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:
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
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.
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.
One of the biggest payroll mistakes is misclassifying employees as exempt when they should be non-exempt.
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.
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.
Overtime calculation is straightforward for hourly employees:
Formula:
Overtime Pay = (Regular Hourly Rate × 1.5) × Overtime Hours
Example:
Salaried non-exempt employees must have their regular hourly rate determined before calculating overtime.
Formula:
Hourly Rate = Weekly Salary ÷ 40
Example:
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:
FWW can help control overtime costs, but strict compliance requirements must be met, including a clear agreement between employer and employee.
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:
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.
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.
One of the biggest compliance risks is incorrectly classifying an employee as exempt when they should be non-exempt.
Common Errors:
Solution:
Carefully review job duties, salary thresholds, and FLSA exemption guidelines. When in doubt, classify employees as non-exempt to avoid legal risks.
Overtime should be based on the employee’s “regular rate of pay,” which includes bonuses, commissions, and certain allowances.
Common Errors:
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.
Failing to track all hours worked can result in unpaid overtime claims.
Common Errors:
Solution:
Use reliable time-tracking systems to ensure all hours are recorded, and educate employees on accurate time reporting.
Salaried non-exempt employees are entitled to overtime pay, but employers often miscalculate their overtime pay.
Common Errors:
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.
Many states have overtime laws that are stricter than federal FLSA rules.
Examples:
Solution:
Always check state and local laws to ensure compliance. If state law provides greater employee benefits than FLSA, the stricter rule applies.
Overtime pay must be included in the paycheck for the period it was earned.
Common Errors:
Solution:
Ensure your payroll system processes overtime in the same pay period it was worked.
It is illegal to fire, demote, or punish an employee for claiming overtime pay.
Common Errors:
Solution:
Create a transparent payroll process where employees feel comfortable reporting errors—train managers to handle overtime claims correctly.
Manually tracking overtime, employee classifications, and payroll errors is time-consuming and prone to mistakes. Automated payroll software can:
Investing in payroll automation ensures compliance and reduces administrative burden.
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.