How to Calculate Overtime: Guidelines for Hourly & Salaried Employees 

As a business owner, you’re responsible for making sure your employees are fairly compensated for their time and effort. How much you decide to pay your employees is determined by both your own judgment and by legal requirements such as minimum wage laws and the Fair Labor Standards Act (FLSA). But how much an employee is owed can become complicated, especially if they put in extra effort and work overtime. Overtime pay can seem simple on the surface, but additional factors can make it a challenge to calculate. 

Starting Simple

When looking at how to calculate overtime, including how to calculate overtime percentage, it’s important to start from the beginning. The standard work week is 40 hours of work time. Employees who are paid an hourly rate will earn this rate for each hour worked, up to 40. For each hour over 40 that they work in a given week, they will earn an overtime rate, which is at least 1.5 times their regular hourly rate. This is the simplest form of overtime pay.


Fluctuating Hours

Some employees’ work schedules can change from one week to the next. Some weeks they may work more than 40 hours, other weeks, they may work less. It can be so variable that it’s difficult to determine just how many hours will be worked in a given week, but for those weeks that the employee clocks in over 40 hours, overtime may still be owed.  


For employees with variable hours from week to week, both employer and employee may agree to an overtime rate of 0.5 of their regular hourly rate. However, to qualify for this special rate, very specific criteria, laid out in the FLSA, must be met. 

Added Benefits

Many employers provide additional benefits to their employees beyond just a paycheck, which can affect how to calculate overtime for them. Providing bonuses, commissions, and other types of additional compensation besides payment for services rendered must be included in the calculation of an employee’s overtime pay.  

Laws Beyond the FLSA

While the FLSA sets the rules on what’s required by federal law, these may not be the only rules you as an employer must follow when compensating employees for overtime. Some states have labor laws that include requirements regarding overtime pay, and some locales have these labor laws, too. It’s important to find out what your federal, state, and local labor law requirements are to make sure you’re in compliance with them all.  

Salaried Employees

While this may seem complicated already, if the employee is salaried, it becomes even more complex. A salaried employee, i.e., one who is paid a certain minimum amount regardless of hours worked, may be exempt from overtime due to the guarantee of getting an agreed-upon wage regardless of work hours. However, there are some employees who still receive overtime, even if they’re salaried.  


While what determines if an employee is exempt or not can be hard to determine, but most exempt employees match the following criteria:  


  • The employee earns over $35,568 per year ($684 per week).  
  • The employee receives a guaranteed minimum pay regardless of time worked.  
  • The employee performs one or more exempt duties, such as supervising other employees, doing intellectual work, or performing support operations.  


Even if these criteria are met, it’s important to get legal counsel to make sure an employee is exempt or not. Failure to provide overtime pay where it’s owed can lead to legal trouble.  

The Consequences of Unpaid Overtime 

If an employer fails to pay overtime when and to whom it’s owed, there can be legal consequences. You will most likely be required to issue retro pay to the employees who haven’t been paid overtime properly, as well as potentially pay liquidated damages to them. You may also face legal fines of up to $10,000. Finally, if you repeatedly fail to properly compensate employees for overtime, you may be threatened with imprisonment.

Manage Your Pay with Payroll Vault 

Managing your payroll, including figuring out how to calculate overtime, is the kind of service we at Payroll Vault are dedicated to. We’re a payroll service provider offering a boutique-style set of payroll and other business solutions to suit your company’s needs, from basic payroll and tax preparation to timekeeping services and more. Contact us or visit your nearest Payroll Vault location today to learn more about what we can do for your business!