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What you may be getting wrong in overtime calculations

Oct 23, 2023

By Jewell Trogdon 

How complicated is it to calculate overtime payment for your nonexempt workers? You may be thinking you have it all covered when you pay employees 1.5 times their hourly rate for the excess hours worked over their 40-hour workweek.

But these calculations are trickier than many business owners and payroll managers are aware of. It’s necessary to follow the fine print of the Fair Labor and Standards Act to be sure your organization is in compliance. When workers are putting in overtime, either at the employer’s request or with their permission, be sure overtime is calculated and recorded correctly. Common errors can mean the wrong dollar amounts showing up in people’s paychecks.

Your business risks legal claims by employees (or former employees) for underpayment, and just as certainly you don’t want to inadvertently be paying more than you should.

Some key provisions of the law are easy to overlook or misconstrue when it comes to calculating and applying overtime payments to your payroll. You want to do right by your employees and your  organization.

Here are three issues for payroll staff to look out for regarding overtime pay:

1. Review the types of pay you are issuing

It’s essential that you understand which kinds of compensation factor into overtime calculations and which do not. When you add supplemental pay like a bonus program to motivate people to perform at a higher level, you may not be considering that this kind of nondiscretionary bonus must also be included in your blended calculation of overtime pay because it’s part of your regular rate of pay. It’s treated differently than discretionary spot bonuses or holiday bonuses, which are excluded from the regular rate of pay and thus not factored into overtime calculations.

If someone earned a bonus in a particular week and had overtime in that same week, you would have to pay an overtime premium on the bonus.

2. Look at individual weeks rather than pay periods

Paying overtime properly means tying it to the specific workweek it was earned, not the entire pay period, which commonly covers a two-week period. Avoid lumping together all of the hours worked and all of the overtime worked in a pay period in a single configuration. You need to separate the two pay periods and do a calculation for each workweek when a bonus or overtime is incurred.

It’s tempting to combine workweeks for efficiency, but your calculations may end up wrong, potentially adversely affecting the employer through overpayment or the employee through underpayment.

Calculating overtime correctly requires listing those hours in the actual week in which the overtime was earned.

3. Be sure you accurately budget for overtime costs

Make sure when you’re building out bonus programs, depending on how you structure those, you might have overtime pay that needs to be accounted for in addition to the bonus payment itself. It’s important to avoid surprises about the impact that overtime may have on your bottom line.

While understanding these key concerns is necessary for accurate overtime calculations, the fact is implementation is complicated. When employers pay variable rates for different work categories like weekend shifts, being on call or other supplemental pay opportunities, some simplify the overtime calculation process by using the highest overtime rate in all situations.

This move would keep you in compliance with FSLA, but you may end up paying out more than you have to.

Those employers choosing to handle calculations manually, taking into account varying pay rates, are likely to find it a burdensome, error-prone experience.

One way to avoid the risks involved in the manual approach but also end up with a precise result is to work with a payroll provider that uses a software solution like iSolved that can support the calculations for you and give you peace of mind.

Even if you currently don’t currently offer any supplemental pay and your calculations are straightforward, having access to a third-party solution can make your decision to add bonus programs and other supplemental opportunities much easier to implement when the time comes.

How Wipfli can help

Calculating overtime and other payroll issues for your employees and your business is more complex than many small and midsize businesses realize. Wipfli’s human capital management (HCM) services team can help you navigate the process and answer your questions big and small.

Contact us to learn how we can help you find impactful solutions to track time, calculate overtime and process payroll.

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Wipfli Editorial Team