Businesses with employees should understand overtime pay – what it is, who's eligible, and how to calculate it – or risk running afoul of federal or state labor laws.
The Fair Labor Standards Act (FLSA), the primary U.S. law regulating the wages and hours of both public and private employees, has been amended many times since it was established in 1938. When you layer in state laws, it can get confusing for employers, especially those operating in multiple states.
What Is Overtime Pay?
Currently, according to the FLSA, U.S. workers are entitled to a wage of at least $7.25 per hour and to overtime pay of at least 1.5 times their regular rate of pay for all hours worked in excess of 40 in a workweek.
The FLSA contains some exemptions from these basic rules for employees who do not perform manual labor, such as professional, administrative, and executive employees. But all employees are considered nonexempt and entitled to overtime pay unless the employer establishes that an employee’s position meets specific exemption criteria.
Many states and municipalities impose stricter requirements for the benefit of employees in their jurisdictions. The District of Columbia is among the list of those with higher minimum wages than the FLSA, topping out at $16.50 per hour as of 2023.
The remaining states either have laws that match the $7.25 federal minimum wage or have no separate minimum wage law. The legal definition of overtime varies by state. California, for example, defines overtime more strictly than most: employees must be paid for all hours worked in excess of 40 hours in a workweek, in excess of eight hours in a workday, or for the first eight hours worked on the seventh consecutive day they worked in any workweek.
Do Employers Have to Pay Overtime?
Salaried or not, employees are eligible for overtime unless they meet the specific FLSA exemption criteria. Even very small amounts of overtime hours or unauthorized overtime must be tracked and compensated for all nonexempt employees.
Keeping things simple and uniform and stating overtime policies in writing can help minimize mistakes.
How to Calculate Overtime Pay
To calculate how much overtime pay is, an employer must determine what makes up the employee’s workweek and then their regular rate of pay.
Defining a workweek: A workweek is a period of seven consecutive 24-hour periods. It can start on any day of the week and at any hour of the day, as established by the employer. To eliminate any ambiguity, it’s a good idea for employers to publish policies that state when they consider the workweek to begin. For example, does the workweek begin at 7:00 a.m. on Monday or at 12:00 a.m. on Sunday?
The FLSA requires overtime to be calculated weekly regardless of whether the employee is paid on a daily, weekly, biweekly, monthly, or other basis. For the purpose of an overtime calculation, each workweek must stand alone. Two or more workweeks cannot be combined or averaged to establish overtime hours to be paid.
To determine overtime hours, start by totaling the number of hours an employee has worked in any given workweek. If that number is greater than 40, under federal law the employee is due overtime pay for the hours worked above 40. It doesn’t matter if the employee worked on unrelated job assignments or on a special one-time project during the workweek – the employee is still entitled to overtime pay for hours in excess of 40 in the workweek.
However, the 40 hours considered include only actual hours worked and exclude pay for time not worked, such as vacation or sick leave. Federal law does not require overtime pay for working on Saturdays, Sundays, evenings, or holidays, unless an employee works overtime on those days.
Defining the regular rate of pay: The “regular rate” is the normal, non-overtime hourly rate paid to the employee. Regardless of whether an employee is actually paid by the hour, by the piece, on a commission, or on a salary, the employee’s compensation must be converted to an equivalent hourly regular rate from which the overtime rate can be calculated. The regular rate of pay includes all compensation, except certain payments excluded by the FLSA itself, and cannot be less than the federal minimum wage.
Holiday and vacation pay are not required to be included in the calculation of the regular rate when no work is performed on those days. As of Jan. 15, 2020, an update to the FLSA definition of regular rate came into effect. It allows the exclusion of certain perks when calculating the regular rate of pay, including:
- The cost of providing certain parking benefits, wellness programs, gym access and fitness classes, employee discounts on retail goods and services, and adoption assistance.
- Payments for unused paid leave, including paid sick leave or paid time off.
- The cost of office coffee and snacks to employees as gifts.
If an overtime-eligible employee is salaried, the regular rate of pay is computed by dividing the salary by the number of hours the salary is intended to cover.
Example: A data-entry clerk who earns $30,000 per year earns the equivalent of $14.42 per hour, based on a 40-hour workweek (30,000/52/40). The overtime rate for salaried nonexempt employees is the same as for hourly nonexempt employees: 1.5 times the hourly rate. Therefore, a data entry clerk with a 40-hour workweek would earn $21.63 for every hour worked over 40 in a workweek.
Once an employer has determined an employee’s workweek and regular hourly pay rate in compliance with the FLSA and the applicable state laws, the actual overtime calculation is simple.
Example: Consider a nonexempt, hourly employee who earns $15 per hour and works 46 hours in a workweek. Suppose there's no additional compensation paid during the workweek and no applicable state law that imposes requirements in excess of FLSA.
This worker’s total pay due, including the overtime pay, can be calculated as follows:
- $15 x 40 hours = $600 (workweek base pay)
- $15 x 1.5 = $22.50 (overtime rate of pay)
- $22.50 x 6 overtime hours = $135 overtime pay
- $600 + $135 = $735 total pay
Paying Overtime
Although overtime is calculated per workweek, the FLSA doesn't require that overtime compensation be paid weekly. However, under most state laws, every employer must pay all wages due to its employees on regular paydays designated in advance by the employer. When the correct amount of overtime compensation can't be determined until sometime after the regular pay period, FLSA requirements will be satisfied if the employer pays the overtime compensation as soon as practicable after the regular pay period. You can find each state’s payday requirements here.
Per the FLSA, employers can't give comp time in lieu of overtime pay.
The Takeaway
It’s important for employers to understand FLSA overtime pay regulations and relevant labor laws for all states in which they have employees. Keeping things simple and uniform and stating overtime policies in writing can help minimize mistakes. There are many resources available from the U.S. Department of Labor.
Photo: Getty Images
