How is overtime calculated?

Overtime starts with knowing your workweek, totaling the hours your team actually worked, and adding up all the pay that must be included. That gives you the “regular rate,” which is total compensation divided by total hours.

From there, overtime is simple: any hours worked over 40 are paid at 1.5× the regular rate. Most mistakes happen when businesses use the base hourly wage instead of the full regular rate, especially when tips or commissions are involved.

The regular rate isn't just based on hourly pay. It includes all remuneration for employment except specific statutory exclusions. You must include:

Retail example: Your sales associate earns $15/hour, works 48 hours, and receives a $100 weekly sales commission.

Incorrect calculation: Overtime at $22.50/hour (ignoring commission)

Correct calculation: Regular rate = ($720 wages + $100 commission) ÷ 48 = $17.08/hour

Overtime premium: 8 hours × ($17.08 × 0.5) = $68.32

Rare exclusions: Only truly discretionary bonuses, paid time off, and legitimate expense reimbursements can be excluded from overtime calculations. Most restaurant and retail bonuses—such as attendance, sales, or production incentives—must be included. Knowing the difference helps you avoid underpaying overtime.

Nearly all hourly restaurant and retail teams are "non-exempt" and must receive overtime pay. This includes servers, cooks, hosts, bartenders, sales associates, cashiers, and stock workers.

To be exempt from overtime, your hourly teams must meet all three tests:

A common mistake is calling someone an "assistant manager". That doesn't make them exempt if they spend most of their time performing the same duties as hourly teams. A cook who occasionally supervises others but primarily prepares food is non-exempt, regardless of title.

Restaurant example: Your kitchen manager earning $650/week is automatically non-exempt and entitled to overtime pay. They fall below the federal salary threshold required for any exemption. Even if their primary duties are management-related, the inadequate salary alone disqualifies them from exempt status.

When federal and state overtime laws differ, you must follow whichever law is more generous to your hourly teams. The FLSA sets the federal floor; states can demand more.

Four states require overtime pay in addition to the 40 weekly hours threshold:

These daily overtime requirements add complexity to multi-state operations, but understanding them protects you from compliance violations. Additional rules regarding continuous workdays or sector-specific overtime rules can also apply. To stay compliant, be sure to do your research into state laws as they can change over time. 

Overtime example: A California server working three 11-hour shifts (33 total hours) gets 9 hours of overtime under California state law, despite working under 40 hours. Federal law would require zero overtime. This is because California requires overtime pay at 1.5x the rate for any hours over 8 in a single workday.

If you operate in multiple states, you need separate compliance strategies for each location to manage employee overtime. What's legal in Pennsylvania may violate California law.

Accurate overtime calculation starts with accurate time tracking. Homebase captures hours worked through tools like our time clock and keeps schedules aligned so you can spot when team members are nearing overtime limits. With clearer visibility into labor patterns, it’s easier to prevent costly surprises.

Homebase also simplifies payroll preparation with resources like our payroll management guide, helping you move from worked hours to correct overtime pay with confidence. Sign up for Homebase today to simplify your payroll and stay on top of your overtime costs.