Are you Calculating Overtime Accurately?

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Overtime regulations govern the payment of additional compensation to employees who work more than a certain number of hours in a defined workweek. These regulations aim to protect workers by ensuring fair compensation for their extra hours of work.  

Overtime regulations are important for employers to understand as they often impact how they process payroll. Overtime regulations may vary by location, but generally employees are entitled to overtime pay for any hours over 40 in a workweek.

The FLSA, or Fair Labor Standards Act, is a federal law which sets overtime rules. Under the FLSA, only certain employees are entitled to overtime pay. To determine if an employee is entitled to overtime compensation, employers must determine whether they are considered an exempt or non-exempt employee.  

Exempt Employees

Employees that meet certain employment requirements may not be protected by the FLSA’s overtime rules. These employees are known as exempt employees. Exemption status is determined by multiple factors, including an employee’s compensation level and job duties. Exempt employees must be paid on a salary basis.

Non-Exempt Employees

Non-exempt employees are protected by FLSA guidelines, so it is critical that they are paid according to minimum wage requirements, and that the proper overtime calculations are handled. Non-exempt employees may either be paid a salary or an hourly rate, however their weekly compensation must equal at least minimum wage for all hours worked, and an overtime premium must be paid for all hours over 40 worked in a week.  

With a few exceptions (such as agricultural workers), hourly and non-exempt employees are entitled to additional compensation known as overtime pay if they exceed a 40-hour workweek.  The FLSA mandates that overtime compensation must be at least 1.5 times the employee’s regular pay rate, commonly referred to as “time-and-a-half.” There is no federally mandated limit on how much an employee can be paid for overtime, so overtime rates may vary based on an employee’s pay rate.

The simplest overtime calculations are handled by multiplying an employee’s base rate by 1.5, and then multiplying any overtime hours by that rate. This calculation is suitable for many situations, however in instances where an employee is paid multiple rates during a workweek, calculating overtime becomes more complicated. The Internal Revenue Service (IRS) has provided the following equation for calculating overtime for employees:

OT Pay Calculation = (Base Rate + (0.5 x RROP)) x OT Hours Worked

• Base Rate: The pay rate used during the base part of the calculation
• OT Hours Worked: The number of overtime hours worked
• RROP (Regular Rate of Pay): This value is a sum of all earning codes and their specified rates multiplied by hours worked for each of those rates in a work week, which are then divided by the total number of hours worked for the total work week. It is important to note that only codes marked as contributing to the RROP will be considered for this calculation. Some payments, such as sick pay and discretionary bonuses, may be excluded from the calculation of regular rate of pay.  

Overtime calculations can get complicated, especially when an employee receives multiple rates during the workweek. Here’s an example of an overtime scenario, and some of the common mistakes payroll practitioners make when calculating overtime for such a situation:  

In a given workweek, a retail worker works 20 hours as a cashier making $17/hr and 20 hours in inventory making $15/hour. The employee then works an additional 5 hours in inventory making $15/hour during the same week.

When calculating overtime pay for this employee, an employer may be tempted to pay out overtime hours at $22.50, or 1.5 times the $15 hourly rate the employee earned while in overtime. Paying out overtime at this rate would not be in compliance with overtime regulations since the employee is entitled to 1.5 times their Regular Rate of Pay, not their hourly rate.  For the scenario above, the employees Regular Rate of Pay is $15.89.  

Alternatively, an employer may choose to calculate overtime pay using the highest rate an employee was paid during the work week to ensure compliance. In this scenario if the employer decided to take this route, overtime hours would be paid out at $25.50. While calculating overtime using the highest rate an employee earns in a week is in compliance with overtime regulations, the employer is incurring additional payroll expenses by paying out overtime hours at a higher rate than is legally required.  Over time, this additional expense can get pretty costly.  

Below is an example of how to calculate overtime correctly for the scenario listed above.

To calculate Overtime using the IRS equation:

1. Calculate Base Pay

Base Pay = (20h*17)+(20h*15) = 340 + 300 = 640

2. Determine RROP

RROP = ((20h*17)+(20h*15)+(5h*15)) / (20h+20h+5h) = $15.89/hour

3. Determine Overtime Pay  

Overtime Pay = (Base Rate + (0.5 x RROP)) x Hours Worked

Overtime Pay = (15 + (0.5 x 15.89)) x 5h = $114.75

4. Calculate Total Pay

Total Pay = Base Pay + Total Overtime Pay  

Total Pay = 640 + 114.75 = 754.75

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For an additional example of how to calculate overtime hours, reference How to Correctly Calculate Shift Differentials and Overtime.  

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The Fair Labor Standards Act (FLSA), as well as the Equal Employee Opportunity Commission (EEOC), require employers to keep records of hours worked by their employees, including regular and overtime hours. The Department of Labor (DOL) enforces recordkeeping requirements and may conduct audits or investigations to verify employers adhere to these regulations. Non-compliant employers may face penalties and legal ramifications.  

Remaining compliant with overtime regulations is crucial for employers as it helps to mitigate legal complications and ensure fair compensation for their workforce. To navigate the intricate landscape of jurisdiction-specific and industry-specific overtime regulations, it is critical your payroll software can handle the proper overtime calculations and is up to date on the latest overtime requirements. With the assistance of payroll software like Greenshades, your organization can maintain a harmonious relationship with both employees and the governing authorities.  

To ensure compliance with government agencies and retain trust with employees, it’s critical that employers properly handle overtime calculations. Luckily, Greenshades payroll software has the ability to automatically calculate blended overtime rates based on the hours and earnings that factor into the employee's RROP (Regular Rate of Pay), allowing you to process payroll with confidence.

• Ensure Accuracy: Manual calculations of blended overtime rates are prone to errors. Greenshades' automated system reduces the likelihood of mistakes, ensuring that employees are paid accurately for their overtime work. This accuracy is crucial for maintaining employee satisfaction and trust.
• Save Time: The automation of blended overtime rate calculations saves significant administrative time. Human resources and payroll staff can focus on other tasks, increasing operational efficiency.
• Maintain Compliance: Compliance with labor laws is a critical concern for businesses. Incorrect overtime payments can result in legal challenges and financial penalties. Greenshades' system helps ensure that businesses comply with federal and state regulations regarding overtime pay, reducing the risk of non-compliance penalties.
• Adapt Easily: The ability to configure which codes count towards overtime means that Greenshades' system can adapt to various employment contracts and work conditions. This flexibility is particularly beneficial for businesses with complex payroll structures or those operating in multiple jurisdictions with different overtime rules.
• Enhance Employee Relations: By ensuring accurate and fair compensation for overtime work, businesses can improve their relationship with their workforce. This fairness is essential for maintaining high levels of employee morale and retention.

To learn more about overtime calculations and how Greenshades can help ensure your overtime calculations are correct, contact sales at sales@greenshades.com.