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How to Calculate Overtime the Correct Way

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Many service companies under pay overtime which creates an ever-increasing financial burden that will catch up to many companies.   

We all know that we must pay regular time plus 50% when employees work more than forty hours in a work week. Some states require overtime after 8 hours in one twenty-four-hour period.

What many companies get wrong is not considering all the employees’ compensation when calculating their “regular time”.

How to Calculate the Employees’ Basis

Add up all compensation* for the payroll period and divide that amount by forty. That is the basis of your regular rate used to calculate the employees’ overtime rate.

*As a general rule, any bonus given to employees as a means of motivating job performance, productivity, quality or accuracy must be included in the regular rate of pay. Holiday/gift bonus, discretionary bonus, and percentage of total earnings bonus are exempt at a federal level. A state can apply tougher rules but not easier (softer) rules.

Payroll Examples

Scenario 1  

John makes $25.00 per hour (straight or regular time) and works eight hours per day, Monday through Friday. He is paid on a weekly basis. For purposes of this example, the time frame of consideration for a bonus will be defined as a workweek.

One week, John worked 40 hours and received a Perfect Punctuality Award of $100 for the workweek.


No action needs to be taken. John did not work over 40 hours during the workweek, so no overtime pay is due, and the regular rate does not need to be recalculated.

Scenario 2

Brian makes $28.00 per hour and works eight hours per day, Monday through Friday. He is paid weekly. He received a production bonus of $200.00 and worked a total of 46 hours during the last workweek.


HR determines the bonus should be included when calculating overtime because it was paid to motivate Brian to produce, and it was within a defined work week.

Straight-Time Compensation

($28.00 x 40 hours) = $1,120.00

Overtime Basis Calculation

($28.00 x 46 hours) + $200.00 = $1,488.00

$1,488.00 / 46 = $32.35 (average rate of pay per hour)

$32.35 * 1.5 = $48.52 (hourly rate for OT)

Total Compensation  

Regular Wages ($28.00 x 40 hours) = $1,120.00

Bonus = $200.00

Overtime Pay ($48.52 x 6 hours) = $291.13

Total: $1,611.13

More Overtime Calculation Examples

Example Overtime Pay Calculation if paid Commission only

Weekly Commissions = $1700
Total Hours = 50
Regular rate = $1700 / 50 hours = $34 per hour
Commission Pay = $1700
Overtime Pay = $34 x .5 x 10 hours = $170
TOTAL Weekly Pay = $1870

Example Overtime Pay Calculation if paid Hourly plus Commissions

Hourly Rate = $15 per hour
Weekly Commissions = $100
Total Weekly Hours = 50
Regular rate = $15 x 50 hours = $750 + $100 commissions = $850 / 50 hours = $17 Regular Rate
$17 x 40 hours = $680 Regular Pay
$17 x 1.5 x 10 hours = $255 Overtime Pay
TOTAL Weekly Pay = $935

Overtime Exemptions

Some commission-based jobs may be exempt from the overtime law and not entitled to overtime pay. There are two different overtime pay exemptions that may come into play for employees who are paid commissions.

Commission Sales OT Exemption

This is commonly referred to as the 7(i) Exemption. For this exemption to apply to a position, three conditions must be met:

  1. The employee must be employed by a retail or service establishment.
  2. The employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked.
  3. More than half the employee’s total earnings in a representative period must consist of commissions.


  1. This would apply to a service technician. You might pay your technician minimum wage plus strong performance based compensation.
  2. You would pay them at least minimum wage for their hours worked.
  3. They would be paid minimum wage x 1.5 for all overtime hours worked.
  4. More than 50% of their compensation must be through the form of incentives through the performance based compensation program.
  5. Design the system so that PBC never fails below 50% of their total compensation. This allows you to avoid figuring out overtime.
  6. This is NOT about cheating the tech out of overtime. It is about paying them so much in incentives, that OT never applies.

Outside Sales OT Exemption

For this exemption to apply to a position, the following tests must be met:

  1. The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer.
  2. The employee must be customarily and regularly engaged away from the employer’s place or places of business.

Credit and many thanks goes to The Lore Law Firm. To simplify accounting and streamline your workflow, try Total Office Manager® for an all-in-one solution.



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