Ask Addi P.: How Do I Calculate Overtime Pay?
Dear Addi P.,
I have teams putting in extra hours to complete a major company project. Can you explain the rules for calculating overtime pay and when it applies?
- Working Hard in Winchester
Dear Working Hard,
I'm happy to address some of this issue's most frequently asked questions.
What laws govern overtime pay?
The Fair Labor Standards Act (FLSA) covers who is eligible for minimum wage and overtime at the federal level; however, some states have their own rules. In places where federal and state overtime laws are in effect, the law providing for the highest overtime pay rate will apply, according to the U.S. Department of Labor (DOL).
While most employees are generally nonexempt from the FLSA, the law provides certain exemptions from the overtime requirements for employees who are paid a salary that meets the law's minimum requirements, and perform certain job duties. For example, some executive, administrative and professional (EAP) employees, outside sales employees, computer professionals and highly compensated employees (HCEs) are exempt from the FLSA's overtime pay requirements.
Effective July 1, 2024, the minimum salary required for the EAP exemptions from overtime will increase from $684 per week to $844 per week (equivalent to $43,888 per year), and the minimum total compensation requirement for the HCE exemption will increase to $132,964 per year, including at least $844 per week that must be paid on a salary or fee basis. To the extent you have employees in states with higher minimum salary thresholds, you would generally have to satisfy those states' minimum requirements to exempt employees from overtime.
How do I calculate overtime pay?
The FLSA requires covered employers to pay eligible employees no less than one-and-a-half times their "regular rate of pay" and at least the minimum wage for each hour over 40 in a workweek. Under the FLSA, a workweek may begin any day and at any hour. But it must consist of seven consecutive 24-hour periods.
Although the FLSA doesn't require employers to compensate employees on an hourly basis, the regular rate of pay for purposes of determining the overtime rate is a rate per hour. The regular rate of pay can be determined by dividing total compensation for employment (subject to certain exclusions) by the total number of hours worked in the workweek. Note that some states have different requirements for calculating the regular rate.
How do vacation days, sick days, holidays, bonuses and commissions affect overtime calculations?
Vacation days, sick days, holidays and failure by the employer to provide sufficient work are not included in the calculation of employee overtime for that workweek.
Note the examples of the types of pay that are not part of the regular pay rate. They are as follows:
- Pay for expenses incurred on the employer's behalf
- Premium payments for overtime work or the true premiums paid for work on Saturdays, Sundays and holidays
- Discretionary bonuses* and payments for times when no work is performed due to vacations, holidays or illnesses
Refer to this fact sheet for more information.
Can employers classify workers as independent contractors to avoid FLSA requirements?
While independent contractors, or ICs, are not subject to federal and state overtime rules, be careful if you're considering hiring ICs to minimize overtime obligations. Federal and state laws control whether workers can legally be classified as ICs versus employees. Unless the ICs meet all the necessary criteria that exempt them from employment status, you could face costs and penalties due to misclassification.
Employers are facing complaints of noncompliance with overtime laws and regulations, so you want to educate yourself on this matter. The DOL's FLSA Overtime Calculator Advisor is a helpful resource.
The application of the law can quickly become complicated, so always consult with an attorney familiar with wage and hour laws if you're unsure what to do.
Take care,
Addi P.
Next steps
Read this alert on the updated 2024 overtime rule. Subscribe to Eye on Washington to stay current on legislative updates.
*In April 2024, the DOL issued its final rule for establishing the amounts required to be earned by an employee for that employee to be exempt from the FLSA's overtime requirements. Under the rule, the amounts required to be earned by an employee for that employee to be exempt are $684 per week ($35,568 annually). Up to 10 percent of the salary can be satisfied with discretionary bonuses. The new salary level for an HCE has increased to $107,432 per year, including at least $684 per week paid on a salary or fee basis.
Addi P. is a digital character who represents the human expertise of ADP. The questions and challenges come from professionals who manage people at companies of all sizes. The advice comes from ADP experts who have a deep understanding of the issues and a passion for helping leaders create a better workplace. If you have a challenge you'd like to pose for Addi P., complete this simple form. The information provided here is for general informational purposes only and not legal, insurance, financial or tax advice. The information and services ADP provides should not be deemed a substitute for the advice of a professional who can better address your specific concern and situation. Any information provided here is by nature subject to revision and may not be the most current information available on the subject matter discussed.
