Time and a half handbook: How employers can calculate overtime pay correctly

What is time and a half pay?

To start, time and a half pay, also known as overtime pay, is always based (and calculated) using an eligible employee’s hourly pay rate. What does this mean? When you pay your employees time and a half, they are being paid 50% more than their regular pay rate. Only non-exempt employees are eligible for time and a half pay according to the Fair Labor Standards Act (FLSA), which is the federal law that sets all requirements for overtime pay and eligibility.

Generally speaking, most employees eligible for overtime are paid hourly, but there are some cases when a salaried employee may qualify for overtime pay (which we’ll talk a bit more about later in this article).

Next, we’ll talk about when overtime pay is usually due and what the regular hours of a typical work shift entail.

When should employers pay time and a half?

First things first: The FLSA guidelines consider 40 hours to be a regular work week. Why is this important to understand? Any non-exempt employees who work over the standard 40 hours will be eligible for a bump in pay (time and a half). As an employer, this means if any non-exempt employee on your staff works over and above 40 hours in a single week, you are required to pay time and a half.

Now that we know when time and a half is due, let’s talk a bit about how the math works out.

How do you calculate time and half?

To calculate time and a half pay, you’ll use both:

• Your employee’s regular rate of pay – or what they are paid per hour
• Plus another half of that hourly wage (which is added on top of their hourly rate)

For example, if you have an employee earning $15 per hour, you would multiply their regular pay rate by 1.5%, and the total would be the employee’s time and a half pay rate, which in this example comes out to $22.50. Let’s see how the calculation breaks out and adds up as a no-frills math equation:

• $15 (regular rate of pay) x 1.5% (time and a half) = $22.50 (this equals the overtime rate of pay)

With a better understanding of the math behind calculating time and a half pay under our belts, let’s go over who qualifies and who does not.

Qualifying for time and a half: which employees are eligible?

In the simplest terms, an employee must be classified as non-exempt in order to be eligible for time and a half pay. It’s important that employees are categorized correctly, following FLSA guidelines, because when employees are misclassified and don’t receive overtime, employers could face fines that start at $1,000 per violation. To begin, it’s helpful to understand the difference between exempt and nonexempt employees.

Exempt vs nonexempt employees

As the name implies, in its Handy Reference Guide, the FLSA provides a lot of helpful information on how an employee should be categorized and the categories of employees that can be considered exempt. They also have a PDF download of the guide if you want to save a copy for your records.

What to know about exempt employees 

Exempt employees are those who:

• Receive a salary (and are not covered by the FLSA and in most cases do not receive overtime pay).
• Earn more than $35,568 annually, which comes out to $684 per week
• Have specific job duties that are considered exempt (more on that below)

FLSA rules state that an employee needs to fall into one of the following six exemption categories to be considered an exempt employee:

1. Exemption for a number of executive positions, including management
2. Administrative exemption which includes office work directly related to management
3. Professional exemption for employees whose work is intellectual in science or learning
4. Computer employee exemption which includes computer analysts, programmers, or software engineers
5. Outside sales exemption for those employees whose primary duty is to solicit (and close) sales
6. Highly compensated employees that are earning more than $107,432 annually

What to know about non-exempt employees

On the other hand, a non-exempt employee is:

• Covered by the FLSA and receives overtime pay for extra hours worked.
• Typically paid hourly, though it’s possible for salaried employees to be eligible for overtime if their pay falls below the FLSA threshold.
• The employee does not fall into one of the exempt categories from the list above (which usually means they do not have a position that requires high-level administrative, executive, computer, and professional duties).

How to calculate overtime pay (plus examples)

Understanding the basics behind overtime pay can be helpful because sometimes employers need their staff to work extra hours on top of a standard shift. The good news is that calculating overtime pay is simple when you follow a few basic steps.

1. Calculate any hours worked over 40 for the week and make sure that you are only including hours worked for that particular week. Remember that things like sick, vacation, or holiday pay should not be included in hours worked.
2. Determine the overtime pay for each eligible employee using the calculation example above.
3. Calculate the overtime pay for each employee by multiplying the total number of overtime hours by the overtime pay rate.

Even though this formula isn’t particularly complicated, let’s put it to the test with a fictional employee.

Overtime calculation example for hourly employees

Let’s say you operate a niche business that manufactures laptop bags for sports fans, and Judith is a non-exempt employee on your staff, earning $20 an hour. Between your busy season approaching (and a well-timed interview on a national fan podcast), demand for your product is up, and you ask Judith if she can take on a few additional hours. She is happy to help.

If Judith worked 50 hours in one week, she would be paid her regular hourly rate of $20 for the first 40 hours but would be paid time and a half for the 10 overtime hours. To determine Jane’s overtime rate, you’ll use the following calculation:

• $20 (regular rate of pay) x 1.5% (time and a half percentage) = $30 (overtime rate of pay)

Now that we have Judith’s overtime rate figured out, the next step is multiplying it by the number of overtime hours worked.

• $30 (overtime rate of pay) x 10 (overtime hours worked) = $300 (total overtime pay)

So, in our first example Judith would earn an additional $300 in overtime pay for that week, which should be added to her regular pay.

Now that we’ve covered one of the most commonplace situations where overtime applies, let’s talk about one that doesn’t happen as often.

Can bonus pay be included in overtime?

Whether an employee is hourly or salaried, as long as they are classified as a non-exempt employee, the rules for including bonus pay in overtime are the same. Let’s take a look at how this would work.

• Discretionary bonus – A discretionary bonus is given by an employer without any expectation on the part of the employee. Though It can be a welcome surprise for the members of your team, it should never be included in overtime pay calculations. For example, a Christmas bonus is considered discretionary.
• Non-discretionary bonus – A non-discretionary bonus is generally tied to job performance and more often than not, an employee expects to receive it. The main difference is a non-discretionary bonus can be factored into the overtime calculation.

Similar to the examples we looked at earlier in this article, to account for a bonus in overtime pay, you would add the bonus amount to the employee’s total wages for the week to get their regular rate of pay. You would then multiply the regular rate of pay by 1.5% to arrive at their overtime pay.

Time and a half mishaps to avoid

Though the basics of time and a half are straightforward, there are some spots where an employer can slip. Here are some items to keep in mind.

• Employee misclassification – Many employers make the mistake of assuming that paying an employee a salary rather than hourly automatically qualifies them for exemption. But to actually be exempt, in line with FLSA rules, employees must fall into one of the six categories we touched on earlier in this article.
• Inaccurately tracking hours – If hours worked are not properly tracked, you may be underpaying your employees, which can result in hefty fines (and unwanted) attention from the Department of Labor.
• Failure to pay for all hours worked – Employers can sometimes make the mistake of assuming that if overtime is not authorized, then they’re off the hook from paying their employees. However, if you have staffers working late, they need to be paid — whether it’s been previously authorized or not.
• Forgetting state or federal laws – While employers should be familiar with FLSA laws, it is equally important for them to understand any rules in the state where they do business. For example, many states and jurisdictions have a higher minimum wage than their federal counterpart.
• Miscalculating the regular pay rate – Though fairly straightforward, calculating the regular rate of pay when accounting for non-discretionary bonuses can sometimes cause confusion.