The basic overtime rule fits on a sticky note: time and a half for hours over 40 in a workweek. The trouble is that almost nobody in hospitality or retail has a basic week. Staff work two roles at two rates, earn tips, pick up a shift differential for closing, or work in California. Each of those changes the math, and each is a common source of back-pay claims.
When we built payroll export for my family's cafes, we found three overtime mistakes in the first month. None were intentional. All were the kind of thing a spreadsheet hides. Here is how to get it right.
This is general guidance on US federal rules plus the most common state variations. Check your state's rules too, because they can be stricter.
The federal rule
Under the Fair Labor Standards Act (FLSA), non-exempt employees must be paid at least 1.5 times their regular rate of pay for every hour worked over 40 in a workweek.
Two words in that sentence do most of the work:
- Workweek: a fixed, recurring 168-hour period (seven consecutive 24-hour days) that you choose, such as Monday 12:00am to Sunday 11:59pm. You cannot average hours across two weeks. A 50-hour week followed by a 30-hour week means 10 hours of overtime, even though the two-week total is 80.
- Regular rate: not necessarily the hourly wage. It is total pay for the week (excluding certain items) divided by total hours worked.
Example 1: One rate, no extras
Dana is a line cook at $18 an hour and works 46 hours.
- Straight time: 46 × $18 = $828
- Overtime premium: 6 × ($18 × 0.5) = $54
- Total: $882
You can also calculate it as 40 × $18 + 6 × $27 = $720 + $162 = $882. Same answer. The first method is useful because it makes the premium visible, and the premium is what you are trying to control.
Example 2: Two jobs at two rates
This is the one that catches most restaurants. Jamie works 30 hours as a server-trainer at $16 and 15 hours as a host at $14. Total: 45 hours.
The default federal method is the weighted average (blended) rate:
| Step | Calculation | Result |
|---|---|---|
| Total straight-time pay | (30 × $16) + (15 × $14) | $690 |
| Regular rate | $690 ÷ 45 hours | $15.33 |
| Overtime premium | 5 hours × ($15.33 × 0.5) | $38.33 |
| Total pay | $690 + $38.33 | $728.33 |
Paying overtime at the lower $14 rate is only allowed if you and the employee agreed in advance that overtime hours would be paid at the rate for the work done during those hours. Without that agreement, use the blended rate.
Example 3: A shift differential or bonus
Nondiscretionary bonuses and shift differentials go into the regular rate. Discretionary gifts (an unannounced holiday bonus) do not.
Chris earns $17 an hour, works 44 hours, and gets a $1 per hour closing differential on 20 of those hours, plus a $50 weekly attendance bonus he was promised for not missing a shift.
- Straight-time pay: (44 × $17) + (20 × $1) + $50 = $748 + $20 + $50 = $818
- Regular rate: $818 ÷ 44 = $18.59
- Overtime premium: 4 × ($18.59 × 0.5) = $37.18
- Total: $855.18
If you had paid overtime off the $17 base, you would have paid $34 in premium and underpaid by $3.18. Small, but multiply it by every closer, every week, for three years, and it becomes a class action.
Example 4: Tipped employees
If you take a tip credit, overtime is calculated on the full minimum wage, not the cash wage. You subtract the tip credit once, not 1.5 times.
At the federal level ($7.25 minimum wage, $2.13 cash wage, $5.12 tip credit), the overtime cash rate is:
- 1.5 × $7.25 = $10.875
- $10.875 − $5.12 = $5.755 an hour in cash wages for each overtime hour
A common mistake is to pay 1.5 × $2.13 = $3.20. That underpays by $2.56 an hour. Tips themselves are not part of the regular rate. Many states have higher minimums and different tip credits (and some, like California, allow none), so run the same formula with your state's numbers. For more on tipped pay, see our tip pooling rules guide.
Example 5: California daily overtime
California adds daily rules on top of the weekly one:
- 1.5 times for hours over 8 in a workday
- 2 times for hours over 12 in a workday
- 1.5 times for the first 8 hours on the seventh consecutive day worked in a workweek, and 2 times after 8 hours on that day
Alex works five 10-hour days at $20, which is 50 hours.
| Type | Hours | Rate | Pay |
|---|---|---|---|
| Regular | 40 | $20 | $800 |
| Daily overtime (2 hours × 5 days) | 10 | $30 | $300 |
| Weekly overtime beyond daily | 0 | $30 | $0 |
| Total | 50 | $1,100 |
You do not pay twice for the same hour. The 10 daily overtime hours are also the 10 hours over 40, so they count once. Alaska, Nevada (for lower earners) and Colorado (over 12 hours) have their own daily rules.
Mistakes that cost the most
- Averaging across pay periods. Each workweek stands alone, even on a biweekly payroll.
- Ignoring unscheduled time. Pre-shift meetings, side work after clocking out, and mandatory training all count as hours worked.
- Rounding in one direction. Rounding to the nearest 15 minutes is allowed only if it is neutral over time. Always rounding down is not.
- Using the base rate when there are differentials or bonuses. Recalculate the regular rate.
- Comp time instead of overtime. Private employers cannot give time off later instead of overtime pay.
- Misclassifying managers as exempt. A "manager" earning below the federal salary threshold, or who spends most of the shift on the line, is likely non-exempt.
Better than calculating overtime: avoiding it
The cheapest overtime is the overtime you see before you schedule it. Set a soft cap at 36 to 38 scheduled hours, so normal shift overruns do not tip people over 40. Our guide to restaurant labor cost percentage shows what a single drifting cook costs over a year, and how to make a restaurant schedule covers the scheduling habits that prevent it.
FAQ
Is overtime calculated weekly or per pay period?
Federally, weekly. Each fixed workweek is calculated separately, even if you pay every two weeks.
Do paid holidays and PTO count toward 40 hours?
Not under federal law. Only hours actually worked count. Some employers choose to count them, and some union contracts require it.
Do tips count toward the overtime rate?
No. Tips are excluded from the regular rate. But for tipped employees on a tip credit, overtime must be calculated on the full minimum wage.
Let the time clock do the math
Shiftnest tracks hours by workweek, calculates blended rates, differentials and California daily overtime automatically, and flags anyone heading for overtime while the week is still running. Approved hours go straight to Gusto, ADP, QuickBooks or Xero. See payroll export.
