Overtime Calculation Guide for Hourly Employees

Overtime seems simple: work more than 40 hours, get paid time-and-a-half. But in practice, the rules are full of traps. What counts as the "regular rate"? Does your state have daily overtime? Can you give comp time instead of overtime pay? Get any of these wrong and you're looking at back wages, penalties, and a DOL investigation.

This guide covers everything a small business owner needs to know about calculating overtime correctly — the federal rules, state variations, the math, and the mistakes that get employers in trouble.

The Federal Rule: FLSA Overtime Basics

Under the Fair Labor Standards Act (FLSA), employers must pay non-exempt employees 1.5 times their regular rate of pay for every hour worked over 40 in a workweek. This applies to most hourly workers in construction, restaurants, and retail.

A few things the FLSA does not require:

• Overtime for working weekends or holidays (unless those hours push you past 40)
• Double time (that's a state rule, not federal)
• Overtime based on daily hours (again, some states add this — see below)

A "workweek" under the FLSA is any fixed, recurring period of 168 hours (7 consecutive 24-hour days). It doesn't have to match the calendar week, but once you set it, you can't change it to avoid paying overtime.

How to Calculate Overtime Pay

The basic formula is straightforward, as outlined in DOL Fact Sheet #23:

Simple enough — when the employee has one pay rate and no bonuses. It gets more complicated fast.

The "Regular Rate" Trap

The "regular rate" is not simply the employee's hourly wage. Under FLSA, the regular rate includes all remuneration for employment — and that catches a lot of employers off guard.

Must be included in the regular rate:

• Base hourly pay
• Non-discretionary bonuses (production bonuses, attendance bonuses)
• Shift differentials
• Commissions
• Piece-rate earnings

Excluded from the regular rate (29 U.S.C. § 207(e)):

• Truly discretionary bonuses (e.g., a surprise holiday gift)
• Paid time off (vacation, sick — hours not actually worked)
• Employer contributions to benefit plans
• Premium pay already at 1.5x or higher

The practical impact: if you pay a $200 weekly attendance bonus, that $200 gets folded into the regular rate before calculating overtime. Skipping this step means you're underpaying overtime — and the DOL knows to look for it.

Multiple Pay Rates in One Week

When an employee works at different rates in the same week (common in construction and restaurants), you calculate overtime using the weighted average method:

There's also a "rate-in-effect" method where overtime is paid at 1.5× whatever rate the employee was earning when the overtime occurred — but this requires a prior written agreement between employer and employee.

States with Daily Overtime

The FLSA only requires weekly overtime. But several states add daily overtime rules that can catch employers off guard — especially those operating across state lines.

California

California has the most complex overtime rules in the country. Per California Labor Code § 510:

• Over 8 hours/day: 1.5× pay
• Over 12 hours/day: 2× pay (double time)
• 7th consecutive day: 1.5× for the first 8 hours, 2× after that

This means a California construction worker doing four 10-hour days gets 8 hours of daily overtime even though they only worked 40 hours that week. California does allow alternative workweek schedules (like 4×10) that avoid daily OT, but they require a formal employee vote.

Colorado

Under the Colorado COMPS Order, employers must pay 1.5× for hours worked beyond 12 in a single workday (or 12 consecutive hours regardless of workday), in addition to the standard 40-hour weekly threshold.

Alaska

Like California, Alaska requires daily overtime after 8 hours in a workday, in addition to weekly overtime after 40 hours. This applies to employees 18 and older.

Nevada

Nevada requires daily overtime after 8 hours, but only for employees earning less than 1.5× the state minimum wage. Higher-paid employees are subject only to the 40-hour weekly threshold. This is established in the Nevada Constitution, not just a statute — making it harder to change.

6 Overtime Mistakes That Trigger DOL Investigations

1. Misclassifying Employees as Exempt

The most common FLSA violation. To be exempt from overtime, an employee must pass all three tests: be paid on a salary basis, earn at least the current salary threshold (check the DOL overtime page for the latest figure — it has been the subject of recent litigation), and perform duties that qualify under one of the white-collar exemptions (executive, administrative, or professional).

Common in our target industries: calling a restaurant assistant manager "salaried" when they spend most of their shift cooking and serving, or classifying a construction foreman as exempt when they do hands-on labor all day. The DOL applies a primary duty test — the employee's principal, main, or most important duty must be genuinely exempt work. Time spent is one factor, but not the only one.

2. Ignoring the Regular Rate

As covered above, failing to include non-discretionary bonuses, shift differentials, and commissions in the regular rate is a textbook violation. When a quarterly production bonus is paid, employers must retroactively recalculate the regular rate for each workweek in the bonus period and pay additional overtime compensation.

3. Offering Comp Time Instead of Overtime Pay

In the private sector, comp time is illegal under FLSA. You cannot tell an employee "take Friday off instead of getting overtime for Monday." Compensatory time off in lieu of overtime pay is only permitted for state and local government employees. Many small business owners don't know this.

4. Averaging Hours Across Two Weeks

An employer with a biweekly payroll assumes that 45 hours one week and 35 the next averages to 40, so no overtime is owed. Wrong. Under 29 CFR § 778.104, overtime must be calculated on a single workweek basis. You cannot average across two or more weeks. The employee is owed 5 hours of overtime for week one.

5. Rounding That Always Favors the Employer

The DOL permits rounding employee time to the nearest 5, 6, or 15 minutes — but only if the rounding averages out over time. If your system consistently rounds down at clock-in and up at clock-out, you're systematically shortchanging employees. That's a violation.

6. Not Paying for Off-the-Clock Work

Requiring or allowing employees to work before clocking in or after clocking out — common in restaurants (prep work, closing duties) and construction (loading equipment at the yard). Under 29 CFR § 785.11, if an employer "suffers or permits" an employee to work, those hours count — whether or not they were officially scheduled.

Industry-Specific Overtime Rules

Restaurants: Tipped Employee Overtime

This is one of the most commonly botched calculations in the restaurant industry. Under FLSA, employers can take a "tip credit" and pay tipped employees a reduced direct wage. But when a tipped employee works overtime, the overtime rate is based on the full minimum wage, not the reduced tipped wage. (The figures below use the current federal minimum — check dol.gov for the latest rates.)

Construction: Travel Time and Prevailing Wage

Two issues hit construction employers especially hard:

• Travel time: If you require employees to report to your yard or shop before heading to the job site, that travel time is generally compensable and counts toward overtime hours (29 CFR Part 785, Subpart C)
• Prevailing wage projects: On federally funded jobs under the Davis-Bacon Act, overtime applies on top of the prevailing wage rate — not just the employee's base rate

How to Stay Compliant

Overtime compliance comes down to three things: accurate time records, correct math, and knowing your state's rules. Here's a practical checklist:

1. Track hours to the minute — don't rely on estimates or rounding. A digital time clock eliminates this problem.
2. Know your state's rules — if you operate in California, Alaska, Colorado, or Nevada, you have daily overtime obligations on top of the federal weekly rule.
3. Include all compensation in the regular rate — bonuses, shift differentials, and commissions all count. When in doubt, include it.
4. Never average across weeks — calculate overtime week by week, even if you pay biweekly or semi-monthly.
5. Never offer comp time — in the private sector, overtime must be paid in cash. Period.
6. Audit your exemptions — if someone is classified as exempt, verify they meet the current salary threshold and the duties test. When in doubt, pay overtime.
7. Use automated overtime alerts — a time tracking system that flags employees approaching 40 hours (or 8 hours/day in daily OT states) prevents surprises on payroll day.