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Payroll

What is Overtime? Definition and How to Calculate It

When someone works more hours than their contract dictates, they are defined to be working overtime; which usually entitles them to overtime pay. As a small business owner paying staff, it is important to understand your employee's basic and overtime hours and rates of pay, as well as associated entitlements to ensure you comply with the law. 

What Does Overtime Mean? 

Overtime is considered any hours an employee works that exceed normally scheduled working hours. Overtime also refers to an employee's remuneration for the hours they work in excess of their standard schedule. What is considered overtime? Ultimately, to define overtime simply – any hours you work over your standard contract are considered overtime hours. 

When an employee works ordinary hours, they are paid at their standard hourly rate. When the working hours exceed their ordinary hours, employees receive overtime pay rates. Overtime rates vary by industry, company or government requirements and are based on the specifics of the overtime worked. It may be time and a half, but it could also be a higher rate, such as double time. 

Overtime can also encompass work completed outside the agreed number of hours or the spread of ordinary hours. 

How To Calculate Overtime? 

As far as calculating overtime pay, it depends on several factors such as:

  • The industry you operate in
  • When the overtime is worked
  • Registered agreement
  • Employment contract
  • Legal Award the employee is working under

As an example, if the overtime rate is time and a half, an hourly wage of $20.33 would become $30.49. If an employee works an extra shift at eight hours, then this would become $243.92 vs. the standard $162.64. Some employee contracts also allow employers to offer time in lieu rather than overtime pay for extra hours worked. 

Please note that if you have employees hired on a part-time contract, the employee won't receive overtime pay until they exceed 40 hours (average hours worked in a week) unless their contract states otherwise. If their contract classifies overtime as any hours outside of their contracted hours, then the employee is entitled to be paid overtime rates for those hours. 

The majority of contracts define the overtime award or agreement as hours exceeding forty hours. Additionally, employees are permitted to make reasonable requests concerning overtime.

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Overtime Payments

There are different types of overtime pay to consider. 

Compulsory Payment

Some employment contracts outline overtime as a requirement. This generally lays out the provisions for compulsory overtime and the conditions. Even if compulsory overtime is detailed in a contract, employers must ensure they meet Fair Work's overtime requirements.

Voluntary Payment

This overtime is when an employee is asked to work overtime, but it isn't required of them as per their contract. Voluntary overtime can be accepted or refused as the employee chooses.

Non-Guaranteed Payment

If a contract details that staff must work overtime when asked, it can also detail that there may or may not be overtime available. If the employer requests an employee to work overtime, there's an obligation for them to do so. But it isn't a guaranteed addition of hours.

Regular Overtime Pay

Overtime pay can be at an ordinary hourly rate if the employment contract defines it as such. But it can be at a higher rate. Whether it's a special rate or not, if overtime was worked then it is classed as overtime pay.

Time In Lieu

Employers can also offer time in lieu rather than a payment, meaning that if approved, the employee can take time off on another day to make up for the hours worked overtime. This should however be outlined in the employment contract. It can also detail how many overtime hours employees can accrue before they take their time off. Often, time in lieu has to be agreed upon with the employer and employee in advance.

Managing Overtime With Payroll Software

Full-time employees are entitled to overtime if they work over their contracted hours. Part-time employees are also entitled to overtime, but they may not receive a higher rate of pay unless they exceed forty hours weekly. Though, if they work overtime on weekends or late nights, they may be entitled to a higher rate of pay. 

If you have temporary employees, they may also be entitled to a higher rate of overtime pay, generally, their contract will outline the need to complete a probationary period before they are qualified to work overtime and receive additional payments. 

QuickBooks Payroll powered by Employment Hero, makes the process of calculating overtime a breeze. The software is also reliable and compliant with  ATO guidelines. You can easily check an individual’s hours worked to ensure whether you are paying them correctly.


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