Overtime Pay: How to Calculate & Apply Your Employee’s “Regular Rate”

Any HR professional is familiar with the “time and a half after 40” overtime rule, which refers to the Fair Labor Standards Act requirement that employees receive compensation at not less than one and one-half times their regular rate of pay for all hours worked over forty hours in any work week.

We’ve already discussed what an employee’s regular rate of pay is- But how does it actually apply in practice? Today, let’s get into how it should be calculated when an employee works more than 40 hours in one week.

Let’s assume your employee Larry is paid on an hourly basis at $15 per hour. Larry also receives production bonuses for each paycheck based on his performance, and normally works past 40 hours per week so he can meet his production targets.

This week Larry works a total of 45 hours and received a production bonus of $125 for meeting his targets. “How much compensation is Larry due?”

Easy enough, right? 40 hours at $15 per hour, 5 hours at time and a half plus the bonus. Not quite- If this is the calculation method you’re following, you are slightly off the mark… Off enough to be charged with a back wage overtime violation during a DOL Investigation. And if you are a large employer, the back wages resulting from this type of small, preventable violation can escalate quickly.

Let’s figure out how to properly compute Larry’s overtime compensation. First, we need to establish his regular rate of pay

  • Regular Rate = Total Compensation ÷ Total Hours Worked
  • Total Compensation = [(45 hours x $15) + $125 bonus] à $675 + $125 bonus = $800
  • Total Hours Worked = 45
  • Regular Rate = $800 ÷ 45 = $17.78 per hour

Now we need to figure out how much Larry’s paycheck should be once overtime is calculated correctly

  • Regular Rate = $17.78
  • Hours Worked = 45 hours
  • Overtime = 5 hours
  • Straight time Compensation (aka “Time”) = 45 x $17.78 = $800
  • Overtime Compensation (aka “and a Half”) = ($17.78 ÷ 2) x 5 à $8.89 x 5 = $44.45
  • Total Compensation due for the week: Straight time due + Overtime due = $800 + $44.45 = $844.45

In the example above, first we calculate all straight time compensation due, including the production bonus earned. Then we calculate the regular rate of pay once the bonus is included. And finally, we compute the additional half time due the employee.

The calculation of the regular rate once the bonus is integrated (i.e., total compensation ÷ all hours worked) includes “all hours worked”, including overtime hours. Therefore, our calculation has computed the straight time compensation earned by the employee for all hours worked. In other words, we have calculated the time, all that’s left to calculate is the half.

Once the additional half time due for the 5 hours of overtime worked, the process is complete. If you have any further questions, feel free to email us at trust@onsigroup.com

Written by Aaron Ramos, Service Compliance Manager