Calculating Overtime - When, Where, Why, and HOW does Weighted-Average Overtime Come Into Play?
Every business owner, no matter what state their business is located in, is required to pay their "non-exempt" employees overtime pay for hours that the employee worked over 40 hours in a workweek at a rate of not less than time and one-half their regular rate of pay.
What is a "non-exempt" employee?
A non-exempt employee is one who is covered by the minimum wage and overtime requirements of the Fair Labor Standards Act, based upon the types of duties performed.
While each state can have their own rules for calculating and paying overtime (check your local "Department of Labor" website for Overtime Laws, ALL business owners and payroll personnel should understand 3 key terms; which this page will explain:
- Hours Worked
- Regular rate of pay
The following information is derived from calculating overtime pay under the Fair Labor Standards Act (FLSA) - a Federal Law.
Under the FLSA, overtime must be determined for each employee for each individual "workweek".
While there are a few very limited exceptions, which we will not cover here, it is not permissible to attempt to calculate overtime based on a period of longer than a single workweek.
Under the FLSA, a workweek is comprised of sevem (7) consecutive 24-hpur periods for a total of 168 consecutive hours.
As an employer, you may choose the day and time that the workweek begins. You may also establish different workweeks for different employees or groups of employees.
Just remember, simple is not only better; it also removes the human margin of error involved when calculating overtime and actually issuing payroll for your employees.
After a business owner has defined the workweek, he and/or the payroll clerk must then determine and calculate the hours worked by each employee and apply overtime calculations when applicable.
The Laws governing the definition of "hours worked" are varied and complex, therefore, these laws must be reviewed against every circumstance of each specific "workplace".
As a general rule, "hours worked" include all of the times that an employee must be "on duty", devoted to the principal work activity or activities that are related to the "task at hand."
The following examples are generally not included in hours worked:
- Hours that were paid but not worked, including vacation days, sick time, and paid holidays
- Travel to and from work
- Clocking or punching in and out of the workplace
- True breaks longer than 20 minutes - EXCEPT that sleeping time on long shifts may be included in certain situations.
Regular Rate of Pay:
Once you have determined the number of hours worked in a workweek, when those hours exceed 40 hours, the employee is entitled to overtime pay for the hours over 40 at a rate of at least 1.5 times their "regular rate of pay".
Calculating Overtime and Paying Employees:
Calculating overtime and then paying your employees appropriately can be a lot more complex than most employers and payroll clerks initially think.
A common misconception is "ok, so I pay Joe $10.00 per hour, when he works overtime it's $15.00"...... and that's it.
In reality, it may not be quite that simple, let's look at some examples:
1. Single Rate of Pay for All Hours Worked on a Specific Job With No Other Types of Compensation Paid to the Employee.
This is truly the most simple and straightforward method of calculating overtime; because, indeed, if you pay Joe $10.00 per hour for the first 40 hours he worked on a specific job, then his overtime rate is $15.00 per hour for all hours worked over 40.
2. Calculating Regular (and Overtime) Rates of Pay for Two or More Different Jobs With Different Rates of Pay.
When Joe works on two or more jobss for you in a single workweek AND those jobs each have a different rate of pay - then the regular rate of pay for that week is the weighted average of the rates.
Joe Works a total of 50 hours for the week
25 hours on Job A at $10.00 per hour
25 hours at Job B at $12.00 per hour
(25 hours x $10.00) $250.00 + (25 hours x $12.00) $300.00 = $550.00
$550.00 divided by 50 hours = $11.00 weighted-average rate of pay
$11.00 + ($11.00 divided by 2) $5.50 = $16.50 overtime rate of pay
Joe is paid (40 hours x $11.00) $440.00 + (10 hours x $16.50) $165.00 = $605.00
Many employers will choose to pay Joe at an hourly rate of not less than 1.5 times the regular rate for each respective job for each overtime hour on that job, just to ease the administrative burden of having to manually perform the above calculations for each employee.
Did you know?
In order to pay overtime at 1.5 times the regular rate for each respective job for each overtime hour on that job, you have to have Joe's approval BEFORE he works any of those overtime hours!
3. Calculating Overtime Pay for Commissioned Employees
When an employee is paid (in whole or in part) on a commission basis, the employer may choose to pay the commissions less frequently than each week, but in doing so, the employer cannot avoid the overtime requirements.
When the commissions are paid, the employer must retroactively divide the commissions earned among the applicable workweeks in the amounts actually earned (or, failing that, reasonable presumed to have been earned) for each week, in order to calculate the regular rate of pay and any overtime due for those weeks.
Joe works a total of 52 hours for the week
His rate of pay is $15.00 per hour
He also earned a $150.00 commission based on sales for that workweek
52 hours x $15.00 per hour = $780.00 straight time pay
$780.00 + $150.00 commission = $930.00 regular compensation
$930.00 divided by 52 hours worked - $17.88 regular rate of pay
($17.88 divided by 2) x 12 hours = $107.28 overtime compensation
Joe is paid $930.00 + $107.28 = $1037.28
4. Paying Overtime to Salaried Employees
A non-exempt employee paid on a salary basis may have hours of work that fluctuate from week to week.
When this is the case, the employee and employer may enter into a legal agreement in which the employee will be paid the same weekly base salary, regardless of the number of hours worked (as long as the employee always earns at least "minimum wage"). However, the employer's obligation to pay overtime according to the FLSA cannot be avoided by entering into such a contract, and an employer is obligated to pay the employee overtime for the hours worked over 40 in any given week.
Joe's weekly salary is $600.00
In the last workweek, Joe worked 44 hours and had hours of paid time off
Joe was also awarded a "premium payment" of $250.00 for long hours worked in the previous month
Straight time pay = $600.00 (paidd time off does not factor in)
$600.00 "salary" + $250.00 premium payment = $850.00
$850.00 divided by 44 hours = $19.32 regular rate of pay
($19.32 divided by 2) x 4 hours = $38.64 overtime compensation
Joe is paid $850.00 + $38.64 = $888.64
QuickBooks Training & Special Events:
Join us on the 2nd Wednesday of each month, from 5-6 p.m. EST, on Google+ for the QuickBooks for Contractors hangout!
- QuickBooks 2015 Compatibility Announced & Other Updates
- Office Closures 2014
- Compatibility for MnDOT AASHTO Trns*port Payroll Spreadsheet
- Regarding the Heartbleed Security Breach
- News & Updates April 1, 2014
- QuickBooks 2014 is here and we're ready!
- Urgent news about QB 2013/Enterprise 13 & Sunburst Software Solutions
- 5/17/2013 - News, Tradeshows, & Vacation Schedules
- New QuickBooks Support & Training Website
- Installing Your Software on a new computer