Are You Paying Overtime Correctly for Your Hourly Employees?

December 3, 2014|Sharon Helms

Beware of possible penalties!

In most circumstances, employers are required to pay hourly employees overtime for the actual hours worked that exceed 40 hours in a work week. The employer determines when the work day begins (the day of the week and the time of day), and the following seven consecutive days would be the work week.

First we need to reflect on the word “worked.” If an employee has paid time off (such as vacation, sick, or funeral time), those hours are not considered physically worked and can be excluded from the calculation. However, an employer may have a company policy or a union contract that includes paid time off when calculating overtime. Some employers are generous and have a company policy that pays overtime after eight hours in a day. The employer must follow the company policy or union contract language.

The examples in this article assume that the work week starts on a Sunday and ends on the following Saturday.

In this first example, Mary Employee has 8 hours of vacation on Monday and works 35 hours from Tuesday through Friday. The total hours Mary accumulates during the work week would be 43. The Department of Labor does not require overtime pay because she had only 35 hours of actual work time. The other 8 hours were vacation time. However, the employer can decide to pay overtime even though it is not required.

What happens when an employee is paid at two different rates? Suppose Mary’s employer pays a shift premium of $0.25 per hour when an employee works during the evening. Mary’s daytime hourly rate is normally $10.00 per hour, so during the evening her hourly rate would be $10.25. She works 32 hours on Monday through Thursday evenings and 11 hours during the day on Friday. Some employers might think that the 3 hours of overtime would be calculated at the $10.00 per hour rate because that is when the overtime occurred. They would be wrong.

To calculate Mary’s overtime rate, you must first determine her regular (without regard to overtime) pay for the week. Divide this by the number of hours worked. Because of Mary’s different hourly rates during the work week, the result will be a blended rate. Her overtime pay should be 50% of this blended rate multiplied by the number of overtime hours she worked. Here is the calculation:

32 hours of evening pay at $10.25 per hour $328.00 
11 hours of daytime pay at $10.00 per hour       + 110.00
Regular pay  $438.00

$438.00 divided by 43 hours equals a blended rate of $10.19
$10.19 multiplied by 50% multiplied by 3 hours of overtime equals $15.29
Mary’s total gross wages for this work week would be $453.29 ($438.00 plus $15.29)

If Mary had been paid overtime at the $10.00 rate, her overtime pay would have been $15.00 ($10.00 multiplied by 50% multiplied by 3 hours), and she would have been underpaid by $0.29. The Department of Labor could assess the employer a penalty under the Fair Labor Standards Act (FLSA), since that is not the proper way to make the calculation. Although this looks like a small amount, it could balloon to much larger dollars depending on the number of employees and their overtime hours. The employer can use the higher ($10.25) rate for the calculation; however, there is no requirement to do so.

What other items could affect the overtime calculation? Any item that is contractual and agreed upon must be included in the calculation of regular pay. Some examples would be nondiscretionary bonuses, retroactive pay, on-call pay, and reimbursement of individual health insurance premiums.

In this example, suppose Mary works 45 hours during the work week on her daytime schedule. She also receives a weekly reimbursement of $150 to help cover the health insurance that she is paying on her own. The overtime should be calculated as follows:

 45 hours of daytime pay at $10.00 per hour  $450.00
 Reimbursement to help cover health insurance costs       +  150.00
 Regular pay   $600.00

$600.00 divided by 45 hours equals a blended rate of $13.33
$13.33 multiplied by 50% multiplied by 5 hours of overtime equals $33.33
Mary’s total gross wages would be $633.33 ($600.00 plus $33.33)

If Mary’s employer paid her overtime at the $10.00 rate, that would have amounted to $25.00 ($10.00 multiplied by 50% multiplied by 5 hours), and she would have been underpaid by $8.33. 

What items are NOT included in the overtime calculation? Certain items would not be included in the overtime calculation, such as the following.

  1. Special occasion gifts (such as for length of service) or Christmas gifts, as long as the amount is not determined by production, efficiency, or hours worked.
  2. Benefit plan contributions (such as employer contributions to profit-sharing plans).
  3. Discretionary bonuses. A bonus is discretionary when there is no contract, agreement, or promise in advance to make a payment.


Some situations make the calculation more difficult. The calculation for employers that pay by piecework or are tipped is even more complex. As you can see, determining what to pay an employee for overtime can become overwhelming. Please contact your Schenck representative if you need assistance with overtime calculations.

Sharon Helms, CPA, CPP, leads our Fox Cities payroll team. As a Certified Payroll Professional, Sharon provides guidance to clients relating to payroll processing and reporting issues. She is well-versed on all aspects of payroll, including garnishments and tax compliance issues.

Tags: Payroll