Methods of Overtime Calculations using Payroll Software

April 15 2010

There are 3 common methods for overtime setup and calculation in payroll software processing.

  • Overtime at Time and a half
  • Overtime automatically calculated by the payroll software system
  • FLSA Overtime calculation for multiple rates of pay

Overtime at Time and a half calculation is accomplished by setting up a pay type code or earnings code, commonly “OT” with a multiplier of 1.5. On the employee’s timecard, regular time is entered using its earnings code and then any hours over 40 in a week or 8 in a day are entered separately under the OT earnings code. For example, if 45 hours are worked during one week, the timecard will be entered as REG 40 hours and OT 5 hours. The system will calculate the 5 hours as time and a half.

Overtime automatically calculated, sometimes called Premium Overtime is accomplished by setting up an earnings code in a payroll software system such as OTP with a multiplier of .5. This method is based on total hours in a week or in a day. On the employee’s timecard, the entire hours worked will be entered using the regular earnings code, for example REG 45 hours. The payroll system will calculate the overtime based on pre-determined settings to determine what earnings codes are to be considered during the calculation.

FLSA Overtime is also referred to as Weighted Overtime or Chinese Overtime. This method performs is an average calculation to determine the overtime rate to be used based on total hours and total wages paid. The calculation is used when an employee receives multiples rates of pay for different jobs and also when other types of pay are awarded to the employee like incentive pay. On the employee’s timecard, multiple entries containing amount of hours worked and rate for that job will be entered. For example, the employee works 45 hours in a week, but has two jobs with different rates of pay. Two entries for regular pay will be entered on the timecard with number of hours and rate of pay for each job. Then the software system will divide the total hours into the total gross paid to get an average hourly rate. Then create a timecard for 5 units at .5 of the average rate to pay the employee the overtime for the hours over 45.

Setup for each of these methods will vary depending on your payroll software provider.

Additional information regarding overtime can be found at http://www.dol.gov/dol/topic/workhours/overtime.htm

Deena Russell- Windows Suite Software Support & Training Specialist