Overtime pay calculation
/What is Overtime Pay?
Overtime pay is the premium pay that an employer must add to the base pay of a nonexempt employee on any hours worked over 40 hours in a work week. This premium is paid because the employee is being asked to work more hours than the standard work week, which is essentially cutting into the person’s free time.
How to Calculate Overtime Pay
Overtime is a 50% multiplier that is added to an employee’s base wage for hours worked over 40 hours in a work week. This rule comes from the Department of Labor. The intent behind paying overtime is to compensate employees for excessive work hours.
In general, follow these steps to calculate the amount of overtime pay owed to an employee:
Determine whether the individual is eligible for overtime. The person might not qualify as an employee, or may instead be paid on a salaried basis, in which case overtime rules do not apply.
Determine the hourly rate of pay, which is the total amount paid in the period divided by the number of hours worked.
Multiply the hourly rate of pay by 1.5x.
The calculation of overtime is subject to some variation by state, so review local regulations to see if there is an overriding overtime calculation in place. Here are two rules to consider when calculating overtime pay:
Do not include in the 40 base hours such special hours as holidays, jury duty, sick time, or vacations.
Add the shift differential to the base wage, and then calculate overtime based on this combined figure.
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There may be situations where an employee is paid different rates at different times during the work period. This situation may arise when the individual works on different jobs that have differing rates of pay associated with them. In these cases, there are three possible options for calculating overtime, which are:
Base the overtime rate on the highest wage rate paid during the period
Base the overtime rate on the average wage rate paid during the period
Base the overtime rate on the wage rate paid after the 40th hour
The last alternative for calculating overtime requires the prior approval of the affected employee.
Example of the Overtime Pay Calculation
Alfredo Montoya works the evening shift at Electronic Inference Corporation, which adds $1 of shift differential per hour to his base wage of $15 per hour. In the most recent work week, he worked 50 hours. The overtime premium he will be paid is based on the combined $16 wage that includes his shift differential. Thus, his overtime rate is $8 per hour. The calculation of his total compensation for that week is:
