Small Business Guide: How to Calculate Overtime Pay

Overtime pay is time-and-a-half, but it's also a little more complicated than that. You need to perform specific overtime calculations under federal law. State laws may have different requirements. You also need to factor in other compensation elements, such as bonuses and shift differentials. This guide provides a step-by-step approach to calculating overtime pay, along with practical examples and state-specific considerations that may impact your business.

What is Overtime Pay?

Overtime pay is the compensation your employees receive for working beyond standard hours. Under federal law, non-exempt employees must receive at least one-and-a-half times their regular rate(opens in a new tab) for hours worked over 40 in a workweek. It protects workers from excessive hours and ensures fair compensation when extra work is necessary.

Understanding Federal Overtime Rules Under the FLSA

The Fair Labor Standards Act (FLSA)(opens in a new tab) establishes minimum wage and overtime standards that apply to most private and public employment. The FLSA's overtime requirements include:

• Workweek Definition: A fixed, regularly recurring period of 168 hours (seven consecutive 24-hour periods)

• Overtime Threshold: Hours worked beyond 40 in the workweek

• Minimum Overtime Rate: 1.5 times the regular rate of pay

• Recordkeeping: All required payroll records, including accurate time and wage records for all non-exempt employees

Exempt vs. Non-Exempt Employees: Who Qualifies for Overtime?

Understanding the differences between exempt and non-exempt employees is critical for proper overtime management. Non-exempt employees qualify for overtime pay, while exempt employees do not, regardless of hours worked. To qualify as exempt, employees must meet specific criteria:

• Salary Basis: Receive a predetermined salary not subject to reduction based on work quality or quantity.

• Salary Threshold: Earn at least $1,128 per week ($58,656 per year) as of January 1, 2025.

• Duties Test: Perform executive, administrative, professional, computer, or outside sales duties as defined by the FLSA.

Not all salaried employees are exempt. Their job titles alone don't determine exemption status. It's the duties performed and the compensation method that specify an employee's classification.

How to Calculate the Regular Rate

Before calculating overtime pay, you need to determine the employee’s regular rate of pay. This rate includes not just hourly wages but also commissions, non-discretionary bonuses, shift differentials, and other non-cash payments, such as meal allowances. The regular rate excludes discretionary bonuses, expense reimbursements, gifts, and specific statutory exclusions. Here's how you can determine the regular rate:

1. Add all compensation for the workweek (including wages, non-discretionary bonuses, commissions).

2. Divide this number by the total hours worked that week.

3. Use this rate to calculate overtime pay.

For example, if an employee earns $600 in wages plus a $100 production bonus and works 50 hours, their regular rate equals $700 ÷ 50 = $14 per hour. You can use this rate to calculate the overtime pay for the workweek.

Standard Overtime Formula: Time-and-a-Half Explained

The standard overtime formula multiplies the regular rate by 1.5 for each overtime hour. Here's how to calculate overtime pay step by step:

1. Determine the total hours worked in the workweek.

2. Subtract 40 from the total hours to find overtime hours.

3. Multiply the regular rate by 1.5 to get the overtime rate.

4. Multiply overtime hours by the overtime rate.

Example calculation (for an employee receiving a single hourly rate with no additional compensation):

• Regular rate: $20/hour

• Hours worked: 45

• Overtime hours: 5

• Overtime rate: $20 × 1.5 = $30

• Overtime pay: 5 × $30 = $150

How to Handle Multiple Pay Rates and Blended Rates

If employees work in different roles at varying pay rates, you need to determine their regular rate using a weighted-average calculation. This blended rate ensures fair overtime compensation across all work performed. Here's how to calculate overtime pay with multiple rates:

1. Calculate straight-time earnings at each rate.

2. Add all earnings together.

3. Divide by total hours worked to find the weighted average rate.

4. Apply the overtime formula to this blended rate.

Overtime Calculations:

• Weighted Average: $750 ÷ 45 = $16.67

• Overtime Rate: $16.67 × 1.5 = $25.01

• Overtime Pay: $25.01 x 5 = $125.05

Calculating Overtime for Bonuses and Incentive Pay

Non-discretionary bonuses affect your overtime calculations because they're part of the regular rate. These include attendance bonuses, production incentives, and retention bonuses tied to specific criteria. When calculating how to track these payments, spread bonuses across the period they cover:

• Weekly Bonus: Add it directly to that week's regular rate calculation

• Monthly Bonus: Divide it by the number of weeks in the period, then recalculate overtime for the affected weeks

• Quarterly Bonus: Spread it across 13 weeks and adjust the overtime pay retroactively

Overtime Rules for Salaried Non-Exempt Employees

Some salaried employees may be non-exempt, meaning they are eligible for overtime pay even though they receive a fixed salary. Roles such as administrative assistants, IT technicians, inside sales reps, or medical assistants may fit this description. As the employer, you need to track their hours to calculate overtime correctly. You usually determine the hourly equivalent of the salary (weekly salary ÷ 40 hours), calculate overtime at this rate, and then add the overtime pay to the base salary.

State-Specific Overtime Requirements to Consider

Some states provide additional worker protections. In California, for example, employees are entitled to daily overtime pay(opens in a new tab) for hours worked over eight per day, and double-time for hours worked beyond 12 hours in a single day. Other states mandate overtime(opens in a new tab) for the seventh consecutive workday (like in Kentucky) or in specific industries (restaurants in Connecticut, for example). Staying compliant means tracking both federal and state requirements. Always apply the standard that is most favorable to employees when federal and state laws differ. Key variations include:

• Daily Overtime Thresholds: Examples are California, Alaska, and Nevada.

• Industry-Specific Rules: Healthcare, transportation, and hospitality often have unique requirements.

• Collective Bargaining Agreements: These may establish different overtime terms.

How Justworks Helps with Overtime Pay

Manual overtime calculations may leave room for error, especially as your team grows. Modern time-tracking solutions integrated with payroll systems automate these calculations, reducing errors and saving valuable time. Justworks' user-friendly payroll solutions and HR platform help you manage overtime calculations accurately while maintaining compliance with federal and state requirements. Get started with Justworks today.