Overtime Calculation: A Guide That Won’t Leave You in the Dark
Overtime calculation is a tricky subject, and is often the cause of a lot of headache for accountants and business owners everywhere. There are so many factors to consider that a simple task of calculating overtime pay can turn into a complex mathematical equation.
If you’re not a passionate accountant, the thought of crunching numbers probably gives you a splitting headache. But when it comes to overtime calculation, you can’t afford not to know the ins and outs.
This guide will take the guesswork out of overtime calculations, so you can rest easy knowing that everything is taken care of. After all, nobody wants an unexpected bill for back overtime wages. So, put on your thinking cap and let’s get started! 💪
⏳ What Is Overtime?
Before we discuss how to calculate overtime, let’s start with the basics and define what overtime actually is.
If an employee works more than a certain number of hours per pay period, which in most cases is a week, these extra hours are called overtime. Overtime hours are paid at a higher rate than regular hours. But there are exceptions to this, such as the state of California, where any time worked in excess of 8 hours per day is considered overtime.
The standard workweek length can also vary by country. It is 44 hours in Canada, 40 hours in the United States (and most other countries of the world), 38 hours in the UK, and just 35 hours in France. Employees can also work shifts, part-time, or have flexible schedules, and be paid by project or a piece of work produced and still be entitled to overtime pay.
🤔 Most Common Questions About Overtime
1. How do you manage overtime?
There are a few basic rules to follow when it comes to effective overtime management for both employers and employees:
- First, any overtime worked should be agreed upon by both parties in advance. This way, there are no surprises, and everyone is on the same page.
- Second, employees should keep track of their hours worked so that they are not working more than they are supposed to. If an employee does happen to work more than the agreed-upon amount, they should be compensated accordingly.
- Lastly, employers should try to create a flexible overtime policy that works for both them and their employees. This way, everyone will remain happy and productive.
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This time tracker will help you stay on top of employee hours and compensate them fairly. The software can also generate detailed reports on work distribution and performance.
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2. What is banked overtime?
In countries like Canada, employees can receive paid time off work instead of overtime pay. This is sometimes referred to as banked overtime, or time off in lieu.
Should an employee agree to bank their overtime hours, they must be given 1.5 hours of paid time off work for every hour of overtime worked. However, this paid time off must be taken within 3 months of the week when the overtime was earned.
3. Overtime rates: time-and-a-half or double time?
In most cases, overtime pay rate is 1.5 times the employee’s regular rate of pay, which is commonly referred to as “time and a half”.
A notable exception is (again) the state of California, where employees who work more than 8 and up to 12 hours per day get paid at one and a half rate, while any hours beyond the 12 hour limit are paid at a double their standard rate.
If an employee in California works seven consecutive days, they are entitled to double time pay after the first 8 hours on the seventh day.
4. Who is eligible for overtime pay?
Depending on their specific job duties, some employees may not be eligible for overtime pay. Since employers are liable for any unpaid overtime, they must carefully determine whether their staff is exempt or nonexempt from overtime pay.
In the United States, an employee is considered exempt if they meet certain criteria established in the Fair Labor Standards Act (FLSA):
- Being on a salary
- Working in an administrative, executive, professional, or outside sales position
- Being paid more than the minimum threshold of $35,568 per year or $684 per week
Exempt classification works on a case-by-case basis and is not based solely on the job title of the employee, or the fact that they’re salaried.
5. Is overtime good or bad for your business?
Overtime can be both good and bad for a business, depending on the circumstances. If a business is struggling to meet deadlines or keep up with customer demand, then overtime can be a lifesaver. It allows employees to put in extra hours to get the job done and keep the business running smoothly.
However, if overtime becomes a regular occurrence, it can start to take a toll on employees. They may become burned out and resentful, which can lead to lower productivity and quality of work. In addition, overtime can be costly for businesses, so it’s important to strike a balance between the two.
Ultimately, it’s up to the employer to decide whether or not overtime is right for the company. If you’re considering implementing overtime, make sure you weigh the pros and cons carefully to ensure it’s the best decision for your business.
➗ How to Calculate Overtime Pay
To accurately calculate overtime pay for an employee, we’ll need to determine their regular hourly rate of pay first, as it will serve as the basis for further calculations. Once we’ve done that, the rest should be pretty straightforward.
Let’s take a look at some of the more common scenarios:
Single hourly rate
An employee is paid $20 per hour, and works 50 hours in one week. Their overtime pay is calculated as follows:
$20 x 1.5 (overtime rate) x 10 hours (overtime) = $300
$800 + $300 = $1100 (total)
Multiple hourly rates
An employee does two different jobs for the same employer at different rates. In one week they work 20 hours for $20 per hour and 30 hours at $30 per hour. Their regular pay rate for that week will be the weighted average of the two, with overtime calculated as follows:
$20 x 20 hours + $30 x 30 hours = $1300
$1300 / 50 hours = $26
$26 x 1.5 (overtime rate) x 10 hours (overtime) = $390
$1300 + $390 = $1690 (total)
An employee works 5 days a week and is paid $100 per day with 50 hours worked in one week. To calculate their regular rate, we’ll need to take the total of their weekly earnings and divide it by the number of hours they worked. Their overtime pay will be calculated as follows:
$100 x 5 = $500
$500 / 50 hours = $10 (regular rate)
$10 x 1.5 (overtime rate) x 10 hours (overtime) = $150
$500 + $150 = $650 (total)
An employee is paid $10 per piece of product created, and creates 150 pieces in a 50-hour week. We’ll need to add the total piece rate earned by the employee in a week, and then divide it by the number of hours worked to find out their regular rate for that week. The resulting overtime pay calculations will look as follows:
150 pieces x $10 = $1500
$1500 / 50 hours = $30 (regular rate)
$30 x 1.5 (overtime rate) x 10 hours (overtime) = $450
$1500 + $450 = $1950 (total)
An employee with a fixed schedule earns a weekly salary of $600. Their typical workweek is 40 hours, but in one specific week, they work 50 hours. To calculate their regular hourly rate, we simply need to divide their weekly salary by the normal hours of work during that week. Their overtime pay will be calculated as follows:
$600 / 40 = $15 (regular rate)
$15 x 1.5 (overtime rate) x 10 hours (overtime) = $225
$600 + $225 = $825 (total)
🤖 Automating Overtime Calculations
Okay, so now that we’re familiar with the factors that go into overtime calculation, and know how it applies to the most typical cases, it’s a good time to think about how you’d like to proceed going forward.
There’s the old-fashioned way of Excel or a calculator with a piece of paper, or — if you are serious about reducing overhead — a more modern approach that consists of adopting a specialized timekeeping solution.
With a simple timesheet application like actiTIME, you can automate overtime calculations and get instant access to current work data for each employee.
With detailed charts and reports, you can get a quick breakdown of your team’s overtime hours and associated costs for a specific period.
Calculating overtime is a fairly straightforward process for the most part, but as always, the devil is in the details. Employee eligibility, work schedules, rates, and the constantly changing legislation — there’s so much information you have to keep in mind to ensure the accuracy of your calculations, that implementing a time-keeping solution to track employees’ overtime may just be what you need!
So, sign up for a free actiTIME trial today and rest easy knowing that your overtime calculations will always be on point!