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What is Overtime? Guide for Businesses

March 27, 2023

Need your employees to work over 40 hours in one week? If so, gaining in-depth knowledge of overtime basics will help you feel confident knowing your employees aren’t getting underpaid.

Rules around overtime can be confusing because there are several things to consider, such as state laws, employee salaries, and an employee’s specific job duties.

In this guide, we help you understand the latest laws related to overtime pay and navigate these with your employees to ensure compliance.

Here’s What We’ll Cover:

What is Overtime Pay?

Are Salaried Employees Exempt from Overtime Pay?

What is the Typical Overtime Pay Rate?

Is Overtime Over 40 Hours a Week or 8 Hours a Day?

How to Calculate Overtime Pay for Employees

Overtime Compliance and Happy Employees

More Resources on Small Business Accounting

What is Overtime Pay?

When you need an employee to work over overtime, the extra hours might be subject to overtime rules. Overtime regulations state that employers must pay a non-exempt employee an overtime rate equal to their regular rate of pay plus time and a half.

The Department of Labor passes labor laws such as an increased rate of pay for overtime work to prevent employee exploitation.

Fair Labor Standards Act (FLSA)

The Wage and Hour Division of the U.S. Department of Labor regulates overtime for employees through the FLSA. States may have stricter laws for employers regarding overtime pay, which we’ll touch on later.

Are Salaried Employees Exempt from Overtime Pay?

Many businesses believe salaried employees are exempt from overtime pay, but this isn’t exactly a rule. An employee paid on salary basis can still be a non-exempt employee based on overtime rules.

So, what makes an employee an “exempt” employee? There are two factors to consider:

Salary level: Employees earning over $684 per week are likely exempt from overtime rates. If employees make less, they’re likely considered non-exempt employees and subject to overtime laws. Minimum salaries differ in some cities like New York City.
Job duties: If salary level is met, employees are eligible for overtime pay if they perform certain duties. Likewise, specific duties make an employee ineligible for overtime rates even if below salary threshold (for example, some transportation employees and certain computer employees.)

The Department of Labor shows a detailed list of exempt duties on their website.

What is the Typical Overtime Pay Rate?

The Department of Labor sets the minimum overtime rate for employees at time and a half.

You’ve likely heard of a business paying their employees double time, but the Federal government doesn’t require an employer to do so, not even for holidays. The one exception is California, where employees must be paid double time instead of time and a half after a certain number of overtime hours.

A business may have a better overtime policy than the FLSA overtime provisions as an incentive for employees to work a higher number of overtime hours.

Is Overtime Over 40 Hours a Week or 8 Hours a Day?

It depends on which state you live in.

Federal laws state anything over 40 hours per week is overtime. California adds that an employee who works over 8 hours in 1 day must be paid the overtime pay rate(even if the employee doesn’t break a 40-hour workweek.)

Is Overtime One Week or Two?

The overtime rule doesn’t consider multiple week periods except rare circumstances (for example, police officers). The overtime definition applies to a pay period of only one week.

Does Sick Leave Affect Overtime Eligibility?

No. Overtime hours only apply when employees are actively working.

How Do I Calculate Overtime Rate if an Employee is on Salary?

Yearly salary ÷ 52 (weeks per year)

÷ 40 (or average hours worked per week) = hourly rate

How to Calculate Overtime Pay for Employees

The formula for calculating overtime rate is:

(Standard hourly rate) x (time and a half) = Overtime hourly rate

The formula for calculating overtime wages is:

(Overtime hourly rate) x (Number of hours worked over 40 hours) = Overtime wages

Calculating Overtime Pay Example

Here’s how to calculate overtime pay for an employee working 45 hours with a normal hourly rate of $12 per hour.

(Standard hourly rate) x (time and a half) = Overtime hourly rate

$12 x 1.5 = $18

(Overtime hourly rate) x (Number of hours worked over 40 hours) = Overtime wages

$18 x 5 = $90

The employee would earn $90 in overtime pay for 5 overtime hours.

Overtime Compliance and Happy Employees

Becoming familiar with overtime laws will save you from IRS fines and keep your employees happy knowing they are getting paid correctly.

When determining if your employee is eligible for overtime payments, double-check the FLSA and information on local laws. Remember that exempt employees are exempt from overtime requirements based on duties and not just their job title.

If you need more help managing overtime hours, time tracking software allows you to track hours worked so you can easily calculate overtime pay for yourself or your employees.