think of overtime pay, they tend to think of it as wages paid for any work over 40 hours a week at one-and-a-half times the regular hourly wage. While that’s partially correct, it isn't the whole story.
Looking for more guidance? Download our guide on How to Correctly Classify Your Workers today.
What are the Federal Overtime Laws?
Introduced in 1938, the Fair Labor Standards Act (FLSA) is a federal law which regulates minimum wage, overtime, equal pay, recordkeeping, and child labor.
The FLSA generally requires employers to pay employees at least the minimum wage for all hours worked and overtime pay at a rate of 1.5 times the employee’s regular rate of pay for hours worked over 40 in a workweek. Those minimum wage and overtime laws don’t apply to certain exempt employees.
Exempt and Non-Exempt Employees
The FLSA and applicable state law generally require employers to pay employees at least the applicable minimum wage for all hours worked and overtime pay according to applicable federal, state, and local laws. Some employees are exempt from the FLSA's and state minimum wage and overtime requirements (exempt employees) and others are subject to those requirements (non-exempt employees).
The simplest explanation for the difference between an employee classified as exempt and an employee classified as non-exempt is that exempt employees do not qualify for overtime and/or minimum wages. Although non-exempt employees typically receive hourly pay, employers can pay them on a salary basis and pay applicable overtime.
Learn how to correctly classify seven different types of workers with our simple guide.
Under federal law, when a non-exempt employee works more than 40 hours in a workweek, overtime must be paid at 1.5 times the employee’s regular rate of pay. For example, if an employee worked 60 hours, they would receive their regular rate of pay for 40 hours, plus an additional 20 hours at the overtime rate.
Some states and local jurisdictions have their own overtime requirements, which may provide greater protection for employees than what is provided under the FLSA. Generally, where federal, state, and local laws conflict, the law that is most beneficial to the employee prevails.
Related Article: A Simple Guide to Exempt vs Non-Exempt Employees Under the FLSA
Calculating an Employee’s Overtime Pay
We know overtime must be paid at 1.5 times an employee’s regular rate of pay. However, that rate isn’t always as straightforward as it might seem.
According to the Code of Federal Regulations (CFR): “The regular hourly rate of pay of an employee is determined by dividing his total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by him in that workweek for which such compensation was paid.” [29 CFR 778.109]
In other words, the regular rate is an hourly rate of pay, and since it refers to “hours actually worked,” hours and pay for vacation, holidays, or sick leave are not included.
Remuneration includes all earned wages based on an hourly rate of pay, as well as any taxable allowances, non-discretionary bonuses, commissions, payments for piecework, other incentive pay, etc.
How Do Those Definitions Affect an Employee's Pay?
Consider an example. Suppose Joe is paid an hourly wage of $10 per hour, works a total of 50 hours in one workweek, and he receives a bonus of $200 per week. What is Joe's total remuneration?
- Hourly wages - $10/hr x 50 hr = $500
- Bonus - $200
- Total remuneration - $500.00 + $200.00 = $700
<p>But we still need to calculate Joe’s overtime wages. For that you need to know his “regular rate” of pay.</p>
The regular rate of pay for the workweek is calculated by dividing $700 by the 50 hours worked. ($700 / 50 hr = $14.00/hr).
Then you multiply half of the regular rate by the overtime hours. Here, the calculation is as follows: $14.00/hr x 50% x 10 hrs = $70.00
So Joe’s total remuneration, including overtime is $700 + $70 = $770.00
Overtime pay is actually the 50% premium that is paid for hours worked over 40 hours in a workweek at the federal level and in most states.
It is not uncommon for some to make the mistake of calculating overtime like this: (1) regular wages for the first 40 hours of work: ($10/hr x 40 hr = $400); and (2) overtime as time-and-a-half of his hourly rate ($10/hr x 1.5 = $15/hr) for the 10 hours of overtime work ($15/hr x 10 hr = $150), for a total of $550 in hourly wages plus $200 bonus for total wages of $750.00. This approach is incorrect because it excludes the overtime wages owed on the non-discretionary bonus that Joe earned.
If Joe's only remuneration were his earned wages, then the total would be the same using either method. However, since his remuneration includes a bonus, his correct overtime is actually $20 higher.
Note that you get the same result by calculating overtime on each kind of pay:
- Hourly Pay: $10/hr x 50 hrs = $500
- Hourly overtime: $10/hr x 50% x 10 overtime hours = $50
- Bonus: $200, and so the bonus “regular rate” is calculated like this: $200 ÷ 50 hrs = $4.00/hr
- Bonus overtime: $4.00/hr x 50% x 10 hrs = $20.00
- Total pay: $500 + $50 + $200 + $20 = $770.00
Why Make a Distinction Between Regular Wages and Overtime Pay?
Understanding how overtime wages are calculated is important for two primary reasons.
<p><ol> <li>When there are additional forms of remuneration involved, the employee's regular rate of pay will be higher, and any overtime correctly calculated as the 50% premium will be higher.</li> <li>In all but four states (Pennsylvania, Delaware, Utah, and Nevada), overtime pay is not included in the calculations for workers compensation insurance. It is the 50% overtime premium that is excluded, so by correctly calculating the overtime pay, an employer can save money on its premiums.</li>
Overtime pay is actually the 50% premium that is paid for hours worked over 40 hours in a workweek at the federal level and in most states. Remember that there are a few states with daily overtime laws. In any event, understanding the correct federal and state definitions of overtime is important because it enables employers to pay their employees what they are legally due, and potentially save money on workers compensation insurance.
How Justworks Can Help
Justworks helps employers pay hourly and non-exempt employees via timecards. Timecards allow employers to record all of an employee’s hours worked — including overtime hours — so they are paid all regular and overtime wages correctly. Learn more about our payroll services.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.