How do I calculate overtime hours? It’s a question often asked by everyone, from administration to legal to accounting.
Today, we’ll cover the basics, from overtime pay calculators to how to manage overtime effectively.
How does overtime work?
As a concept, overtime is simple. If an employee works more than X hours in a week (typically 40), the additional hours are classified as overtime (OT). Employees are paid at a higher rate for overtime hours.
Why does overtime exist?
From a legislative standpoint, overtime exists to:
- Prevent workers who are willing to work long hours from taking all the available jobs
- Reduce unemployment by spreading work among more people
- Compensate OT workers for increased risk of accidents due to exhaustion or overexertion
How to calculate overtime pay: Hourly workers
When it comes to how to calculate overtime hours, the process for hourly employees is straightforward. The government requires companies to pay people at a minimum, one and a half times the regular hourly rate for any work over 40 hours per week.
Overtime hours calculator for hourly workers
Example: An hourly employee who makes $13/hour will make $520 per week.
If your employee works 50 hours in one week, their overtime pay will be $195 for 10 OT hours. This means their weekly payment will be $715 rather than $520 — a difference that becomes exponentially more significant with each employee and each OT hour worked.
How to calculate overtime pay: Salaried workers
Salaried employees are typically exempt from overtime — unless they make less than $684 a week. As of January 1, 2020, employees below that threshold must also receive overtime pay for any work exceeding 40 hours/week.
This change means more employees are eligible for OT. However, employers can still apply certain funds to the salary threshold — something that can be financially beneficial when considering how to manage overtime effectively. When calculating an employee’s salary, employers can count non-discretionary bonuses and incentive payments such as commissions toward the total.
How to calculate overtime pay: Exemptions
In most companies, some employees are exempt from receiving overtime pay.
To qualify as exempt, employees must be:
White-collar jobs are higher-paid, higher-skilled positions that typically require more training or education than low-skilled or manual work.
Common examples of exempt employees are:
- Sales representatives
- Computer and IT experts
- Administrative professionals
Managing overtime costs with incentives
While all employers are required to pay at least the minimum for overtime, many use overtime to improve employee satisfaction and motivate workers.
Managing overtime may be easier when employees see the perks, which could include:
- Paying employees at a higher rate than the legally required 1.5X their hourly rate
- Starting overtime pay at less than 40 hours/week, especially for jobs requiring intense manual labor
- Offering special incentives for night, holiday or weekend work such as extra PTO
- Setting performance-based targets (sales thresholds, project completion) so employees can work toward a goal rather than just logging OT hours
- Holding overtime-only contests such as raffles, which can only be entered during OT hours
How to manage overtime effectively with time tracking
Now that you know how to calculate overtime hours, it’s time to answer another key question: How is your company currently tracking employee hours?
As an owner or manager, you know that paper timesheets are antiquated and disorganized systems and lead to everything from time theft to mistrust in the workplace. But what you may not know is that solutions like Time Tracker can benefit employers and employees by increasing:
Time tracking is especially important when managing overtime costs because it streamlines and standardizes processes, saving you time and headaches.
With Time Tracker, you can:
- View each employee’s total shift hours while creating new schedules
- See daily, weekly and monthly hours as they come in
- Set up rules so you’re alerted when an employee goes into OT
- Use historical data to ensure you don’t over-schedule an employee who often works OT
- Ensure payroll costs don’t go over budget
Ready to try Time Tracker for yourself?
Get started with our 14-day free trial.