How to Calculate Overtime Pay Correctly

Overtime calculation errors are one of the most common sources of wage and hour litigation. The FLSA requires that non-exempt employees receive overtime pay at one and a half times their regular rate of pay for all hours worked over 40 in a workweek. While the concept sounds simple, the calculation of the regular rate of pay creates frequent confusion.

Understanding the Regular Rate of Pay

The regular rate is not simply the employee's hourly rate. It is the total compensation for the workweek divided by the total hours worked, and it must include most forms of compensation:

Included in the regular rate:

• Base hourly rate or salary
• Shift differentials
• Non-discretionary bonuses
• Commissions
• Piece-rate earnings
• On-call pay (when required to remain on premises)

Excluded from the regular rate:

• Discretionary bonuses (where both the fact and amount are at the employer's sole discretion)
• Gifts and special occasion payments
• Expense reimbursements
• Premium pay for hours worked on holidays or weekends (if at least time and a half)
• Contributions to benefit plans
• Vacation, holiday, and sick pay (since no work is performed)

Basic Overtime Calculation

For a straightforward hourly employee, overtime calculation is simple:

1. Determine total hours worked in the workweek
2. Calculate the regular rate by dividing total straight-time compensation by total hours worked
3. Multiply the regular rate by 1.5 to get the overtime rate
4. Multiply the overtime rate by the number of overtime hours

For example, an employee paid $20 per hour who works 45 hours earns $20 x 40 = $800 in straight time, plus $30 x 5 = $150 in overtime, for a total of $950.

Complications: Multiple Rates

When an employee works at different pay rates in the same workweek, the regular rate is the weighted average:

1. Calculate total straight-time earnings at each rate
2. Divide total earnings by total hours worked to find the weighted regular rate
3. Calculate overtime premium at half the weighted regular rate (since straight-time pay for those hours is already included)

Complications: Non-Discretionary Bonuses

When a non-discretionary bonus is paid, it must be included in the regular rate for all workweeks covered by the bonus period:

1. Divide the bonus by the total hours worked during the bonus period
2. Add this per-hour amount to the regular rate for each week
3. Calculate the additional overtime owed for each week in which overtime was worked

This retroactive calculation is required even if the bonus is paid quarterly or annually.

Complications: Salaried Non-Exempt Employees

A non-exempt employee paid a weekly salary is entitled to overtime. The calculation depends on whether the salary is intended to cover 40 hours or all hours worked:

• Salary for 40 hours: Divide weekly salary by 40 to get the regular rate, then pay 1.5 times that rate for overtime hours
• Salary for all hours (fluctuating workweek method): Divide salary by actual hours worked to get the regular rate, then pay an additional half-time premium for overtime hours. This method requires a clear mutual understanding and a fixed salary regardless of hours.

State Law Variations

Some states have additional overtime requirements:

• California, Alaska, and Nevada require daily overtime for hours over 8 in a day
• California requires double time for hours over 12 in a day
• Some states require overtime on the seventh consecutive day of work
• State minimum wage rates affect the minimum regular rate

Always check applicable state law in addition to the FLSA.