What Is Overtime Pay & How Does Overtime Work?

Running a business is a difficult task. There are a huge amount of things to consider and it’s near impossible to do everything by yourself. 

Once finances allow, many business owners will hire employees. This is to help share the workload so they can concentrate on the process of actually running the business. 

Any small business owner that employs people to work for them will have heard of overtime. 

It’s a system that’s put in place to help protect workers and make sure they are compensated fairly for their time and hard work.

But what exactly is overtime pay? 

We’ll break down how overtime works, when it’s necessary and how to calculate it. 

Here’s What We’ll Cover:

What Is Overtime Pay?

How Do You Calculate Overtime Pay?

Do I Have to Pay Overtime for Salaried Employees?

Is Every Employee Eligible For Overtime?

Key Takeaways

What Is Overtime Pay?

Overtime is when you pay an employee who has worked hours that exceed their normally scheduled working hours. 

The legally required overtime hours vary slightly from state to state. But the general rule is that overtime comes into effect if an employee works more than 8 hours a day. 

It also comes into effect if they go over the threshold of working more than 40 hours a week. 

So if an employee has worked 50 hours in a week, then they have worked 40 hours of regular time, and 10 hours of overtime. 

Both of these numbers aren’t just arbitrary amounts. They are actually decided by the U.S. Department of Labor under the Fair Labor Standards Act (FLSA). This department regulates the majority of labor laws and decides the overtime pay requirements. 

Under overtime rules, once an employee has exceeded their scheduled working hours they will have to be paid a premium rate. Again this rate varies from state to state and can vary between companies. 

This is sometimes calculated by “double time” which is double their normal rate, but the standard rate is calculated by “time and a half”.

How Do You Calculate Overtime Pay?

Calculating overtime pay is a straightforward process. 

With the standard amount being time and a half, this is calculated by multiplying the employee’s hourly wage by 1.5. 

So for every hour of overtime that an employee works past their normal hours per day or hours per week, you will have to pay them their regular rate plus 50%. 

So if an employee works for 10 hours and their regular hourly rate is $20, then you would calculate their overtime like this: 

• Regular rate: $20
• Overtime wages: $20 x 1.5 = $30
• Hours worked: 10
• Regular hours: 8 x $20 = $160
• Overtime hours: 2 x $30 = $60
• Overall pay: $160 + $60 = $220

This means that for every hour past their normal scheduled hour, their overtime compensation would be $30 an hour instead of $20. 

Do I Have to Pay Overtime for Salaried Employees?

Overtime works for both employees on an annual salary and hourly employees. 

To work out a salaried employee’s overtime, you’ll have to calculate what their hourly wage would be from their monthly or weekly salary. 

So if you have an employee who earns $800 per week and they normally work 40 hours per week, you would divide $800 by 40 for their hourly rate. You would then calculate the overtime rate from there. 

Is Every Employee Eligible For Overtime?

Not all employees are eligible for overtime pay. Their ability to receive overtime depends on whether they are exempt employees or a nonexempt employee. 

Employees are exempt from the FLSA overtime laws if they:

• Make at least $35,568 annually or $684 per week
• Receive a salary and
• Have job duties that are considered exempt

A job duty that would be considered exempt would include high-level responsibilities. For example, this could be executive, administrative or computer-based duties.

It’s the exact reverse for nonexempt employees. So they will receive overtime if they: 

• Do not make at least $35,568 annually
• Are not salaried and/or
• Do not have exempt job duties 

Key Takeaways

Overtime is a legal requirement. So unpaid overtime isn’t only unfair on the employee but is also illegal. 

Overtime is a logical way to ensure that employees are fairly treated and aren’t being overworked without due compensation.

As a small business owner, having employees work overtime will impact your overheads. However, it is a great way to show your employees that you value their time and efforts. 

People will be much more likely to want to work hard for you if they know that they are valued and their extra hours are being fairly compensated. 

Are you looking for more business advice on everything from starting a new business to new business practices? 

Then check out our FreshBooks resource hub.

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