Getting overtime calculations wrong isn’t just a compliance issue—it’s a payroll nightmare. Underpay employees, and you risk lawsuits and fines. Overpay them, and you’re draining company resources unnecessarily. With so many variables—hourly rates, bonuses, fluctuating workweeks—how do you ensure every paycheck is accurate?
Unlike general FLSA compliance, which covers everything from minimum wage to recordkeeping, this article focuses exclusively on payroll calculations. You’ll learn:
- How to calculate overtime for different pay structures (hourly, salaried non-exempt, fluctuating workweeks, and bonuses)
- The biggest mistakes payroll teams make—and how to fix them
- Best practices to streamline your payroll process and avoid costly miscalculations
If you handle payroll, HR, or compliance, this is your step-by-step guide to getting overtime pay right—every single time.
Table of Contents
- Understanding the FLSA Overtime Rule
- How to Classify Employees for Payroll Purposes
- Overtime Pay Calculation Methods for Different Pay Structures
- Payroll Pitfalls: The Most Common Overtime Calculation Mistakes
- How Payroll Software Can Simplify Overtime Compliance
- Mastering Overtime Compliance to Protect Your Business
Understanding the FLSA Overtime Rule
The Fair Labor Standards Act (FLSA) sets the federal standard for overtime pay in the United States. Under the FLSA, non-exempt employees must receive overtime pay at 1.5 times their regular hourly rate for any hours worked over 40 in a workweek.
Key Points of the FLSA Overtime Rule
Overtime kicks in after 40 hours – Unlike some state laws, the FLSA does not require overtime pay for working over 8 hours in a day—only for exceeding 40 hours in a week.
Overtime is calculated based on the “workweek” – A workweek is any fixed, recurring period of 168 hours (7 consecutive days).
Applies to non-exempt employees – Not all employees qualify for overtime. The next section will cover exempt vs. non-exempt classifications.
Salaried employees can still qualify – Just because an employee is salaried doesn’t mean they are automatically exempt from overtime.
How to Classify Employees for Payroll Purposes
One of the biggest payroll mistakes is misclassifying employees as exempt when they should be non-exempt.
Payroll Red Flags That Suggest Misclassification:
- An employee is paid a salary, but their job duties do not meet the FLSA exemption criteria.
- The employee is not receiving overtime pay, even though they do not manage other employees or make high-level business decisions.
- The company assumes all salaried workers are exempt without checking their job duties.
Key Payroll Considerations:
- Exempt employees must meet three tests: Salary Basis Test, Salary Level Test, and Duties Test.
- Salaried non-exempt employees must still receive overtime pay based on their regular hourly rate.
- Job title alone does not determine exemption status—actual job responsibilities do.
Payroll teams should regularly audit employee classifications to ensure compliance. If there is any uncertainty, the safest approach is to classify an employee as non-exempt.
📊 Classification Impact: Misclassification accounts for 35% of overtime-related lawsuits, highlighting the importance of regular audits.
Overtime Pay Calculation Methods for Different Pay Structures
Once an employee is classified as non-exempt, payroll teams must determine how to calculate overtime pay correctly. The method depends on the employee’s pay structure.
Hourly Employees
Overtime calculation is straightforward for hourly employees:
Formula:
Overtime Pay = (Regular Hourly Rate × 1.5) × Overtime Hours
Example:
- Employee earns $20 per hour
- Works 50 hours in a workweek
- Overtime pay = ($20 × 1.5) × 10 = $300
- Total pay for the week = (40 × $20) + $300 = $1,100
Salaried Non-Exempt Employees (Fixed 40-Hour Workweek)
Salaried non-exempt employees must have their regular hourly rate determined before calculating overtime.
Formula:
Hourly Rate = Weekly Salary ÷ 40
Example:
- Employee earns $800 per week
- Works 45 hours in a workweek
- Regular hourly rate = $800 ÷ 40 = $20
- Overtime pay = ($20 × 1.5) × 5 = $150
- Total pay for the week = $800 + $150 = $950
Fluctuating Workweek Method (FWW)
For non-exempt employees on a fluctuating schedule, the Fluctuating Workweek Method (FWW) allows employers to pay overtime at half-time instead of time-and-a-half.
Formula:
Regular Hourly Rate = Weekly Salary ÷ Total Hours Worked
Overtime Pay = (Hourly Rate × 0.5) × Overtime Hours
Example:
- Employee earns $800 per week
- Works 50 hours
- Regular hourly rate = $800 ÷ 50 = $16
- Overtime pay = ($16 × 0.5) × 10 = $80
- Total pay for the week = $800 + $80 = $880
FWW can help control overtime costs, but strict compliance requirements must be met, including a clear agreement between employer and employee.
Employees with Bonuses & Commissions
Non-discretionary bonuses and commissions must be included in the regular rate of pay before calculating overtime.
Formula:
Regular Hourly Rate = (Total Weekly Earnings ÷ Total Hours Worked)
Overtime Pay = (Regular Hourly Rate × 1.5) × Overtime Hours
Example:
- Employee earns $20 per hour, works 50 hours
- Earns a $100 production bonus for the week
- Total earnings before overtime = (40 × $20) + $100 = $900
- New regular hourly rate = $900 ÷ 50 = $18
- Overtime pay = ($18 × 1.5) × 10 = $270
- Total pay for the week = $900 + $270 = $1,170
Payroll teams should review all pay components to ensure overtime calculations reflect actual earnings.
💡 Pro Tip: When calculating overtime for employees who earn bonuses or commissions, spreadsheet errors are common. Consider using automated payroll software that can handle these complex calculations accurately.
Payroll Pitfalls: The Most Common Overtime Calculation Mistakes
Even with a clear understanding of FLSA rules, overtime miscalculations are one of the most common payroll mistakes. These errors can lead to costly back pay, government fines, and even lawsuits. Below are the most frequent mistakes employers make—and how to avoid them.
1. Misclassifying Employees as Exempt
One of the biggest compliance risks is incorrectly classifying an employee as exempt when they should be non-exempt.
Common Errors:
- Assuming all salaried employees are exempt
- Failing to apply the Duties Test (job role must meet exemption criteria)
- Ignoring state-specific overtime exemption rules
Solution:
Carefully review job duties, salary thresholds, and FLSA exemption guidelines. When in doubt, classify employees as non-exempt to avoid legal risks.
2. Using the Wrong Overtime Rate
Overtime should be based on the employee’s “regular rate of pay,” which includes bonuses, commissions, and certain allowances.
Common Errors:
- Calculating overtime based on the base hourly rate alone
- Forgetting to include non-discretionary bonuses or commissions
- Not adjusting rates for fluctuating workweek employees
Solution:
Always calculate the regular rate before applying the overtime multiplier. If bonuses or commissions are included, they must be factored into the weekly earnings before determining the hourly rate.
3. Not Tracking Hours Accurately
Failing to track all hours worked can result in unpaid overtime claims.
Common Errors:
- Not recording time spent on work-related activities outside of scheduled hours (e.g., emails, calls, training)
- Rounding hours incorrectly, leading to underpayment
- Not paying overtime if an employee works off the clock
Solution:
Use reliable time-tracking systems to ensure all hours are recorded, and educate employees on accurate time reporting.
4. Incorrectly Calculating Overtime for Salaried Non-Exempt Employees
Salaried non-exempt employees are entitled to overtime pay, but employers often miscalculate their overtime pay.
Common Errors:
- Not dividing the salary correctly to determine the hourly rate
- Misapplying the fluctuating workweek method without meeting FLSA requirements
Solution:
Use the correct formula based on whether the employee's schedule is fixed or fluctuating. Before applying the fluctuating workweek method, get the employee's consent.
5. Ignoring State-Specific Overtime Laws
Many states have overtime laws that are stricter than federal FLSA rules.
Examples:
- California – Overtime applies after 8 hours in a day, not just 40 hours in a week.
- New York – Higher minimum salary thresholds for exemption.
- Colorado – Overtime applies after 12 hours in a day.
Solution:
Always check state and local laws to ensure compliance. If state law provides greater employee benefits than FLSA, the stricter rule applies.
6. Failing to Pay Overtime on Time
Overtime pay must be included in the paycheck for the period it was earned.
Common Errors:
- Deferring overtime payments to the next payroll cycle
- Not paying overtime until the employee requests it
Solution:
Ensure your payroll system processes overtime in the same pay period it was worked.
7. Retaliating Against Employees Who Claim Overtime
It is illegal to fire, demote, or punish an employee for claiming overtime pay.
Common Errors:
- Pressuring employees not to report overtime
- Retaliating against employees who file wage complaints
- Misclassifying employees to avoid paying overtime
Solution:
Create a transparent payroll process where employees feel comfortable reporting errors—train managers to handle overtime claims correctly.
Key Takeaways
- Misclassification is a major compliance risk—ensure job roles meet exemption criteria.
- Overtime pay must include all earnings—not just base pay.
- Accurate time tracking is essential—work done off the clock still counts.
- State laws may be stricter than federal laws—always check local regulations.
- Overtime must be paid on time—delays can result in penalties.
How Payroll Software Can Simplify Overtime Compliance
Manually tracking overtime, employee classifications, and payroll errors is time-consuming and prone to mistakes. Automated payroll software can:
- Accurately calculate overtime pay based on different pay structures
- Track employee hours in real time to prevent underpayment claims
- Adjust for state-specific overtime laws automatically
- Flag misclassified employees before payroll errors occur
Investing in payroll automation ensures compliance and reduces administrative burden.
Mastering Overtime Compliance to Protect Your Business
Ensuring accurate overtime calculations is not just a matter of compliance but a critical component of maintaining a healthy business environment. Missteps in this area can lead to significant financial and legal repercussions. By understanding and applying the Fair Labor Standards Act (FLSA) rules, classifying employees correctly, and implementing best practices, businesses can avoid costly mistakes.
At Lift HCM, we emphasize the importance of staying informed and prepared. With the right tools and knowledge, you can navigate the complexities of overtime laws, safeguard your business from potential disputes, and foster a satisfied and motivated workforce. As your business evolves, let compliance be your ally in achieving sustainable growth and success.
