Federal law requires that hourly employees (with a few exceptions) who work more than 40 hours in a typical week are subject to receiving overtime pay. Some small businesses make the mistake of not properly tracking employee hours which can lead to claims of not being paid properly later on. It is imperative that a company, regardless of the number of employees, accurately tracks employee hours and maintains those records in case discrepancies arise. Maintaining the proper paper trails for all aspects of your business should be a high priority for your office team.
How to Properly Calculate Employee Hours
Typically, the average company uses Sunday at midnight as the beginning of the workweek and ends on Saturday at 11:59 pm. There are some exceptions to this as there are no steadfast rules for calculating when workweeks begin or end. When calculating an employee’s hours, do not take into account pay frequency as a way to determine a workweek.
For example, regardless of whether your company pays weekly, bi-weekly, semi-monthly or monthly, a workweek begins at a specific date and time that lasts one calendar week. Hours are to be calculated during that one calendar week, and not throughout the pay period. So if you have an employee that worked 8 hours per day totaling 32 hours one week and 16 the next, there would be no need to pay overtime because each week had less than 40 hours.
Rounding Minutes
Employee pay is calculated to the closest one-quarter hour (15 minutes) and not divided by minutes. So, if an employee clocked in and out at odd times such as 5:05 pm every day, you would round it down to 5:00 pm to calculate the time. The extra 5 minutes every day is not added together during the week to equal an extra 25 minutes of pay. However, if the employee clocks out at 5:12 pm one day, you would need to round it up to 5:15 pm. Even if every other day they clocked out at precisely 5:00 pm totaling 40 hours, you would need to compensate for that 15 minutes of overtime.
Example of rounding:
- Monday – 8:03 am (Round down to 8:00 am) to 5:07 pm (Round down to 5:00 pm)
- Tuesday – 7:58 am (Round up to 8:00 am) to 5:17 pm (Round down to 5:15 pm)
- Wednesday – 7:51 am (Round down to 7:45 am) to 5:08 pm (Round up to 5:15 pm)
- Thursday – 8:09 am (Round up to 8:15 am) to 4:55 pm (Round up to 5:00 pm)
- Friday – 8:07 am (Round down to 8:00 am) to 4:49 pm (Round down to 4:45 pm)
To make calculating quarter-hours easier, get accustomed to converting the minutes into decimals. For example:
- 15 minutes equals 0.25
- 30 minutes equals 0.50
- 45 minutes equals 0.75
Once you have calculated all of the whole hours, you can add the decimal equivalents of the quarter hours to speed up the calculation process. For example, an employee works 40 regular hours but stayed 15 minutes late two days that week and 45 minutes late another day. The calculation would be: 0.25 + 0.25 + 0.75 = 1.25. Then, simply add 40 + 1.25 = 41.25 hours.
Calculating Total Hours
Using the same example as above you will need to calculate the total hours of the employee. Overtime pay is known as “time and a half” and it will also need to be converted into the decimal of 1.5 to make it simple. So, let’s assume the employee time card above gets a one hour lunch, we would calculate the total hours as such:
- Monday – 8 am to 5 pm = 9 hours – 1 hour for lunch = 8 hours
- Tuesday – 8 am to 5:15 pm = 9.25 hours – 1 = 8.25 hours
- Wednesday – 7:45 am to 5:15 pm = 9.5 hours – 1 = 8.5 hours
- Thursday – 8:15 am to 5 pm = 9.25 hours – 1 = 8.25 hours
- Friday – 8 am to 4:45 pm = 8.75 hours – 1 = 7.75 hours
Alternatively, if lunch hours were consistent throughout the week, you could add all of the hours, then subtract 5 hours for the lunches. However, if the employee returned early or late from lunch, you would also need to convert those times into decimals and factor them in. But, we will continue with this example and proceed to calculate regular time and overtime payment amounts.
Add up all of the total hours for each day and it should look like this: 8 + 8.25 + 8.5 + 8.25 + 7.75 = 40.75 total hours. Since it is above 40, we have overtime pay to calculate.
First, we will take the employee’s hourly pay ($15) and multiply it by regular time: 40 x $15 = $600.
Now we calculate the overtime pay rate: $15 x 1.5 (time and a half) = $22.50
Next, we use the overtime pay rate and apply it to the total overtime hours worked: $22.50 x 0.75 = $16.88 (rounded up to the nearest penny)
Finally, we add the regular pay and the overtime pay: $600 + $16.88 = $616.88
For the last example, let’s say our employee skipped lunch on Monday and Friday. We would add 2 hours to make 42.75 hours and calculate the overtime pay like $22.50 x 2.75 = $61.88 overtime pay. The weekly paycheck amount would be $661.88.
Tips to Avoid Errors in Timecard Calculations
Many small businesses still use old-fashioned punch cards or hand-written timesheets to track employee time. Occasionally, something will go wrong such as an employee punching the wrong slot, punching it twice in the same spot, or smudging the ink, making it difficult to read. To avoid these common mistakes, invest in a time clock or software that tracks time records digitally. Not only will this help avoid errors in calculations, but it can also help you save time and energy from inputting the information into your accounting software or excel spreadsheet manually.
In conclusion, it is a good idea to have employees know the rules of time calculation and timecard policies. It is not enough for an employer to simply say “no overtime” and not pay an employee if they arrived early or left late with good cause. All overtime must be compensated. If an employee routinely breaks the timecard policies, you must compensate them and decide whether to keep that employee or not.
Do you have questions about how to properly calculate timecards or other HR procedures? Luxa is your full-service HR, payroll, and accounting outsourcing specialist for the Tulsa area. Contact us today to find out how we can help you!