How to Calculate Overtime (Easy Formula)

Understanding how to calculate overtime is key to paying people fairly, but it's also essential for keeping an eye on labor costs. Does your team always end up working overtime to get their project work finished? If "yes", you may have a problem...
Mae Angeline
July 1, 2022

Overtime is a headache – both for the person working it, and the person working out how to pay for it!

We all know that a project can suddenly take an unexpected turn, and it's only fair that your employees be compensated for the extra hours they put in at the office. While the occasional overtime may be unavoidable, when it becomes a regular occurrence you'll find your employees and your profit margins both start to suffer.

So let's take a quick spin around the world of overtime. We'll look at the overtime regulations, how to calculate overtime for your employees and – more importantly – how to stop needing overtime altogether.

What is overtime?

Work hours in excess of an employee's normal working hours can be considered overtime. Overtime usually means the employee has helped out with extra work, and as a result they are paid not only for their time, but an overtime premium pay rate.

When it comes to overtime rates, there are specific factors that need to be considered. Entitlement to overtime pay is governed by labor laws. You will need to familiarize yourself with local labor regulations, as laws differ depending on where you are based.

In the U.S., for instance, the Fair Labor Standards Act, or FLSA, sets overtime laws, the minimum wage, and other employee rights and benefits policies.

The FLSA classes some employees as exempt from overtime pay rules, depending on the employee's pay, whether they are paid on a salary or fee basis, and the duties they perform. Most exempt employees are in senior or executive roles, with higher salaries and more managerial duties. These employees are not entitled to overtime pay.

However, most salaried employees are not exempt, meaning they have a right to be paid overtime for every extra hour of work they put into your business once they go beyond the 40-hour workweek.

What is the rate of pay for overtime hours?

Overtime is usually paid at one and half times the employee's regular rate. However, time and a half is the minimum requirement for overtime calculations: some employers choose to pay higher overtime rates, or have overtime rules related to how many hours an employee works overtime during each pay period.

According to the FLSA, if non-exempt employees work more than 40 hours in a given week without getting a rate of 1.5 x or double their regular pay, the employer needs to provide an additional fee for the number of hours they clocked in beyond the 8-hr.

What is the formula to calculate overtime pay?

Calculating overtime pay is straightforward if you know the company's overtime rate, the number of overtime hours worked, and the employee's hourly wages. You can use this formula:

For example, suppose you run a restaurant where you have a non-exempt employee who works 40 hours per week at $20 per hour. This week you were short-staffed, and this employee picked up some extra shifts, clocking in a total of 43 hours during the week.

In this case, your employee is entitled to overtime pay (rate X 1.5) for the three hours of overtime they worked. So, the overtime pay looks something like this: 

$20 (hourly rate) X 1.5 (overtime pay rate) X 3 (number of overtime hours worked) = $90

So for this week, the employee will receive an additional $90 for 3 hours' worth of overtime. 

Always relying on overtime? You might have a problem

While knowing how to calculate overtime compensation is important, no company wants to pay overtime more than they need to. Paying overtime depletes financial resources that could be better spent on improving the capacity of your team.

Apart from the disadvantages for the company, employees who are continuously working overtime to meet deadlines could face several problems, such as: 

Low productivity

Overworked employees tend not to be as productive. People are prone to making mistakes when they're tired that could cost your business money down the line. This means that not only are you paying an overtime premium, but the outputs may not be as high quality as you need.

Heightened stress levels

It's a given that employees who tend to work more than 40 hours per week are prone to stress. Increased cortisol in the body can lead to several health conditions such as high blood pressure, increased blood sugar, and lethargy. Routinely working beyond the 40-hour workweek can lead to burnout.

More turnover

Overworked employees are more likely to quit their jobs in the long run. High turnover means more costs in training and disruption to your operational flow. New employees typically have lower productivity since they're still learning the ropes. 

How to tackle an overtime problem

To address your company's need for overtime, it's important to get a proper resource management process in place. It will help business owners or project managers plan and control overtime while meeting deadlines.

One goal of resource management is to make employees' workload transparent. From here, you can check the performance and workload of every employee with a given timeline to deliver projects without overloading them. Furthermore, it will help minimize underutilization, and maximize productivity. 

One of the first steps is to assess the current workload of your team, along with their availability and capacity. This gives you the information you need to assign tasks strategically, so that no employee works beyond their capacity, reducing the likelihood of you needing to pay overtime.

While it is possible to do this manually (especially if you run a very small business), software tools can help automate data collection and present you with easy-to-interpret summaries to help decision-making.

For example, resource management software can help by accurately noting every employee's working hours, as well as what tasks they were performing. It can also flag when a resource's workload exceeds their capacity, so that tasks can be re-distributed to keep everyone's work within their contracted hours.

What to look for in resource management software

Not all software has the same features and capabilities. When choosing the right one for your company, you need to talk with key personnel and identify challenges faced by employees.

That said, you want your business resource management tool to meet the following criteria: 

  • User-friendly: Users should be able to navigate the platform quickly and not get confused with directions and instructions on how to operate it. 
  • Flexibility: The software should adapt to the unique needs of your company. 
  • Scalable: It can grow your company by maximizing employees' capabilities without burning them out. 
  • Affordable: It should be cost-efficient while providing better returns for your business. 

Takeaway

It's important for every employer to understand when and how to pay overtime rates. But the more important task is to reflect on why you are needing to pay overtime at all.

With a resource management platform, managers can check an employee's deliverables in real-time, have greater control over planning, and give tasks to the right people. This will help you better understand and manage hourly employee workload so that they can stay productive and happy.

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