The overtime rate is a term that may be used to describe two distinct calculations. In the first instance, the overtime rate is the amount of additional pay a worker is owed for working more hours than are legally specified over a period of time. The overtime rate also describes how many overtime hours employees are putting in, versus how many hours were planned by the employer for completing work.
Overtime rate in terms of pay is a somewhat confusing issue. Most regions have laws specifying how many hours are in a normal work week; for instance, in some places, 40 hours in a seven day period is considered a normal work week. In many areas, if a person works more than 40 hours a week it is considered overtime and must legally be paid a premium wage. The premium is generally 1.5 to two times the amount of the normal hourly wage for the worker.
Thus, if a worker gets paid $10 US Dollars (USD) per hour and works 45 hours in a week, five of those hours would be charged at an overtime rate of $15-$20 USD, depending on the legally mandated overtime rate. If the rate was 1.5 normal pay for overtime, the worker would make $400 for the first 40 hours and $75 for the overtime hours for a total of $475 USD for the week. If the worker was paid his or her normal rate for the entire time, the total would be $450 USD.
The other use of the term relates to how a business measures performance and potential need for expansion or contraction of the workforce. Calculating the overtime rate in this situation becomes a ratio of hours actually worked versus hours allotted for a job. Paying a worker 1.5 to two times his or her normal rate for overtime may be a necessary expense in some cases; such as to deal with an unusually large job or finish an important project before a set deadline. Over a long period of time, however, consistent overtime hours can begin to take a toll on the financial health of a business.
By measuring the ratio rate, employers can get an idea of the reality of hours as compared to what is assumed will be enough time. If a small office has two full-time workers who both end up working 20 hours of overtime every week, the company is paying out 40 hours of the higher overtime salary every week. A smart business move in this situation might be to hire a third full-time worker, since paying an additional 40 hours at the regular rate to a third worker will cost less than paying 40 hours of overtime to the two original workers.
A high overtime rate ratio can be negative for several other reasons besides additional costs. Constantly overtaxing employees by requesting or requiring overtime can lead to a serious drop in morale, even when higher wages are provided for extra work. Workers may become exhausted and emotionally stressed, leading to higher rates of illness or potential for injury and critical mistakes. Keeping the overtime rate ratio low can help ensure worker accuracy, morale, and safety.