How to Calculate Overtime in Compliance with Federal Labor Law
Federal Labor Law Rules for Calculating Overtime
Millions of U.S. business managers and owners struggle to understand how to calculate overtime for their workers. Federal laws that govern who should be paid overtime wages, and what those wages should be, are quite strict.
The Fair Labor Standards Act of 1938 was one of the core components of the New Deal. Its main provision established the 40-hour week for lower-income workers and required pay of "time and a half" for every hour worked in excess of that 40-hour threshold.
Knowing how to calculate overtime is one of the key requirements for any company that has even a single employee. For companies with large numbers of employees, overtime rules are an integral part of the pay cycle. In order to gain a clear understanding of all the particular wrinkles of the FLSA, you need to know, at minimum, the following:
- How overtime works
- How to calculate overtime for your employees
- The basic formula for time-and-a-half overtime
- How your state's rules impact your company
- Who is exempt from overtime rules
- How the law affects employees who receive tips
How Does Overtime Work?
There are two types of employees, according to the FLSA: exempt and non-exempt. Here are the key points of the definitions:
Exempt: These employees are paid a salary, not a per-hour wage. Their weekly earnings must be at least $455 per week.
Their jobs fit into one of the following categories: administrative, “learned professions,” or supervisory roles.
Non-exempt: This area includes workers who are usually paid by the hour but can also receive their wages in the form of a salary. They can work in any field and can earn any amount of money per week. Any workers who do not fit into the “exempt” category are, by definition, considered non-exempt.
Workers who are paid by the hour and earn more than $455 a week, and meet a few other criteria are covered by FLSA regulations. In other words, they are "not exempt" from the law. However, workers who are not paid by the hour and who earn more than $455 per week are exempt from most, if not all, overtime rules.
There are special methods for calculating how to pay exempt employees for any hours they work in excess of their regular work load. But for hourly employees, the rules are pretty cut and dried: anything over 40 hours in a given week is compensated with at least time-and-a-half wages.
Note that vacation time and paid-time-off does not count toward the legal, 40-hour total. So if worker A logs 30 hours of work and takes 25 hours of vacation pay for a week, there is no overtime paid. The law pertains to "actual hours worked," not PTO, vacation pay, or any other type of non-work pay.
How to Calculate Overtime
The basic formula for time-and-a-half overtime is this:
[Hourly pay rate x 40 hours] + [Number of hours worked in excess of 40 x the hourly pay rate] + [Number of hours worked in excess of 40 x half the hourly pay rate].
If worker A has an hourly wage of $16 and works 55 hours during a given week, total gross pay for the week is calculated like this, according to the standard formula:
[16 x 40] + [15 x 16] + [15 x 8] = 640 + 240 + 120 = $1,000.
Business owners often turn to web-based or mobile apps to accurately track overtime, paid time off and other parameters of employee timesheet data. For example, the ClockInEasy app can streamline timesheets, payroll, overtime and PTO. Keeping error-free overtime records helps managers meet federal and state reporting requirements.
Employees who fall under the scope of the FLSA but receive a salary rather than an hourly wage are entitled to overtime pay. The calculation is a little different. First, you have to determine the person's average hourly wage for the week by dividing total pay by the number of hours worked. That rate of pay will be used as the basis for calculating the time-and-a-half" rate for any hours worked in excess of 40.
How to Navigate State Regulations
The Department of Labor's rules for calculating overtime are strict. To learn all the details about the Fair Labor Standards Act and see exactly how to calculate overtime in your state, visit the Department of Labor (DOL) website's "minimum wage" page.
Keep in mind that additional state regulations can add even more reporting requirements. As a business owner, you should always check your own state's specific rules for how to calculate overtime.
Fortunately, the Department of Labor's website includes a very handy page where you can check your state regulations and see whether they mirror the federal rules or have additional reporting regulations.
For anyone looking for a deeper look into how overtime works can view all the fine print in a PDF version of the amended Fair Labor Standards Act.
How Does the Law Handle Tipped Workers and Tip Credits?
Workers who typically receive a portion of their earnings in tips, like restaurant servers or valet attendants, are subject to FLSA regulations. The only difference between these workers and standard hourly-wage employees is a more complicated formula for calculating overtime. Tipped workers often earn a wage lower than the legal minimum but are compensated for that shortfall with tip income. Tip income can make up for the differential between low hourly pay and the local minimum wage rate.
The calculation, with an example that follows through on each step, works like this:
1. Calculate the "standard overtime rate" of pay by multiplying the local minimum wage by 1.5.
Example: Joan works in a restaurant, where the local minimum wage is $7.25. That means the “standard overtime rate” in this location is $10.88, the product of $7.25 x 1.5.
2. Calculate the "tip credit" by subtracting the actual hourly pay from the minimum wage.
Example: Joan’s actual hourly pay is $2.50. Thus, the tip credit is $7.25 minus $2.50. That comes out to $4.75 for the tip credit.
3. Subtract the tip credit from the standard overtime rate. This amount is called the "tipped employee overtime rate."
Example: Standard overtime rate of $10.88 minus tip credit of $4.75 is $6.13. This is Joan’s “tipped employee overtime rate.”
4. Calculate how many hours of overtime the employee worked by subtracting 40 hours from actual hours worked.
Example: Joan worked 50 hours for the week. That’s 10 hours of overtime.
5. Multiply the number of overtime hours by the "tipped employee overtime rate" to arrive at the amount of overtime pay due to the employee.
Example: Joan’s overtime pay is 10 hours times her “tipped employee overtime rate” of $6.13. That gives her an overtime pay total of $61.30.
The Future of Overtime Law
Answering the question, "how does overtime work" is actually a moving target because the federal laws are currently in a state of flux.
If expected changes take place within the next year or two, the threshold for who can be considered "exempt" from the FLSA's regulations will rise considerably. Right now, anyone who makes less than $455 per week in gross pay is automatically covered by the rules. The proposed guidelines would raise that amount to $679. That means anyone who earns an annual salary of approximately $35,000 or less would come under the scope of the federal overtime rules.
Knowing how to calculate overtime is an essential skill for any business owner or manager. There's a ton of data to keep track of and the laws offer no room for error. The best course of action is to become familiar with the FLSA and keep an eye on the news to see when changes to the law go into effect.
With very few exceptions, all U.S. companies have at least some employees who are covered by the reporting requirements. The Fair Labor Standards Act is one of those pieces of legislation that touches millions of workers at any given time. Business owners who know the key provisions of the law are in a good position to understand how to calculate payroll for all the different categories of employees within their company.