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How To Calculate Overtime Pay for Hourly, Salary, and Tipped Employees
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Workforce Management

How To Calculate Overtime Pay

UPDATE: DOL Announces New Overtime Rule

On April 23, 2024, the U.S. Department of Labor (DOL) announced its new overtime rule, and increased salary levels for executive, administrative and professional workers (EAP) and highly compensated employees (HCE) to be exempt from overtime.

  • Increased Salary Threshold: Effective July 1, 2024, to qualify for exemption, executive, administrative, or professional employees must earn at least $43,888 annually ($844 per week). This amount increases to $58,656 ($1,128 per week) on January 1, 2025.
  • Higher HCE Threshold: Also on July 1, 2024, highly compensated employees now require a minimum annual compensation of $132,964 (previously $107,432) to be exempt. This threshold increases to $151,164 on January 1, 2025.
  • Automatic Updates: Salary and compensation thresholds will be automatically adjusted every three years to reflect changes in worker pay.

Overtime pay can be a complex issue, especially when you factor in the different state and federal overtime laws. The Department of Labor recently updated the compensation thresholds for overtime eligibility.

Effective July 1, 2024, to be considered exempt from overtime, an EAP employee needs to make at least $43,888 a year and then at least $58,656 on Jan. 1, 2025. In addition, the rule will adjust the threshold for highly compensated employees (HCE), now requiring a minimum annual compensation of $132,964 to be considered exempt. The HCE threshold increases to $151,164 on January 1, 2025.

Starting July 1, 2027, salary thresholds will update every three years, by applying up-to-date wage data to determine new salary levels.

Who Can Receive Overtime Pay?

In the workplace, you’re either considered an “exempt” or a “non-exempt” employee based on your specific job duties. Only non-exempt employees are eligible for overtime pay according to the FLSA. 

Employers are required to pay at least the federal minimum wage ($7.25) for regular hours and any hours of overtime at a pay rate of one-and-a-half times the employee’s regular rate for any hours worked over 40 during a workweek. Keep in mind that states’ minimum wages may be greater than the federal minimum.

The workweek is considered any 168 hours in seven consecutive 24-hour periods that can begin on any day and at any time. It’s not necessary that all employees of a company have the same workweek, but once a workweek is established by the employer, it’s best to remain consistent to avoid paying overtime.

Some states also have rules about the number of hours one can work in a day. For example, if an employee works more than 8 hours in a day, then they are eligible for overtime pay for that day, even if they work only 40 hours to get their weekly salary. While the FSLA sets out its guidelines, the State rules must be adhered to.

Be sure to review the regulations issued by your state’s department of labor.

Track the Number of Overtime Hours

It’s important to keep an accurate record of the regular and overtime hours worked by employees in case of an audit by the Department of Labor or a lawsuit. 

Any time an employee is “on duty,” that hour counts toward the 40 total hours allowed at regular pay. This includes if employees are required to be at a certain location to begin work or remain at the place of business to perform services.

Some common examples of activities that generally aren’t included in the regular hours worked:

  • Paid time off
  • Travel to and from work
  • Checking in and out of the workplace
  • Breaks totaling more than 20 minutes (possible exception: sleeping time on long shifts)

Unless you have a policy that states employees aren’t allowed to work certain hours, all hours worked in excess of 40 hours per week must be paid time and a half.

This includes any time worked beyond the normal 40-hour workweek, as well as any time worked on weekends or holidays. If you don’t have a policy in place specifying employees’ work hours, then all hours worked over 40 in a workweek must be paid at the overtime rate.

Weighted average pay is the pay an employee receives based on the different hourly wages of each job they perform. This is done for an employee who handles many roles, but they all pay a different hourly rate. You take the average of the hourly pay of each job to get the rate of pay. Also, you calculate overtime based on the weighted overtime pay rate.

Calculating the Regular Rate of Pay

An employee’s regular pay rate is based on the amount of calculated earnings divided by the number of hours worked. This includes a base rate and any additional compensation such as commission or non-discretionary bonuses. The chart below explains what is included in determining the regular wage.

Included in Regular Rate Not Included in Regular Rate 
Nondiscretionary bonuses (including commissions)Discretionary bonuses
Production bonusesPay for unworked hours
Cost of living adjustmentsOvertime in excess of FLSA rules
Shift premiumsOvertime Premiums
Retroactive payEmployer benefit plan contributions
Noncash compensationGifts on special occasions
Other payments not excluded by lawNon-taxable earnings

See the examples below for a better understanding of how to calculate overtime for both hourly employees and salaried non-exempt employees.

Calculate Overtime Pay for an Hourly Employee

The Paper Company paid Tom a production bonus of $200. He worked 48 hours this week and is paid a $9 hourly rate.

Regular Earnings:

  • 48 (all hours worked) x $9 (the hourly rate) = $432
  • $432 (regular earnings)
  • +200 bonus
  • $632 total gross earnings

Overtime Pay

  • $632 ÷ 48 hours = regular rate of $13.17
  • $13.17 x 0.5 = overtime pay of $6.59 per hour
  • $6.59 x 8 hours = total overtime due of $52.72

Tom’s total gross earnings: $632.00 + $52.72 = $684.72

Calculate Overtime Pay for a Salaried Non-Exempt Employee

Sam is a call center employee who agreed to be paid on a weekly basis of $600. She works fluctuating hours every week. Under the FLSA, her agreement does not waive her right to overtime pay. Last week she worked 44 hours and was also awarded a commission of $50.

Regular Earnings

  • $600 regular earnings
  • +$50 commission
  • $650 total gross earnings

Overtime Pay

  • $650 ÷ 44 hours = regular rate of $14.77
  • $14.77 x 1.5 = overtime pay of $22.16 per hour
  • $22.16 x 4 hours = total overtime due of $88.64

Sam’s total gross earnings: $650 + $88.64 = $738.64

How to Calculate Overtime Pay for Tipped Employees

Many employers assume that overtime is calculated the same for their tipped employees as everyone else, but it is much more complex.

A tipped employee is anyone who generally makes $30 or more a month in tips (though some states have a lower cutoff). If you’re making payroll for a restaurant, this will likely include a big chunk of your staff.

For a full rundown of requirements by state, read this list provided by the Department of Labor.

For regular hours, tipped workers’ salaries will comprise of a basic cash wage plus any tips. If this combined amount does not reach the highest of all applicable federal, state or local minimum wages, then employers are responsible for making up the difference.

In some areas, though, employers may be able to claim a tip credit against their minimum hourly wage obligation. Under DOL rules, a tip credit is determined by taking the federal hourly minimum wage rate ($7.25) minus the minimum cash wage for tipped employees ($2.13), which works out at $5.12 per hour. However, a tip credit cannot exceed the number of tips actually received by the employee. Employers should also be aware that the maximum tip credit differs by state.

Confused? You’re not alone. Keeping track of all of this is impossible to do on paper, but with the right tools in place, you can be sure to stay compliant with federal and state laws.

Keeping track of employee hours is vital for any business. Not only does this help you to track overtime pay, but it also helps you to see where your employees are spending their time.

How Paycor Helps

There is an easier way to calculate overtime pay!

For additional help understanding overtime rules, check out Paycor’s Department of Labor solution page, which offers you peace of mind by providing everything you need in one place. Get access to Paycor’s overtime resources, including an overtime calculator.