How does overtime work?
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Originally Posted On: Overtime pay: How does overtime work? | QuickBooks (intuit.com)
Overtime is a phrase that almost everyone is familiar with. You’ve probably heard it thrown around here and there. And yet, you may be asking yourself, “How does overtime actually work?”
Overtime is a pretty straightforward concept, but it’s important for both employers and employees to understand all of its implications. If you’re an employee, becoming familiar with overtime laws and policies will help ensure you’re earning the weekly salary you’re owed. And if you’re an employer, knowing overtime rules will help keep you in compliance with the law, preventing potential fines and lawsuits.
In general, employees who work more than 40 hours in a week qualify for overtime pay. However, this isn’t true for every employee. There are some exceptions that depend on job duties, how compensation is determined (salaried vs. hourly employees), and how much an employee is paid. In this article, we’ll take a closer look at what overtime is, how much overtime pays, and who qualifies for overtime. Read on for the full picture or skip to any section using the links below.
What is overtime?
Overtime occurs when an employee exceeds their regular weekly working hours. More specifically, overtime refers to nonexempt employees who clock more than 40 hours in a workweek. Any time worked beyond the 40 hour workweek mark is considered overtime, and the employee is entitled to overtime pay according to federal law.
Overtime pay in the United States was introduced in 1938 through the Fair Labor Standards Act (FLSA). This employment law was a response to labor groups that protested long working hours and unsafe workplace conditions. In addition to introducing overtime, the FLSA also created minimum wage and labor safety standards that are still in use today.
According to federal law, employers are required to pay certain employees who work more than 40 hours per week an additional one-half times their regular rate for every extra hour they clock. Time and a half means you have to pay the employee’s hourly wage and add an additional 50%. For instance, if an employee’s regular hourly rate is $20 per hour, you would be required to pay them at least $30 per hour for any overtime they put in. For nonexempt employees, overtime begins as soon as they exceed 40 hours of work in a week. On the other hand, exempt employees do not qualify for overtime.
In many cases, employees can be paid a regular wage no matter how many hours they clock in a workday. As long as the total number of hours they clock in a workweek doesn’t exceed 40, they won’t qualify for overtime pay. However, some state laws, such as California’s, require overtime pay for employees who work more than eight hours in a day. Review overtime laws by state to find out whether your state has a daily overtime requirement.
New overtime rules for employees
On January 1, 2020, important changes were made to the overtime rules. Namely, the U.S. Department of Labor implemented new overtime rules that raised the exemption salary level from $455 per week to $684 per week. So now, if an employee makes less than $684 per week, they must be paid overtime if they work more than 40 hours in a week. Exempt employees who are paid more than $684 per week are not eligible for overtime. Keep these updates in mind as you read through the rest of the article.
How much is overtime pay?
Overtime pay varies depending on company policy. However, federal law dictates the minimum amount of overtime pay that an employer must pay employees. Nonexempt employees who work more than 40 hours in a week must be paid at least one and a half times their regular rate of pay. This increase goes into effect once workers pass the 40 hour threshold. So, once a worker reaches 40 hours in a week, they must receive time and a half for every additional hour worked.
While time and a half is the minimum overtime wage required by law, companies are free to offer additional overtime compensation. A higher than required overtime wage can both incentivize employees to work longer hours and improve overall employee satisfaction.
How to calculate overtime pay
Calculating overtime pay is a fairly straightforward task. All you need to do is complete some basic multiplication to determine an overtime wage. Then, by adding some figures together, you can come up with an employee’s total compensation in no time.
The minimum overtime pay mandated by the federal government is time and a half. Thus, you can calculate an employee’s overtime pay rate by using the following equation:
- (Regular hourly wage) x (1.5) = (Overtime hourly wage)
If your company pays an overtime rate that’s higher than the federal minimum, you just need to adjust accordingly. For instance, if your company pays double time instead of time and a half, you’d multiply an employee’s regular hourly wage by two.
Further, calculating the total amount of overtime pay owed to an employee is simple. All you have to do is multiply the overtime hourly wage by the number of overtime hours worked. As an example, let’s say a nonexempt employee makes a regular rate of $14 per hour and they worked 50 total hours last week. This means they worked 40 hours of straight time and ten hours of overtime. Their total compensation can be calculated by adding up their regular hourly wages and overtime wages:
- Regular hourly wage = $14 x 40 = $560
- Overtime wage = ($14 x 1.5) x 10 = $21 x 10 = $210
- Total weekly wages = $560 + $210 = $770
Keep in mind that calculating overtime by hand is time-consuming and prone to inaccuracies. This is especially true if you run a company that employs many workers. Specialized payroll software and overtime pay calculators can help you stay on top of the wages you owe employees.
How pay periods affect overtime pay
If your employees are on different pay period schedules, calculating overtime can be a bit more complex, but no matter the pay frequency, overtime is always always based on a seven-day workweek.
For example, an employee who works a biweekly pay period may work 50 hours in the first week of the pay period, and 30 hours in the second pay period. While that may equal 80 hours in total for the pay period, you still owe 10 hours of overtime for the first week.
A semi-monthly pay period can be even more complicated. While most employers process payroll on the 1st and 15th, sometimes there are not an even amount of workweeks in a month. You must first determine where the workweek starts and ends, then calculate the number of hours worked within each, just as you would with the above biweekly example. If the work week ends during the pay period in which the employee has worked in excess of 40 hours, you are required by federal law to pay overtime for that pay period.
Exempt and nonexempt employees
Not everyone is eligible to receive overtime benefits. The federal government only mandates overtime pay for certain groups of workers. Receiving overtime pay depends on whether or not you’re an exempt or nonexempt employee. While the latter is eligible for overtime pay, the former is not. So, what’s the difference between these two classifications? In this section, we’ll look more closely at what separates exempt vs. nonexempt employees.
There are several exemptions that may prevent a particular employee from receiving overtime pay. These exemptions are outlined in FLSA and are generally based on employee job duties. The following job duties typically call for an exemption under federal law:
- Executive exemption: An executive is an employee whose primary duty is managing a department, section, or subdivision of a company. They must regularly oversee at least two full-time employees and have hiring and firing power over other workers.
- Administrative exemption: An administrative employee takes part in nonmanual labor aimed at supporting wider business operations. In this position, the administrative employee must exercise their own judgment on important or significant matters.
- Learned professional exemption: A learned professional is someone whose job mainly consists of intellectual or analytical matters. In general, the work they do requires advanced or specialized knowledge in science, learning, or a related field.
- Creative professional exemption: A creative professional fulfills his or her job duties through the use of imagination, invention, and originality. Under the terms of their employment, they engage in artistic pursuits.
- Computer employee exemption: A computer employee works closely with computer hardware, programs, systems, and more. Professions such as software engineers, computer programmers, and systems analysts fall under this exemption.
- Outside sales exemption: The primary duties of a sales employee is to interact with clients and make sales. For this exemption, sales employees must regularly work outside of the physical business itself.
- Highly compensated employees: Employees who complete nonmanual work and earn a salary of $107,432 or more are generally considered exempt. In addition to that salary threshold, they must also perform one or more of the duties outlined in the executive, administrative, or professional exemptions. However, this exemption doesn’t include blue-collar workers and first responders, who are entitled to overtime regardless of compensation level.
One more important thing to note is that exempt employees must be compensated in a specific way. Besides computer and outside sales employees, who can be paid hourly, these exempt professionals must be salaried employees or paid on a fee basis. Alternatively, employers can pay up to 10% of an exempt employee’s salary in nondiscretionary bonuses.
A nonexempt employee is any worker who doesn’t meet the exemptions listed above. Additionally, to be considered exempt, an employee must earn at least $684 per week. So, while certain employees may perform some of the job duties listed above, they’re considered nonexempt if they don’t meet the income threshold.
However, many nonexempt employees earn more than the salary threshold required by federal law. They are simply considered nonexempt because their job duties don’t align with the exceptions described in the previous section. In any case, all nonexempt employees are eligible for overtime pay.
It doesn’t matter whether you’re an employee or an employer, in either case, understanding overtime is important. Staying compliant with overtime laws is in the best interests of both the employee and the employer. However, it may not always be easy to keep up with overtime rules and regulations, especially as a small business. For tips on navigating overtime laws, check out our article on overtime rules and small businesses.
Staying in compliance with overtime laws starts with tracking hours and determining whether a nonexempt employee has exceeded 40 hours in a week. With QuickBooks Time, you can easily track time, stay on top of payroll, and manage overtime each pay period. Our software is one of the best resources when it comes to tracking employee time and conducting payroll. We even have a mobile app, so employees can track time no matter where they are. Use QuickBooks Time to save on payroll costs while keeping up-to-date timesheets that will help your company stay compliant with overtime provisions.