Calculating Payment for Overtime Hours

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February 3, 2017

True or False:  Overtime hours must be paid at a rate of at least 1½ times the regular rate of pay. If you said “true” you are correct.  However, do you know what the “regular rate of pay” is and how to calculate payment for overtime hours?

The “regular rate of pay” is not simply the employee’s hourly rate.  The “regular rate of pay” is determined by dividing the “pay earned” for the week by the number of hours worked.  “Pay earned” is not simply the employee’s hourly rate.  Included in the “pay earned” are all non-discretionary payments such as shift premiums, piecework or production bonuses, on-call pay, and non-cash payments.

Calculation example.  To correctly calculate overtime, you must first calculate the regular rate of pay, then calculate the overtime premium as in this example:

Sally, a non-exempt employee, works 45 hours in a workweek at an hourly rate of $13.50.  In addition, she receives a production bonus of $125.

Her regular earnings

45 x $13.50  


Add production bonus 

$607.50 + $125


Regular rate of pay 

$732.50 / 45          


Overtime premium rate  

$16.28 x 0.5  


Overtime premium earnings

$8.14 x 5 


Total earnings

$732.50 + $40.70          


Special conditions.
  There are many situations which have specific rules relating to calculation of regular rate of pay and/or overtime. 

One common situation is Tipped employees:  If an employer is utilizing the tip credit and the tipped employee is thereby paid less than the minimum wage, the full minimum wage is used to calculate the regular rate of pay.

Make sure you are aware of this and other special conditions which may impact calculation of overtime for your employees.

In conclusion, the question posed in the title is true as long as the employer correctly calculates the regular rate of pay and performs calculations in accordance with IRS guidelines. Like many payroll situations, employers should ensure that they are aware of the details of payroll laws, and that they also keep current on the ever-changing rules and regulations. 

Contributed by Roger A. Smith, CPP, Owner, Payroll Consulting firm

View the on-demand webinar “Calculating Overtime for Michigan Employees” with Roger Smith.