The Ultimate Guide To Overtime Calculation

If you own or operate a trade business, chances are you've got a pretty good head for numbers (or you wouldn't still be in business!). But calculating overtime is enough to have even seasoned bookkeepers scratching their heads. 

Calculating overtime, we can all agree, is a headache.

Unless you're a passionate accountant (and if you are, hats off to you!), you're likely as excited by crunching the numbers come payroll day as you were about maths tests in high school. But don't worry; we’ve made an overtime cheat sheet to help you take the guesswork out of overtime calculation. Because nobody wants an unexpected bill for back pay. So, put on your thinking cap and let's get started! Here's your ultimate guide to overtime calculation.

What Is Overtime Pay?

Before we discuss how to calculate overtime, let's start with the basics: what is overtime pay, and who is entitled to it?

Overtime pay is a higher rate of pay that can apply when your employees work beyond their: 

• Ordinary work hours
• Agreed number of hours
• Spread of ordinary hours. 

But not every instance of work beyond the 9-5 qualifies your employees for overtime pay - it all depends on their contract of employment, modern award, or enterprise agreement. For that reason, it's important to familiarise yourself with your employees' entitlements to ensure you complete your overtime calculations properly. 

How Overtime Works

If your employee is covered by a modern award or enterprise agreement, then whether or not they can earn overtime will be set out in the modern award or enterprise agreement. However, if your employee is not covered by a modern award or enterprise agreement, then whether they can earn overtime is a matter to determine in their employment contract. 

When Overtime Applies

Instances where overtime applies vary greatly between modern awards. Usually, overtime pay applies when an employee works:

• More than a certain number of hours each day or week
• Outside of a certain spread of hours
• More than their usual hours each day or week (for part-time employees).

Hourly Vs Salaried Employees

Overtime calculation for employees is fairly simple - just follow the formula (which we'll show you a little later on). However, tracking overtime with salaried employees can be a bit more challenging than for hourly workers. Salaried employees may be exempt from overtime if they make a certain amount of money or perform duties that are not recognised as eligible for overtime pay. Commonly, salaried employees will receive an allocation of work to complete and will receive the same fixed, regular payment regardless of the hours they take to complete the task. Therefore, a salaried employee will not usually receive overtime pay or penalty rates. There are exceptions to the rule, so check your employment contracts to ensure you meet your employees' specific contractual agreements.

What Are Overtime Rates?

Get out your pen and paper, kids; here are those formulas we promised for your cheat sheet earlier on.

Overtime calculations from Monday through Saturday

On an ordinary weekday or Saturday, overtime is paid at the rate of:

• 1.5 times your employee's ordinary pay rate for the first three hours of overtime worked.
• 2 times your employee's ordinary pay rate for any overtime worked after three hours of overtime.

Overtime calculations on Sundays 

On Sundays, overtime is paid at a rate of:

• 2 times your employee's ordinary pay rate.

Overtime calculations on public holidays

When a public holiday falls on a weekday, overtime is paid at:

• 1.5 times your employee's ordinary pay rate for the first 7.6 hours.
• 2.5 times your employee's ordinary pay rate for any time worked thereafter. 

When a public holiday falls on a Saturday or Sunday, overtime is paid at:

• 2.5 times your employee's ordinary pay rate.

Calculating Overtime Pay 

To accurately calculate overtime pay for an employee, you'll need to know their regular hourly rate and working hours. Once you know that, the rest is fairly straightforward.

Let's look at an example. Let's say you sent Abbey and Oren out to mount a TV on a Friday afternoon. Looks like a pretty simple job. However, the job goes haywire. Abbey can't find studs where the customer wants the TV, so they have to negotiate a new spot. When Oren starts snaking the cable bundle through the wall cavity, he finds that building debris was chucked behind the plasterboard during construction. What should have only taken an hour soon turns into a five-hour job, and your employees need to work overtime. Your job costing calculations have just gone out the window.

Now, Abbey is your 9 to 5er, so by working until 7 pm, she's entitled to two hours of overtime pay. But Oren works 7 to 3 on Fridays, meaning he's entitled to four hours of overtime pay. 

They both earn $42 per hour. That means Abbey will be paid at 1.5 times her standard hourly rate for her two hours of overtime. Her overtime rate is $62 per hour, meaning she earns an extra $126 on Friday to take her mates out for drinks after work. Let's hope she's walking home.

Oren is entitled to the same 1.5 overtime rate. However, since he's working four hours overtime, he'll get $62 per hour for the first three hours, and his final hour of overtime will be calculated at 2 times his usual hourly rate, meaning he'll get $84 for his last overtime hour and a total of $270 overtime pay for the day.

It's a long day, but his dog has just undergone an expensive hip operation, so he's grateful for the overtime.

As you can see, overtime calculation can get complicated. That’s why there’s a nationally-recognised formula – it keeps things fair across the board.

Is overtime good or bad for your business?

Overtime can be good or bad for a business; it all depends on the circumstances. 

If your business struggles to meet deadlines or keep up with customer demand, overtime can be a lifesaver. It allows employees to put in extra hours to get the job done and keep the business running smoothly.

However, if overtime becomes a regular occurrence, it can take a toll on employees. They may become burned out and resentful, which can lead to lower productivity and quality of work. In addition, overtime can be costly for businesses, so it's important to strike a balance between the two. If you regularly pay overtime, could you find a better balance by employing another tradie?

If you're considering implementing overtime, make sure you weigh the pros and cons carefully to ensure it's the best decision for your business. Ultimately, it's up to you to determine whether or not overtime is right for your business. 

Let AroFlo calculate the costs for you

Are your overtime calculations keeping you off the tools? It's time to get on top of your overtime calculations by booking a software demo with AroFlo.