Understanding overtime pay: A comprehensive guide

Ensuring shifts are adequately staffed often requires overtime. Overtime pay is a critical aspect of employment law that impacts the relationship between employers and employees, making it essential to compensate employees fairly and accurately for their overtime work. But what exactly constitutes overtime, and how do we compute it? This article takes an in-depth look at overtime pay, how it works, rules and regulations, how to calculate it and upcoming proposed changes to overtime pay rules.

What is overtime pay?

Overtime pay refers to additional compensation employers must pay to eligible employees who work more than the standard hours in a workweek. The Fair Labor Standards Act (FLSA), administered by the Department of Labor (DOL), sets the federal guidelines for overtime pay in the United States, requiring eligible employees to be paid at least one and a half (1.5) times their regular rate for hours worked beyond 40 in a workweek. According to the FLSA, an employee’s workweek is a fixed and regularly recurring period of 168 hours or seven consecutive 24-hour periods. Businesses that come under FLSA regulations and are required to pay overtime include those engaged in interstate commerce or earn more than $500,000 in annual sales. While the FLSA establishes federal guidelines for overtime eligibility, some states have their own laws and may require additional factors, such as daily overtime payments or double-time premium pay. In addition, the FLSA clarifies industry specific exemptions for workweeks, such as a 7 consecutive to 28 consecutive days “work period” for public safety, and the 80 and 80 system in healthcare that allows employers to adopt a fixed work period of 14 consecutive days.

How does overtime pay work?

Employers must first establish whether an employee is categorized as exempt or nonexempt to determine overtime pay eligibility.

Exempt employees: Exempt employees are considered exempt from receiving overtime because they make at least twice the minimum wage in their area and are paid on a salary basis at not less than $684 per week. However, salary-based pay alone does not determine exempt status. The FSLA outlines certain job duties that make an employee exempt, including managing at least two other employees and having the authority to hire or fire employees. These are some job categories to which exempt employees may belong:

• Executive
• Administrative
• Computer
• Outside Sales
• Highly-compensated

Nonexempt employees: Nonexempt employees can receive overtime pay from their employer. This group of employees must earn at least the minimum wage per hour, and they are paid by the hour, based on the number of hours worked in each pay period. Here are some examples of nonexempt positions:

• Administrative assistants
• Contractors
• Retail associates
• Hospitality roles
• Construction workers

Types of overtime

Some employers require overtime as stated in their employment contracts, while others may offer overtime as an option depending on the week’s schedule and where there’s extra work to be done. Here are some other types of overtime an employer may offer:

• Time off in lieu (TOIL): Also known as compensatory time, employees get compensated for overtime with paid time off instead of extra pay. This is subject to employer policies and regulations, and the employer and employee work together to schedule the time off.
• Voluntary time: Refers to overtime work offered by an employer and an employee can accept or decline without penalty. Employees who accept receive full overtime pay and are compensated accordingly.
• Compulsory time: Also known as mandatory overtime, occurs when employees are required to work overtime due to essential business needs such as emergencies or operational timelines.

Voluntary and compulsory time are most prevalent in public safety, but other industries may offer one or more of the prior examples.

How to calculate overtime pay

1. Determine employee classification

Assess whether the employee falls under the classification of nonexempt or exempt as per criteria from the FLSA. Consider any exemptions applicable to specific industries or job roles.

2. Track weekly hours

Maintain a record of employee weekly working hours. Review hours at the end of each workweek, and if an employee worked any hours beyond 40, calculate and include overtime pay in the paycheck.

3. Find hourly pay rate

For hourly employees, the hourly pay rate is typically known upfront. The federal minimum wage is $7.25 per hour, and many states have minimum wage laws that exceed the federal rate.

4. Identify overtime pay rate specific to employer

Recall the federal requirement for overtime for employers is at least 1.5 times the regular pay rate, but some employers may offer double time or a unique rate that exceeds time and a half. Additionally, state laws may dictate the extent of overtime pay for eligible employees.

5. Calculate overtime earnings

Upon identifying the number of overtime hours worked in a workweek and the employer’s overtime pay rate, multiply the number of overtime hours by the overtime pay rate to determine the total overtime wages for the pay period.

For example, let’s say Taylor worked 55 hours as a front desk receptionist at a hotel, she earns $20 per hour, and she’s a nonexempt employee and the hotel pays an overtime rate of time and a half (1.5). How much overtime pay would she earn in her paycheck?

Regular hourly pay rate: $20

Overtime worked: 15 hours (55 hours total worked-40 standard hours)

Overtime pay rate: $20 x 1.5 = $30

Total overtime wages: 15 hours (overtime hours) x $30 (overtime pay rate) = $450

Overtime pay rules and regulations

Overtime has been part of American workforce law since the FLSA was passed in 1938. Though it initially ruled an employee worked 44 hours a week, lawmakers amended the FLSA two years later to reflect a 40-hour workweek, lowering the threshold for overtime pay and determining the workweek we use now.

The current overtime rules have been in effect since January 1, 2020, and at the time of implementation, made 1.3 million American workers newly eligible for overtime. In addition, the following overtime regulations also changed:

• An increase to $684 per week for the standard salary level, up from the previous level of $455.
• An increase to $107,432 per year for the total annual compensation requirement for “Highly Compensated Employees” (HCE).
• Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.

Overtime requirements can vary in certain states. In California, nonexempt employees must receive one and a half times their regular rate of pay for hours worked over eight in a day or 40 in a week and double the regular rate of pay (double time) for all hours worked more than 12 hours in a day. FLSA overtime regulations are federally mandated for all states, but individual states can enact more generous overtime laws such as daily overtime requirements or industry-specific rules—such as Oregon, where manufacturing workers must be paid overtime premiums after working 10 hours.

The future of overtime

The Department of Labor announced in the Federal Register on September 8, 2023, that it will be proposing a new Final Rule on Overtime, expected to be released in late spring of 2024. The DOL has proposed raising the weekly salary threshold from $684 per week to $1,059 per week, extending overtime protections to an additional 3.6 million workers. In addition, the new rule would also automatically update the salary thresholds every three years to reflect current earnings data and raise the threshold for highly compensated employees’ exemption to $143,988, whereas it currently is $107,432. There will be a 60-day public comment period, potentially subject to extension, before the rule’s finalization. Following the comment period, the DOL is obligated to review all comments and decide whether to adjust the proposal before issuing a final rule. While the new Final Rule on Overtime is only proposed for now, employers should consider taking steps to prepare their businesses and employees for any potential changes.

Simplify your overtime pay with TCP Software

Overtime pay is a type of payroll record and must be retained for at least three years in accordance with the FLSA. To support overtime recordkeeping compliance, it is essential for employers to ensure accurate tracking, calculations, and records for all overtime hours and pay.

With TCP’s time and attendance solution, TimeClock Plus, employers can monitor which employees are in or close to overtime thresholds. Organizations can also accurately calculate overtime pay, no matter how complex your rules (including federal and state rules for overtime), for accurate and compliant payroll.

TCP also helps organizations start at the source of overtime: employee scheduling. TCP simplifies workforce scheduling with Humanity, a dynamic employee schedule solution that provides AI-powered forecasting, automated scheduling, and a mobile app that employees love, so employers can avoid unnecessary overtime.

Learn more about how TCP can help you overcome costly scheduling obstacles and develop the best approach for your organization by downloading our eBook or speaking to an expert.

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