What is overtime pay? Definition, types, and calculations
Understanding overtime formulas, how to track overtime, and when overtime is owed is essential to running a business and adhering to workplace law. But, figuring out when overtime applies and keeping records of hours can become a tedious task when you have many employees.
Read on for an explanation of what overtime is, the various types of overtime, and to whom and when it applies.
What is overtime pay?
Overtime pay is the compensation an employee receives for working beyond normal working hours.
For example, full-time employees generally work 38-40 hours per week. An employer may ask an employee to work outside of these standard hours, and as a result, any additional hours worked may be paid at an overtime rate. But, stipulations vary by job.
Certain jobs specify the maximum daily or weekly work hours and the times of day the work may be performed, which will affect how overtime is paid.
What is the overtime rate?
Typically, overtime rates will apply when a worker performs their job:
In addition to their regular hours
Outside the “spread” of typical hours
In addition to their agreed amount of hours.
Determining what is fair overtime can be a challenge, as employees who are paid higher wages may not always be entitled to overtime. If the additional hours are deemed reasonable due to the line of work, overtime may be expected.
Certain Awards and employment contracts provide employees with the option to receive paid time off in lieu of overtime compensation. Time off in lieu is commonly used when a worker is on the job for longer periods due to travel, higher demand, or other circumstances. Keep in mind, this approach needs to be outlined in writing beforehand with the employee's consent.
Who is entitled to overtime pay?
Overtime pay is contingent on various factors, including whether an employee is full-time, part-time, permanent, or temporary. Below are 3 different ways a worker may be eligible for overtime.
Standard workweeks contain 38 or 40 hours for full-time employees. Full-time workers are entitled to overtime pay unless stated otherwise in an employment contract.
When working outside regularly scheduled or agreed-upon hours, part-time employees are entitled to overtime pay. These hours might be beyond the scheduled hours or in some instances even more than a full-time employee’s hours. In addition, part-time employees may also be entitled to overtime pay when their work hours occur during atypical times, like weekends or late nights.
Temporary workers are eligible for overtime pay. Depending on the work environment and employment contract, temporary employees may need to complete a probation period before earning overtime compensation.
How much overtime pay are workers entitled to?
The amount of overtime pay workers are entitled to may vary depending on how an employer calculates overtime rates.
An employee's employment contract or award should be the first point of reference when determining the overtime rate. One position may be entitled to different rates of overtime when compared to another position.
How do you calculate overtime pay?
Calculating overtime pay for multiple employees can be challenging. Using a platform that can help you calculate pay when your staff is working beyond their standard hours is one obvious way to address this issue. But first, be sure you're familiar with the overtime laws in your state or territory.
To calculate what the overtime rate is when an employee is due a rate of time-and-a-half, follow the following formula:
(Agreed hourly rate) x (time and a half) = Overtime hourly rate
For example, Eleanor gets paid $10 per hour at the local convenience shop. The shop has been short-staffed recently due to a few workers quitting to go back to school. Eleanor has graciously agreed to cover the hours until her boss hires more help. Eleanor gets paid $10 an hour and is due overtime pay at a rate of time-and-a-half.
$10 (her standard hourly wage) x 1.5 (time-and-a-half) = $15 (per hourly overtime rate)
Types of overtime pay
Overtime can be accrued differently depending on the nature of the work.
1. Compulsory overtime
While some employment contracts outline specific needs for occasional overtime work, compulsory overtime hours still need to meet government guidelines.
Some employment agreements outline overtime provisions, but even though the employee has agreed to additional work hours, they may still be due overtime pay.
2. Non-guaranteed overtime
Certain circumstances require staff to work overtime upon necessity; this is called non-guaranteed overtime.
Non-guaranteed overtime means that staff may or may not be asked by their employers to work additional hours upon request. In these instances, workers may be obligated to accept overtime work at their employer’s request.
3. Voluntary overtime
Voluntary overtime is not unpaid overtime. When an employer asks a worker to stay for additional hours outside the contract requirements, and the employee agrees, this would be considered voluntary overtime.
Voluntary overtime is when the employee can decline or accept additional work as they wish. There is no penalty for declining casual overtime requests in these circumstances because there is no provision requiring such.
4. Time off in lieu
Contingent on an employee's contract, a worker may be entitled to time off in lieu (TOIL), which means they'll receive paid time off instead of overtime pay. Typically, the amount of time worked beyond their standard hours is then awarded as time off, on future days agreed upon by the employer.
TOIL may be discussed verbally or agreed upon in writing. Some employers may require their staff to take their TOIL within a certain period or before excessive overtime hours accrue.
5. Overtime pay
Payment for overtime work performed outside an individual's scheduled or standard hours is considered overtime pay.
Rates for overtime should be clearly outlined in employment contracts, so both parties know what they're entitled to. Overtime pay could be at the same rate as regular pay, depending on their contract agreement, or it could be higher.
What is reasonable for overtime work?
An employee's wellbeing needs to be considered when considering what is reasonable overtime. Workers who perform manual labour or operate heavy machinery, in particular, need to be given extra consideration when working overtime to avoid fatigue, work-related stress, accidents, and injuries.
When asking an employee to work overtime, consider the following:
the employee's role and responsibilities
risk to health and safety as a result of additional work hours
an employee's personal needs, such as mental health, family duties, or other personal requirements
if the employee has expressed the inability to perform overtime work
whether the employee understands that overtime may be required
the needs of the workplace
compensation for overtime hours
the typical cadence of the industry.
If the circumstances are unreasonable, an employee may refuse to work overtime. Each situation needs to be managed respectfully and with the employee's needs and capacity in mind.
You can read further information on reasonable overtime for salaried employees in Australia in the Fair Work Act.
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Sorting your employees' overtime rates and ensuring you're calculating your figures correctly can absorb valuable time and energy. Using payroll software to simplify the task gives you time to focus on larger issues.