Are You Using the Regular Hourly Rate to Calculate Overtime?

A year end bump in business adds volume but not enough to warrant a new hire. The extra work can be covered by overtime. Carl’s a great employee who earns $20 an hour performing skilled work. He volunteers quickly to cover in the storeroom over the weekend even though the hourly rate there is only $15. It seems like a good deal all around since Carl will be able to earn $22.50 at time and a half for the extra hours. This overtime calculation would be a violation of federal wage and hour regulations.

Overtime Basics

Federal law mandates that non-exempt employees be paid time and one half when they work more than 40 hours in a work week. Employers set a consistent work week, say starting at 12:01 am on Monday and ending at midnight the following Sunday. So working six days straight does not necessarily put someone into overtime.

Regular Hourly Rate

Time and one half is calculated using the employee’s regular rate of pay. If a staff member earns the same base rate all week, that’s the regular hourly rate. When employees work two or more jobs with different rates of pay, earn commissions, bonuses or other forms of compensation during the week these variables must be used to calculate the regular, or average, hourly rate.

Calculating Carl’s overtime rate correctly takes a few steps:

Step 1 Multiply the hours worked by the hourly rate.

            40 hours x $20 per hour = $800

            10 hours x $15 per hour = $150

Step 2 Add the totals from Step 1 to get $950 total base pay.

Step 3 Determine the regular rate by dividing the total base pay by the total hours worked. $950  / 50 hours = $19.00.  For 40 hours of work at this regular rate Carl would earn $760.

Step 4 The overtime rate of time and one half is calculated using the regular rate identified in Step 3.  In this case $19.00 x 1.5 = $28.50. Ten hours of overtime equals $285.

Step 5 Add the forty hours at the regular rate plus the overtime to determine wages for the week.   $760 $285 = $1,045.00

If you had incorrectly paid Carl the overtime using the $15 an hour as a base he would have earned $112.50 in overtime and $912.50 for the week. 

Is there an easier way?

If the thought of these computations is daunting an easy solution is to simply pay the overtime using the higher rate of pay. You can always pay an employee more than what is required, just like you pay more than minimum wage.  In Carl’s case this would mean paying all overtime $30 an hour. Check your payroll system ability to handle calculations before making this decision.

Can’t I just write a separate paycheck?

The weekend work that Carl covers is in a separate location, different building, different boss. Can’t we just say it’s like another job and issue a separate check at the regular rate for the work? Nope, it’s the same employer, added on to the W-2 at the end of the year. A separate check does not eliminate the requirement to pay the overtime.

Can it be any more complicated?

Sure, your state or local laws may require overtime when an eligible employee works more than 8 hours in a day, more than five consecutive days, on holidays or weekends. State departments of labor are very helpful with this information. You want to ask them the questions and pay correctly. When a wage and hour investigator is asking the questions, in response to an employee complaint, it will cost a lot more than a few hours of overtime.