The first thing that usually comes to someone's mind when they hear that question is this: It is wages paid for any work over 40 hours at one-and-a-half times the regular hourly wage. At first glance, that may appear to be right, but it isn't quite accurate.
What are the Federal Overtime Laws?
The regulations covering overtime are found in the Code of Federal Regulations (CFR). Regarding overtime laws, the Code basically states that an employee who works more than a 40 hours in a workweek must be paid additional wages for the overtime work based on one and one-half times the employee's regular rate. If you're curious, you can find the detailed document in Part 778 of Title 29 of the CFR.
And what is the “employee's regular rate?” “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] So it is an hourly rate of pay, and since it refers to “hours actually worked,” hours for vacation, holidays, or sick leave are not included.
What is remuneration? It would include all earned wages based on an hourly rate of pay, as well as any taxable allowances, non-discretionary bonuses, commissions, payments for piecework, etc.
How Do Those Definitions Affect an Employee's Pay?
Consider an example. Suppose Joe is paid an hourly wage of $10 per hour, and he works a total of 50 hours in one workweek, and he receives an auto allowance of $200 per week. What is Joe's total remuneration?
• Hourly wages - $10/hr x 50 hr = $500
• Auto allowance - $200
• Total remuneration - $500.00 + $200.00 = $700
The regular rate of pay for that workweek would be calculated by dividing $700 by the 50 hours worked. ($700 / 50 hr = $14.00/hr)
The common view is that Joe should be paid his regular wages for the first 40 hours of work ($10/hr x 40 hr = $400), and he would be paid time-and-a-half ($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 wages.
However, the correct method is to calculate all of Joe's earned wages first, and the overtime pay is the equivalent of the 50% premium (or the “half” part of time-and-a-half).
• Hourly wages - $10/hr x 50 hr = $500
• Overtime pay - $14/hr x 10 hr x 50% = $70 (Note that the regular rate of pay is used.)
• Total wages - $500 + $70 = $570
If Joe's only remuneration were his earned wages, then the total would be the same using either method, but since his remuneration was increased by the auto allowance, his correct overtime is actually $20 higher.
Learn how to correctly classify all seven employee types.
Why Make a Distinction Between Wages and Overtime Pay?
The distinction is important for three primary reasons.
- 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.
- 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.
- Lastly, IRS Publication 15, (Circular E), Employer's Tax Guide defines overtime pay as supplemental wages. The payment of supplemental wages is subject to federal law, but the payment of earned wages is subject to state law.
So overtime pay is actually the 50% premium that is paid for hours worked over 40 hours in a workweek. Knowing the correct definition of overtime is important because it enables employers to pay their employees what they are legally due, save money on workers compensation insurance, and allow for more flexibility in the timing of payment for overtime.
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.