7 Things to Keep in Mind About Overtime

Rachel Blakely-Gray
Posted by Rachel Blakely-Gray on May 25, 2021 12:46:47 PM

Here’s a large, scary number for you: $358,675. That’s how much one business had to pay 50 workers in back wages by failing to pay overtime according to a U.S. Department of Labor News Release last month.

Businesses that ignore overtime laws might fall into a similar liability pit, which is why educating your clients about overtime is oh-so-important. Take a look at seven facts you and your clients must keep in mind about overtime.  

7 Things to keep in mind about overtime

The last thing your client wants to deal with is an overtime pay lawsuit. You can help them accurately run payroll by educating them on overtime laws—and encouraging them to follow them.

Here are seven things to keep in mind to get started.

1. All parties must know what it is

Overtime is a pay rate qualifying employees receive when they work over a certain number of hours per week. It is also called time and a half pay. Overtime is part of the protections of the Fair Labor Standards Act (FLSA). 

Under the FLSA, overtime is 1.5 times an employee’s regular rate of pay for hours worked over 40 in a workweek. To calculate overtime, employers take the employee’s regularly hourly rate of pay and multiply it by 1.5 for hours worked beyond 40.

Let’s say an employee who earns $15 per hour works 45 hours in a workweek. They’re entitled to overtime pay for five hours (45 - 40). Their overtime pay would be $112.50 ($15 hourly X 1.5 overtime X 5 overtime hours). Add the overtime pay to their regular earnings to get $712.50 [$112.50 + (40 regular hours X $15 hourly rate)].

There is also overtime for tipped employees. If your client is able to claim a tip credit, the calculation is a little different than calculating regular overtime. To calculate this, multiply the tipped employee’s regular minimum wage by 1.5. Then, subtract the tip credit from that total, and multiply that amount by the number of hours of overtime worked.

Some employers choose to offer overtime pay to employees who work on holidays, but the FLSA does not require this.

2. Overtime is taxable

Overtime isn’t a tax-free payment. Like any other employee compensation, your client must withhold taxes on overtime pay. However, overtime is part of the IRS category of supplemental wages, so there are a few options for federal income tax withholding.

Employers can choose to treat overtime pay as regular wages or supplemental wages.

If your client treats overtime pay as regular wages, they calculate federal income taxes on the employee’s total earnings for the pay period using the federal income tax withholding tables.

If your client treats overtime pay as supplemental wages, they withhold a flat 22% for federal income taxes on the separate overtime pay.

To simplify the process of calculating overtime pay and withholding taxes on it, your client might opt for payroll software.

3. Some employees are exempt

Not all employees are entitled to overtime pay. Employees who are exempt from the Fair Labor Standards Act do not need to receive overtime wages. 

Employees are eligible for exemption if they:

  • Receive a salary
  • Earn at least $35,568 annually ($684 per week) AND
  • Have a position that is considered exempt (e.g., administrative exemption)

 If your client’s employee doesn’t meet all three of the exemption requirements, they must pay that employee overtime.

4. Your clients might need to follow state overtime laws

The federal overtime law says that all nonexempt employees receive 1.5 times their regular pay for hours worked above 40. But, is that what your client needs to follow? Not necessarily.

Although many states follow the federal overtime law, some set stricter, state-mandated overtime laws.  

State laws might regulate:

  • Who is exempt
  • Overtime pay amount (e.g., double-time pay)
  • When to give overtime pay (e.g., if the employee works beyond X hours in a day)

For example, California requires that employers provide overtime for time worked beyond eight in a workday, not just 40 in a workweek.

If your client’s state doesn’t have a state overtime law, they may not be in the clear for long. States may set state overtime laws at any time, requiring both you and your clients to be on the lookout for new laws.

5. There’s a fluctuating workweek calculation

Does your client have an employee who works different work hours from week to week? Does that employee earn the same fixed salary regardless of whether they work 30 or 40 hours? If so, they might be able to use the fluctuating workweek calculation. 

Before getting invested in this calculation, there are a number of requirements that an employer must meet. And, some states prohibit the use of the fluctuating workweek calculation.

If your client is in the clear to use this method, it’s relatively simple. For the week the employee works overtime, employers calculate their hourly rate by taking their total earnings for the week and dividing by the number of hours worked. Then, your client multiplies the hourly pay rate by 0.5 for each hour worked over 40 during the workweek to get the fluctuating workweek overtime. Finally, employers add the fluctuating workweek overtime to the employee’s total weekly pay.

6. ...And a weighted overtime calculation

Say an employee works overtime, but they do so in two different positions with two different pay rates. What does your client do?

Weighted, or blended, overtime is a calculation method some businesses use for employees who receive two or more different pay rates.

The weighted overtime calculation requires employers to find the weighted average of the two or more rates the employee receives. To do this, add together the earnings from all rates and divide the total by the number of hours worked at all jobs. This gives you the employee’s “regular hourly rate,” which you can use to calculate overtime.

7. Penalties can be severe

Violating the federal overtime pay law can cost employers up to $1,000 per violation. Not to mention, state laws could impose more severe penalties. 

But wait, there’s more. In addition to federal or state penalties, employers may need to provide back pay to employees (remember that $358,675 in back pay for 50 employees?). And in the case of a lawsuit, your client could wind up paying attorney fees, too.

Topics: Payroll


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