Calculating Overtime Pay in the United States

Overview

This article deals with the principles that apply to calculating an employee's overtime pay under United States federal law. It includes a basic discussion of a covered employer's obligation to pay overtime to eligible employees and the two main factors that go into calculating the amount of overtime compensation due: the relevant "workweek" and the employee's "regular rate" of pay.

While the basic principles are seemingly straightforward, variations in how employers schedule work and compensate employees create corresponding variations in the method of calculating the overtime entitlement. The process can become quite complicated, and the financial consequences of erring can be astronomical.

Business Case

Overtime pay has been a feature of U.S. law since 1938. Yet compliance with the Fair Labor Standards Act (FLSA) has been a consistent problem for businesses. Many executives simply do not understand, or refuse to recognize, the requirements of the law.

The cost of noncompliance is growing. Class actions and "mass actions" have become more prevalent, brought by both private law firms and the enforcement division of the U.S. Department of Labor. 

 See CBS Settles Overtime Complaint for $10M.

HR's Role

HR professionals are expected to have a thorough knowledge of compliance with overtime laws. Willful or inadvertent disregard of overtime laws is one of the surest ways for a business to end up in a wage/hour audit or lawsuit.

HR professionals should not rest with merely knowing what the law is but should also acquaint themselves with the policies behind the law because managers and employees alike are rarely satisfied with just being told, "That is what the law says." For example, managers often push back against HR professionals when told that just putting an employee on salary does not automatically exempt that employee from receiving overtime pay. Similarly, employees often push back against HR professionals when they are told that they must fill out their time cards in accordance with their actual hours worked, or when they are told that they cannot work 50 hours in one workweek and then make up for the overtime by working only 30 hours the next week. HR professionals need to be able to communicate the reasons why the law says what it says.

HR professionals must make sure that written policies accurately reflect the legal requirements and that actual procedures follow the written policies. HR professionals also need to ensure that required wage/hour notices are posted.

In addition, HR professionals must anticipate that their organization may be randomly audited by state or federal wage/hour authorities, pursuant to an enforcement emphasis, or as a result of a complaint from an employee or a competitor. HR professionals should take proactive steps to ensure that such audits go well. These steps include maintaining accurate job descriptions and time records.

Relevant Law

The FLSA is the primary U.S. federal law regulating the wages and hours of both public and private employers. It requires covered employers to pay eligible employees at least one and one-half times their regular rate of pay—and at not less than the relevant minimum wage—for all hours worked in excess of 40 in a workweek.

To comply with the overtime provisions of the FLSA, an employer must determine what makes up an employee's workweek and the employee's regular rate of pay for that workweek. 

 For some general resources regarding overtime under the FLSA, see:

What You Need to Know About ... Overtime Pay

Overtime Pay

Fact Sheet #23: Overtime Pay Requirements of the FLSA

FLSA Advisor

Final Rule: Regular Rate under the Fair Labor Standards Act

Adult employees (ages 16 and over) have no maximum hour limitation under the FLSA. Employees may work as many hours per day or week as they and their employers see fit, as long as the required overtime compensation is paid for the hours worked in excess of 40 hours per workweek. Federal law does not require that any employee be paid overtime compensation for working more than eight hours per day (although some state laws do) or for working on Saturdays, Sundays or holidays.

Overtime pay is triggered when an employee works more than 40 hours in the workweek. This amount of time includes only actual hours worked and excludes pay for time not worked such as vacation or sick leave. 

 See Must employers count holiday leave, vacation and sick leave hours taken during the workweek toward the overtime requirement?

The FLSA does not relieve an employer of any obligation it may have assumed by contract. Moreover, it does not relieve an employer of any obligation imposed by any other federal or state laws that limit overtime hours or that require the employer to pay premium rates either for working in excess of a daily standard or for working on Saturdays, Sundays, holidays or other periods outside or in excess of the normal or regular workweek or workday. 

 See Application of Overtime Provisions Generally, 29 C.F.R. §778.102.

Though the FLSA is the federal law requiring overtime compensation for most employees, many states and municipalities impose stricter requirements for the benefit of employees in their jurisdictions. For example, some states have daily overtime pay requirements for hours worked in excess of eight hours in a day. 

See Minimum Wage Laws in the States and What states require overtime to be calculated on hours worked in excess of eight per day instead of forty per week?

Determining the Workweek

An employee's overtime is determined by the number of hours the individual works in a workweek. A workweek is a period of seven consecutive 24-hour periods (168 hours). It may begin on any day of the week and at any hour of the day established by the employer. Employers are advised to state in their policies when they consider the workweek to begin. For example, does the workweek begin at 8:00 a.m. on Monday or at 12:00 a.m. on Sunday? The beginning of the employer's workweek may be altered if the change is intended to be permanent and is not designed to evade the overtime requirements of the FLSA. Defining the employer's workweek eliminates any ambiguity.

To calculate the overtime hours, an employer simply totals the number of hours an employee has worked in any given workweek. If the number is greater than 40, the employee is due overtime for the excess hours under federal law. The employee might have worked on totally unrelated job assignments or for joint employers during the workweek—the employee is still entitled to overtime for hours in excess of 40 in the workweek. Weekly calculation is required regardless of whether the employee is paid on a daily, weekly, biweekly, monthly or other basis.

Generally, for purposes of minimum wage and overtime payment, each workweek stands alone; two or more workweeks cannot be averaged. Employee coverage, compliance with wage payment requirements and the application of most exemptions are determined on a workweek basis.

 See: 

Each Workweek Stands Alone, 29 C.F.R. §778.104

Are employees working a compressed workweek and paid bi-weekly entitled to overtime in the week they work over 40 hours?

Determining Compensable Working Time

In general, the term "hours worked" refers to all hours an employee must be on duty, whether on the employer's premises or at any other prescribed place of work, from the beginning of the first principal activity of the workday to the end of the last principal activity of the workday. Principal activities include all duties, tasks or actions that are an integral part of the employee's job.

 See:

Hours Worked, 29 C.F.R. Part 785

Fact Sheet #22: Hours Worked Under the Fair Labor Standards Act

Chapter 31 of the DOL Field Operations Handbook

What must be included as "hours worked" when calculating weekly overtime?

We have employees who regularly work overtime without permission. Are we required to pay for unauthorized overtime?

Under the Portal-to-Portal Act of 1947 (amending the FLSA), principal work activities are compensable, but "preliminary or postliminary" activities are not unless they are closely related and indispensable to an employee's principal duties.

The courts have not fully clarified what activities are "closely related" and "indispensable" for purposes of this rule. The U.S. Supreme Court concluded in IBP, Inc. v. Alvarez, 546 U.S. 21 (2005) that the donning and doffing of unique protective gear was compensable, along with the time spent walking to and from changing areas immediately after and before doffing. The time spent waiting to doff unique protective gear is also compensable because it is integral and indispensable to principal work activities, but the time spent waiting to don clothes was not found to be compensable time.

As a general rule, activities that employees engage in before or after their regular workday that are not part of their principal duties are not compensable under the FLSA. Examples of noncompensable activities are waiting in line to punch a time clock, changing clothes or washing up for the employees' convenience, and waiting in line for paychecks.

Changing clothes and washing up required by law, by the employer or by the nature of the job are compensable. To be compensable, donning and doffing clothing must be done on the employer's premises. It is not compensable when done at home. Nor is it compensable when employees change clothes at their workplace solely for their own convenience. 

 See Are employers required to pay employees for the time employees spend putting on their uniforms or protective gear before the start of their shift?

Other activities that, depending on circumstances, may be compensable time worked include waiting time, on-call time, meal periods and more. A summary of these time-worked rules can be found on the DOL's FLSA Hours Worked Advisor website.

 See:

How should we pay on-call nonexempt employees for the time they are not actually working when on call?

Do we have to pay workers for time spent in new hire orientation?

If a specific certification is required in an employee's job, is my company required to pay for the time spent attending training to obtain the certification? What about paying for

Under the FLSA, how do I pay nonexempt employees for travel time when they are required to stay overnight?

Determining the Regular Rate

The regular rate is the hourly rate actually paid the employee for the normal, non-overtime workweek for which the employee is employed. The regular rate of pay cannot be less than the minimum wage and includes all remuneration for employment except certain payments excluded by the FLSA itself. Regardless of whether an employee is paid by the hour, by the piece, on a commission or on a salary, the employee's compensation must be converted to an equivalent hourly regular rate from which the overtime rate can be calculated. 

 See The "Regular Rate," 29 C.F.R. §778.108 and The Regular Rate Is an Hourly Rate, 29 C.F.R. §778.109.

Employers are not required to include holiday and vacation pay in their calculation of the regular rate when no work is performed due to the vacation or holiday.

Payment of wages based on an hourly rate

Different rules apply to determining the regular rate depending on whether the employee is paid at the same rate or at different hourly rates for all hours worked.

Single hourly rate. When an employee is employed solely on the basis of a single hourly rate, that rate is the regular rate. If, in addition to earnings at the hourly rate of pay, other payments are made, such as a production bonus, the amount of the payment must be added to the straight-time earnings. The new regular rate is determined by dividing the total straight time earnings by the number of hours worked. 

 See Hourly Rate Employee, 29 C.F.R. §778.110.

Different straight-time rates. When in a single workweek an employee works at two or more different types of work for which different straight-time rates have been established, the regular rate for that week is the weighted average of the rates. In addition, under specified conditions, the FLSA allows the employer to calculate overtime pay based on one and one-half times the hourly rate in effect when the overtime work is performed.

 See:

We would like to have a nonexempt employee work two jobs with a different hourly rate of pay. Which rate of pay is used to calculate the employee's overtime pay?

Computing Overtime Pay on the Rate Applicable to the Type of Work Performed in Overtime Hours, 29 C.F.R. §778.415-421

Payment of wages based on a nonhourly rate

In addition to hourly pay rates, overtime-eligible employees may be compensated in a number of different ways. Each of these methods requires the employer to determine the regular rate and to calculate overtime pay in a specialized way.

Piece-rate basis. When an employee is employed on a piece-rate basis, the employer computes the regular hourly rate of pay and the employee's total earnings for a given week as follows:

• First, the employer adds the total earnings for the workweek from piece rates, plus earnings from other sources (such as production bonuses), plus any sums paid for waiting time or other hours worked (except statutory exclusions).
• Second, the employer divides that sum by the number of hours worked to yield the pieceworker's regular rate for that week.
• Third, the employer multiplies one-half that regular rate by the number of hours worked in excess of 40 to derive the overtime pay amount, and adds that amount to the total weekly earnings at the regular rate for all hours worked.

 See Pieceworker. Piece Rates and Supplements Generally, 29 C.F.R. §778.111(a) and Pieceworkers, 29 C.F.R. §778. 418.

Piece-rate basis with a minimum hourly guarantee. Sometimes, a pieceworker is hired on a piece-rate basis with a minimum hourly guarantee. When the total piece rate earnings for a given week fall short of the amount that would be earned for the total hours at the guaranteed rate, the employee is paid the difference. For any weeks in which the employee receives such a make-up payment, the employee is, in effect, paid at an hourly rate. That minimum hourly guarantee becomes the regular rate for that week.

 See Pieceworker. Piece Rates with Minimum Hourly Guarantee, 29 C.F.R. §778.111(b).

Day rates and job rates. If an employee is paid a flat sum for a day's work or for doing a particular job, without regard to the number of hours worked in the day or at the job, and if the employee receives no other form of compensation for services, the regular rate is determined by totaling all the sums received at such day rates or job rates during the workweek and dividing by the total hours actually worked. The employee is then entitled to extra half-time pay at that rate for all hours worked in excess of 40 in the workweek. 

See Day Rates and Job Rates, 29 C.F.R. §778.112.

Salaried employees. If an overtime-eligible (i.e., nonexempt) employee is employed solely on a weekly salary basis, the regular hourly rate of pay is computed by dividing the salary by the number of hours for which the salary is intended to compensate. Employers should be careful not to make the mistake of thinking that paying an employee on a salary basis automatically makes the employee exempt from overtime eligibility. Because the salary compensates straight time for all hours, including overtime hours, only one-half times the regular rate for hours worked beyond 40 in the workweek must be added to the salary as overtime pay. 

 See What is the meaning of "salaried, nonexempt employee?" and Are employers required to pay overtime to employees classified as salaried nonexempt? If so, how is overtime calculated?

When the salary covers a period longer than a workweek, such as a month, it must be reduced to its workweek equivalent. A monthly salary is subject to translation to its equivalent weekly wage by multiplying by 12 (the number of months) and dividing by 52 (the number of weeks). A semimonthly salary is translated into its equivalent weekly wage by multiplying by 24 and dividing by 52. Once the weekly wage is determined, the regular hourly rate of pay will be calculated as indicated above. 

 See Salaried Employees—General, 29 C.F.R. §778.113 and How to Calculate Overtime on a Semi-Monthly Pay Period.

Fluctuating workweeks. An employee employed on a salary basis may have work hours that fluctuate from week to week, and the salary may be paid pursuant to an understanding with the employer that the employee will receive that fixed amount as straight time pay for whatever hours the employee is called on to work in a workweek, whether few or many.

If both parties have a clear mutual understanding that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number (rather than for working 40 hours or some other fixed weekly work period), such a salary arrangement is permitted by the FLSA if both the following conditions are met:

• The amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours worked is greatest.
• The employee receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half the regular rate of pay.

Because the salary in such a situation is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the regular pay rate for the employee will vary from week to week and is determined by dividing the amount of the salary by the number of hours worked in the workweek to obtain the applicable hourly rate for the week. Payment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate, under the salary arrangement. 

 See Fixed Salary for Fluctuating Hours, 29 C.F.R. §778.114 and Fact Sheet #82: Fluctuating Workweek Method of Computing Overtime Under the Fair Labor Standards Act (FLSA) / "Bonus Rule" Final Rule.

Other forms of compensation included in the regular rate

All compensation paid by or on behalf of an employer to an employee as remuneration for employment must be included in the regular rate, whether paid in the form of cash or otherwise.

 See:

Must bonuses be included in overtime pay calculations?

How to Calculate Overtime Rates for Shift Differentials

How to Calculate Bonuses into a Regular Rate of Pay for Overtime Purposes

Chapter 32 of the DOL Field Operations Handbook

How is overtime pay affected when employees are paid double for working on a holiday or are paid a premium to do so?

Commissions (whether based on a percentage of total sales or of sales in excess of a specified amount, or on some other formula) are payments for hours worked and must be included in the regular rate. This is true regardless of whether the commission is the sole source of the employee's compensation or is paid in addition to a guaranteed salary or hourly rate, or on some other basis, and regardless of the method, frequency or regularity of computing, allocating and paying the commission. Whether the commission earnings are computed daily, weekly, biweekly, semimonthly, monthly or at some other interval does not matter. That the commission is paid on a basis other than weekly and that payment is delayed for a time past the employee's normal payday or pay period do not excuse the employer from including this payment in the employee's regular rate.

 See Commission Payments, 29 C.F.R. §778.117-122.

Deductions

Typically, the regular rate is calculated prior to taking deductions for certain expenses payable by the employee, for example:

• Board, lodging, meals and other facilities.
• Tools or uniforms.
• Deductions authorized by the employee, such as union dues, or required by law, such as taxes and garnishments.

Such deductions must not reduce hourly earnings below the statutory minimum or cut into any part of the overtime compensation due the employee. 

  See How Deductions Affect the Regular Rate, 29 C.F.R. §778.304-307.

Compensation excluded from the regular rate

Seven types of payments to employees are excluded from the regular rate by Sections 7(e)(1)-(7) of the FLSA. 

  See Statutory Exclusions and Chapter 32 of the DOL Field Operations Handbook (PDF).

• Gifts, holiday and special occasion bonuses.
• Payments made for occasional periods when no work is performed, such as during vacations, holidays, illnesses and failures of the employer to provide sufficient work.
• Profit sharing, thrift and savings plans.
• Benefits plans.
• Overtime premiums in excess of a daily or weekly standard.
• Premium pay for work on Saturdays, Sundays and other "special days."
• Premium pay pursuant to an employment contract or collective bargaining agreement.

An update to the FLSA definition of regular rate, effective January 15, 2020, allows employers to exclude the following additional perks when calculating the regular rate of pay:

• Parking benefits, wellness programs, onsite specialist treatments, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance.
• Unused paid leave.
• Certain penalties employers must pay under state and local scheduling laws.
• Business expense reimbursement for items such as cellphone plans, credentialing exam fees, organization membership dues, and travel expenses that don't exceed the maximum travel reimbursement under the Federal Travel Regulation system or the optional IRS substantiation amounts for certain travel expenses.
• Certain sign-on and longevity bonuses.
• Complimentary office coffee and snacks.
• Discretionary bonuses (the DOL noted that the label given to a bonus doesn't determine whether it is discretionary).
• Contributions to benefit plans for accidents, unemployment, legal services and other events that could cause a financial hardship or expense in the future.
  

Exceptions to Standard Requirements for Calculating Overtime Pay

The following methods offer exceptions to the normal FLSA overtime pay requirements.

Basic rate

The use of basic rates to calculate overtime compensation is principally intended to simplify bookkeeping and computing overtime pay. An employer that chooses to use a basic rate must comply with all the very strict requirements listed at 29 C.F.R. §548.2. If an employer wants to use a basic rate other than one of the authorized rates set forth in 29 C.F.R. §548.3, prior approval is required from the DOL.

Belo-type wage contracts

Under a Belo contract, employees may receive a constant weekly wage under certain conditions even when overtime is worked. Belo plans are difficult to comply with, and the requirements of 29 C.F.R. §778.402-414 must be met. 

 See What is the difference between the fluctuating workweek compensation method and a Belo contract?

Veteran's subsistence allowance

The GI Bill pays veterans subsistence allowances while employed in on-the-job training programs. Because these payments are not paid for services rendered to the employer, these allowances may not be counted toward either straight time or overtime wages.

See 29 C.F.R. §778.600.

Hospital and residential care establishments

Special treatment is afforded hospital and residential care employers, allowing them to substitute a 14-day period for the "workweek" concept for purposes of calculating overtime. Under this system, the employee is entitled to overtime for all hours worked in excess of eight hours in any workday and in excess of 80 hours in such 14-day period. Three conditions must be met before a hospital or residential care employer can qualify for this exemption. 

 See 29 C.F.R. §778.601.

Employees receiving remedial education

Employees receiving remedial education are provided an overtime exemption for spending up to 10 hours in any workweek in remedial education without compensation for overtime, provided that the requirements under the regulation are met. 

  See 29 C.F.R. §778.603.

Payment of Overtime

Although overtime is calculated on a workweek basis, the FLSA makes no requirement that overtime compensation be paid weekly. However, under most state laws, every employer must pay all wages due to its employees on regular paydays designated in advance by the employer. 

 See State Payday Requirements.

The general rule under the FLSA is that overtime compensation earned in a particular workweek must be paid on the regular payday for the period in which such workweek ends. When the correct amount of overtime compensation cannot be determined until sometime after the regular pay period, however, FLSA requirements will be satisfied if the employer pays the excess overtime compensation as soon as practicable after the regular pay period.

Payment may not be delayed for a period longer than is necessary for the employer to compute and arrange for payment of the amount due, and in no event may payment be delayed beyond the next payday after such computation can be made. Additionally, when retroactive wage increases are made, retroactive overtime compensation is due at the time the increase is paid. 

See Time of Payment, 29 C.F.R. §778.106.

Technology

The technology used in calculating overtime may be as simple as the technology available when the FLSA was enacted in 1938—paper and pencil. However, the technology may also include a time clock or keeping time records by recording log-in and log-off times of employees on their computers. Similarly, computerized time records for building entry and departure may be pertinent when disputes about hours actually worked arise. Technology can be very useful—for both sides—in the event of disputes over overtime earnings. 

 See 5 Ways to Leverage Technology for Overtime Compliance.

The proliferation of technological devices and applications used for work has created issues of compensable work time. 

 See The Legal Risks of Digital Workplace Apps.

Legal Issues

As can be readily seen from the above discussion, the correct calculation of overtime pay can be a difficult process depending on the number of different work arrangements an employer allows to exist in terms of basis of pay and hours worked. There are numerous opportunities for employers to make technical mistakes.

An employee may raise an overtime issue with the DOL or with the employee's own attorney as to whether the employee—and others similarly situated—has been properly paid for overtime. The employer's window of liability for overtime violations concerning multiple employees can go back several years. 

 See Employer That Failed to Keep Accurate Records Must Pay Overtime.

To avoid legal trouble under the FLSA, employers should understand the FLSA overtime regulations to the best of their ability in light of the fact that the law contains ambiguities and that the law can vary from one state to another, even when applying the same federal law. Second, the employer should try to keep things simple and uniform. Similarly situated employees should be treated similarly, with exceptions for only the most important of reasons. Third, overtime policies should be stated in writing and reviewed by legal counsel familiar with the issues. 

 For a sample training presentation for supervisors and other individuals who manage nonexempt employees, see FLSA Training for Supervisors Part V.

Related Reading

Determining Overtime Eligibility in the United States

Using Overtime Effectively