Why Your Employee’s Overtime Pay Was Calculated Wrong—and How to Fix It

Overtime errors aren’t just payroll slip-ups—they can tank your business with hefty fines, frustrated workers, and a tarnished reputation. The Department of Labor isn’t playing around: nearly 50% of payroll audits uncover overtime mistakes, leaving employers on the hook for thousands in underpaid wages. Want to dodge the chaos? This guide exposes the biggest overtime pitfalls, shows you how to fix past errors (even mid-payroll), and reveals foolproof ways to stay compliant moving forward.

Common Overtime Mistakes You Need to Avoid

Many employers make overtime missteps without even realizing it. Common errors include:

• Misclassifying Employees
  Treating non-exempt workers as exempt from overtime leads to unpaid hours at 1.5 times the regular pay rate.

• Ignoring Bonuses and Commissions
  If bonuses and commissions are non-discretionary, they must be included when calculating overtime rates.

• Averaging Hours Across Multiple Weeks
  Overtime is based on a single, seven-day workweek. You can’t average hours across two or more weeks to avoid paying overtime.

• Forgetting Pre-Shift or Post-Shift Activities
  Tasks like setting up or cleaning up—before or after scheduled shifts—often count as compensable time.

• Misunderstanding Training Time
  If training is mandatory and job-related, those hours should be included when figuring out if overtime applies.

Take Action:

• Conduct regular audits of hours worked and overtime paid.
• Document your calculations.
• Train payroll staff to spot and correct errors immediately.
• Use digital timekeeping to reduce manual mistakes.

Understanding the Legal Requirements

Federal law—specifically the Fair Labor Standards Act (FLSA)—spells out key overtime rules:

1. 1.5x the Regular Rate: Most non-exempt employees must be paid at least time-and-a-half for hours over 40 in a workweek.
2. Workweek-Based Calculations: Overtime is determined by each individual workweek, not by pay periods or calendar months.
3. No “Waiving” of Overtime: Employees cannot legally forgo their right to overtime pay.
4. Non-Discretionary Bonuses: If a bonus is guaranteed based on performance or productivity, it must be factored into the overtime rate.
5. Accurate Recordkeeping: You must maintain complete records of all hours worked—including any overtime hours.

For more on legal obligations, read our post on employee overtime mistakes. Be sure to follow both federal and state laws—whichever is more favorable to the employee.

The Cost of Misclassification

Employee misclassification is a top reason employers end up paying back wages and penalties. If you label a worker as “exempt” when they should be “non-exempt,” you may owe:

• Unpaid Overtime (plus interest)
• Civil Penalties and Legal Fees
• Damages for Willful Violations (in some cases)

Best Practices:

• Review job duties against federal exempt vs. non-exempt criteria.
• Do not rely solely on job titles.
• Keep documentation of each role’s daily tasks and compensation structure.
• Conduct internal audits yearly or as job roles change.

Key Components of Accurate Overtime Calculations

To calculate overtime correctly:

1. Track All Hours Worked
   Include mandatory training sessions, pre-shift setup, and post-shift cleanup.

2. Determine the Regular Rate
   Divide the total weekly earnings by total hours worked. Earnings should include non-discretionary bonuses and certain commissions.

3. Apply the Overtime Multiplier
   Multiply the regular rate by 1.5 (or higher if your state requires it) for hours beyond 40 in a workweek.

4. Keep Detailed Records
   Maintain payroll records for at least three years. This includes time logs, pay stubs, and any supporting documents showing how pay was calculated.

Some states have additional requirements—always follow the rule that gives employees the most protection or the highest pay.

Correcting Overtime Errors

Correcting Historical Overtime Errors

If you discover past mistakes, address them right away:

1. Audit Previous Payroll Records

   • Review overtime calculations for at least the past two years (or more if required by law).
   • Identify underpaid employees and note how much they’re owed.

2. Notify Affected Employees

   • Explain the errors and when you’ll distribute back pay.
   • Provide a clear timeline for resolution.

3. Issue Adjustment Payments

   • Pay any money owed, including interest if required.
   • File amended tax forms if needed.

4. Create an Audit Trail

   • Document who found the error, how you calculated the correction, and when you processed it.

Check our payroll compliance checklist for tips on maintaining accurate records in the future.

Correcting Errors Mid-Payroll Cycle

Sometimes you spot an overtime mistake before the pay period ends. Fixing it mid-cycle can help you avoid confusion for both you and your employees:

1. Identify the Error Early

   • If you’ve overlooked bonuses or miscalculated hours, address it as soon as you see it.

2. Decide How to Adjust Pay

   • Off-Cycle Payment: Issue a separate check or direct deposit to cover the missing overtime.
   • Add It to the Next Paycheck: If you have enough time before payroll processing, include the corrected amount in the upcoming paycheck.

3. Notify the Employee

   • Let them know you’ve corrected the error.
   • Explain how it will appear on their pay stub (e.g., separate line item or in total earnings).

4. Document the Correction

   • Keep a clear record of what changed, why, and who approved it.
   • Update your payroll software so it doesn’t repeat the mistake.

Acting quickly to fix overtime problems mid-pay cycle builds trust with employees and keeps payroll consistent.

Building Systems to Prevent Future Mistakes

After correcting errors, set up methods to avoid them going forward:

1. Automate Timekeeping
   Use a tool that calculates overtime automatically and flags potential issues.

2. Set Up Approval Workflows
   Have managers confirm overtime hours before payroll processing.

3. Regularly Update Payroll Software
   Ensure it uses the latest state and federal laws.

4. Provide Ongoing Training
   Give your payroll team wage-and-hour law refreshers at least once a year.

By taking these proactive steps, you lower the risk of repeat mistakes—and another wave of back-pay situations.

Frequently Asked Questions

Can Employees Waive Their Overtime?

No. Under the FLSA, overtime rights can’t be waived. An employee is entitled to overtime if they work more than 40 hours in a workweek, regardless of any signed agreement.

How Does PTO Affect Overtime?

Paid time off generally doesn’t count toward the 40-hour threshold. Overtime is based only on hours actually worked in that workweek.

Do Old Bonuses Affect the Current Overtime Rate?

Yes. If a non-discretionary bonus is linked to a past period, you must recalculate the regular rate for that period and pay any additional overtime owed.

What About Remote Employees in Different Time Zones?

Overtime rules depend on where the employee physically works. Track their local hours carefully, and specify in your policy which time zone you use for record-keeping.

Can Private Companies Use Comp Time Instead of Overtime Pay?

No. Under the FLSA, private employers must pay the proper overtime wage rather than offering comp time. Public sector entities have different rules.

Christina

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