Overtime is a tricky part of payroll. There are many factors to consider that involves more than just calculating hours multiplied by a number.
Here is a detailed guide on how to calculate overtime correctly for your employees.
What is Overtime Pay?
Whenever an employee works more than a certain number of hours per pay period, the extra hours worked are called overtime.
Overtime hours worked are paid at a higher rate than the standard workweek hours.
The standard workweek length varies by country. It is 44 hours in Canada, 40 hours in the United States (and most other countries of the world), 38 hours in the UK, and just 35 hours in France.
Some employees are not eligible for overtime. First, you need to figure out if your employee is exempt or nonexempt from overtime pay.
How to Calculate Overtime
In the US, overtime pay is required whenever employees work more than 40 hours a week. Usually, their pay must be 1.5 times their regular wages. This is also known as time and a half.
In order to calculate overtime, you need to know if an employee is an hourly or daily worker.
For Hourly Employees
For hourly employees who are nonexempt for overtime, you will multiply their regular rate of pay by 1.5 and then multiply that by the number of overtime hours for the workweek.
Let’s go through an example. If an employee earns $20 an hour and worked 48 hours during one workweek.
You would calculate 40 regular hours x $20/hour. This is the regular wages for the employee.
To calculate overtime, multiply $20/hour x 1.5 = $30. That means the employee earns $30 for every hour of overtime.
$30 x 8 overtime hours = $240 overtime wages
Now all you need to do is add the regular wages plus the overtime wages to have the employees total workweek wages.
For Daily Rate Employees
Some employees are paid a daily rate. Let’s say you pay an employee $200 a day and they work 50 hours a week.
$200 x 5 days a week = $1000 earnings for the week.
Now you can calculate the hourly rate for the employee. $1000 % 50 hours = $20/hour.
Now we can calculate the overtime rate by factoring in the additional hours they worked. Let’s say the employee worked an extra 10 hours one week.
$20 hour x 1.5 = $30. This employee earns $30 for every hour of overtime worked.
$30/overtime hour x 10 hours of overtime = $300 of overtime for this week.
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Other Considerations to Calculate Overtime
Now that we’ve walked through real examples, it’s important to understand the considerations.
An employee must physically work more than 40 hours to get overtime pay. Let’s say an employee takes 8 hours of vacation pay plus works 48 hours. You are entitled to pay all 48 hours at the regular rate.
When calculating over time, be sure you know when the workweek starts and ends and what the regular rate of pay is per employee.
Final Thoughts
Thanks for reading! Now you know how to calculate overtime pay for employees. The more you practice, the easier this process will become.
Be sure to come back soon for more informative articles for you to read.