How is Overtime Rate Calculated?
Calculating overtime rate correctly is essential for ensuring fair compensation for hours worked beyond the standard workweek. For most employees, overtime pay is mandated by labor laws, such as the Fair Labor Standards Act (FLSA) in the United States, which generally requires a premium pay rate for hours worked over 40 in a single workweek.
The Standard Overtime Formula
The most common overtime rate is known as "Time and a Half." This means that for every hour of overtime worked, the employee receives their standard hourly wage plus an additional 50% of that wage.
Overtime Rate = Regular Hourly Wage × 1.5
For example, if an employee earns $20.00 per hour, their overtime rate is calculated as:
- $20.00 × 1.5 = $30.00 per overtime hour.
Step-by-Step Calculation Guide
To determine total pay including overtime, follow these specific steps used by payroll professionals:
1. Determine Regular vs. Overtime Hours
First, identify the standard hours threshold (usually 40 hours per week). Split the total hours worked into two categories:
- Regular Hours: Any hours up to the threshold (e.g., the first 40 hours).
- Overtime Hours: Any hours exceeding the threshold.
2. Calculate Regular Pay
Multiply the Regular Hours by the standard Hourly Wage.
3. Calculate Overtime Pay
Multiply the Overtime Hours by the calculated Overtime Rate (Wage × Multiplier).
4. Calculate Total Gross Pay
Add the Regular Pay and the Overtime Pay together.
Real-World Example
Let's assume Jane earns $24.00 per hour and worked 48 hours last week. The standard workweek is 40 hours.
- Split Hours: 40 Regular Hours and 8 Overtime Hours (48 – 40).
- Regular Pay: 40 hours × $24.00 = $960.00.
- Calculate OT Rate: $24.00 × 1.5 = $36.00 per hour.
- Overtime Pay: 8 hours × $36.00 = $288.00.
- Total Pay: $960.00 + $288.00 = $1,248.00.
Double Time and Special Rates
While "Time and a Half" (1.5x) is the federal standard in the US, some contracts or state laws mandate "Double Time" (2.0x) in specific scenarios, such as:
- Working on holidays.
- Working more than 12 hours in a single day (e.g., in California).
- Working seven consecutive days in a workweek.
In a Double Time scenario, an employee earning $20/hr would receive $40/hr for those specific hours.
Weighted Average Overtime
If an employee works two different jobs at different rates within the same company, the overtime rate is often calculated using a "weighted average" of the two rates, rather than just the rate of the job performed during the overtime hours. This ensures the overtime premium reflects the average earnings for that week.