If you aren't paying eligible employees for the overtime hours they work, you may end up facing fines or even legal action.
When your employees work longer hours than they are scheduled for, not paying them the appropriate amount for the extra work could force you into some hot water. Employees who are eligible for overtime pay and don't receive it could take their case to court, which will not only cost you in legal fees but also put a serious dent in your company's reputation. To avoid the hassle and hardship of an overtime pay lawsuit, it is important to understand exactly what overtime pay is, how it is calculated, and under what circumstances you need to offer it to your employees.
What is overtime pay, and how does it work?
Simply put, overtime is the additional time employees work outside of their normal hours. Overtime pay is the amount of money workers are entitled to for putting in that extra time. Employees should receive their overtime wages in the paycheck that follows the pay period in which they worked the overtime hours.
As noted by the United States Department of Labor, unless employees fall under exempt status, per the Fair Labor Standards Act, employees must be paid overtime wages for the time they work past 40 hours in a week. Employers can require their staff to work overtime but must pay them appropriately for it. If employees fail to work the required overtime, according to the FLSA, you can legally fire them. However, the laws vary state to state, so you should look up the standards for your state before taking any actions.
"Before launching a business plan, small business owners should become very familiar with the local, state and/or federal overtime pay rules," said Tiffany Cruz, assistant general counsel and HR consultant for Engage PEO. She pointed to the following differences in how states handle overtime pay as examples.
In New York, nonexempt employees must be paid 1.5 times their regular rate of pay for all time they work in excess of 40 hours in one workweek, unless the employee is engaged in farm or domestic services.
In contrast to federal law, California generally requires daily and weekly overtime pay for nonexempt employees unless an exception applies. California employers must pay nonexempt employees 1.5 times their regular rate for all time worked over eight hours (up to and including 12 hours) in any workday and for the first eight hours worked on the seventh consecutive day of work in one workweek, and two times their regular pay rate for all hours worked in excess of 12 in a workday and in excess of eight hours on the seventh day of work in one workweek.
When Nevada nonexempt employees earn less than 1.5 times the state minimum wage ($8.25 per hour), employers must pay them 1.5 times their wages whenever they work overtime:
- More than 40 hours in any scheduled week
- More than eight hours in any workday, unless they've made an agreement with the employer to work 10 hours per day for four calendar days within any scheduled workweek
When Nevada nonexempt employees earn at least 1.5 times the minimum wage, they must receive 1.5 times their regular rate whenever they work more than 40 hours in any scheduled week.
If Kansas law applies instead of federal law, overtime pay is due to nonexempt employees who work over 46 hours in a workweek.
What are common violations of overtime wage requirements?
Not paying employees overtime wages is illegal. The rate employees receive for overtime cannot be less than time-and-a-half of the pay they regularly receive. Employees are not entitled to overtime pay for working weekends and holidays unless they work overtime on these days that exceeds the week's 40 hours.
Employers that only pay employees their regular rate or don't pay them at all for the extra hours they work are subject to penalties for withholding overtime pay. These are some common penalties:
Back pay: This is the least damaging penalty for an employer. It requires them to make up for the missed payments by paying employees the overtime wages they previously earned.
Liquidated damages: These apply to compensation that employees are owed for a specific breach. They can be more costly than back payments, even exceeding double or triple the back pay the employer owes.
Statutory penalties: Employers may be subject to pay up to $1,000 for each overtime violation. This penalty is most likely when employers are charged with violating minimum wage and overtime laws on more than one occasion.
- Attorney fees: If employees file a lawsuit against their employer to claim their overtime wages, they may be entitled to the employer paying their attorney fees. In addition, the employer may want to hire their own attorney and will be responsible for the expense.
What to know before calculating overtime pay
Before we dive into the formula for calculating overtime pay, it's important to understand what some of the terms involved mean, and what goes into paying your employees.
Regular rate of pay
Per the FLSA, the regular rate of pay is the weighted average of an employee's hourly wage. To determine the weighted average, you need to calculate the employee's total pay in a workweek by the total number of hours they worked.
Salary vs. hourly employees
These two are classified differently. Workers classified as hourly employees are paid a certain rate for each hour they work and must be paid for any overtime. Salaried employees are not typically paid overtime wages if they are classified as exempt.
These are separate from a wage or weekly salary. Discretionary bonuses are extra rewards for employees, typically given because they went above and beyond for a certain task.
Exempt vs. nonexempt employees
Exempt employees are paid a salary instead of an hourly rate. In place of paying them overtime, some companies offer them better benefits than hourly employees receive, such as paid time off along with higher wages. Exempt employees must also make a certain wage, which changes yearly. As of 2020, exempt employees must make at least $684 per week or $35,568 per year. Exempt employees also have these responsibilities:
- Regularly supervising two or more full-time employees or four part-time employees
- Managing at least part of the business
- Playing an important role in the job status of other employees, such as hiring new employees and assigning projects or tasks
These responsibilities are why some jobs qualify for overtime pay while others don't. Think of exempt status as the senior-level employees who are typically the decision-makers in a company.
Employees who classify as nonexempt are required by law to be paid a minimum wage set by federal regulations. In addition, they must be paid overtime wages. Typical nonexempt job categories include freelancers, interns, servers, contractors and others who do not serve in executive-level roles. The U.S. Department of Labor's Wage and Hour Division breaks down exemptions in detail.
How to calculate overtime pay
Simply put, overtime pay equals the hourly rate times 1.5. So, if an employee makes $30 per hour, their overtime pay would be $45 per hour. If this employee worked a normal 40-hour week, they would earn $1,200 for that week. If they ended up working 45 hours in a week, they would be owed five hours of overtime pay. In this scenario, they would be owed $1,425 for the week.
If your payroll software doesn't automatically calculate overtime pay, these are some online overtime calculators you can use:
Paying employees more than minimum overtime
The minimum overtime payment is 1.5 times the regular pay, but contracts can be negotiated where employers commit to paying more than this minimum overtime rate. A common example is to pay double time instead of time-and-a-half.
In this scenario, overtime still works the same way. If an employee goes over 40 hours of labor in a given pay week, they are entitled to overtime pay. The pay still only applies to hours worked in addition to the initial 40, but in this example, employees will earn more money for overtime hours than in previous examples. To calculate the new total, simply double the standard wage.
Time-and-a half and double time are the most common overtime rates, but they are not the limit of possibilities. Double-time-and-a-half would be 2.5 times the employee's regular pay, while triple time is triple the standard wage – you get the idea.
It is important to understand that federal regulations do not require overtime commitments above time-and-a-half, but many positions will negotiate higher overtime rates for an employee. This is especially common with union jobs where the union is able to negotiate above-and-beyond rates for members.
Here's the bottom line: If an employee is entitled to more than minimum overtime, it is treated the same as any other overtime, but the final pay modifier will be whatever is outlined in the employee's contract.
How to track and record overtime pay
The best way to track and record overtime pay is with a tool designed specifically for this. Without one, you risk making calculation errors. These are several types of tools that can help calculate your overtime pay. You can use time and attendance software or an online payroll service. These services often work in conjunction with one another.
An example of a time and attendance system that can track overtime is QuickBooks Time. When you set up overtime rules and employees clock in and out, TSheets automatically calculates their overtime pay.
Meanwhile, these are some tools that do not automatically track overtime wages, but still help you track employees' hours and organize the data to be accessible from one central location:
- Clockify: This free time-tracking and timesheet app lets you record time for an unlimited number of employees.
- Connecteam: This is a time-tracking app with multiple solutions for a deskless workforce.
- DeskTime: This solution tracks work time and automatically calculates daily productivity and efficiency based on how you categorize certain URLs, programs, and apps.
- KiwiHR: Employees can track their time with this app, which automatically calculates the amount of overtime they worked based on their schedules. It can't calculate the actual overtime wages currently, however.
How to deduct taxes for overtime pay
It is entirely possible that overtime pay rates will push an employee into a new tax bracket. Figuring out how much to withhold can be tricky, but there are a few simple rules that help. First, tax brackets are based on the total amount of money earned, not the dollars per hour. So, to figure out an employee's tax bracket for a pay period, you need to total their earnings in that period.
Once you've calculated the total, factor in deductions as outlined in their tax forms. When that is done, you will have the taxable income for the pay period. That total is what will determine the employee's tax bracket, and withholding can follow accordingly.
It is worth pointing out that taxes are marginal. If overtime raises an employee's tax bracket, they will not be paying more in taxes than they would if they didn't earn the overtime. Only income above the previous threshold will be taxed at the higher rate.