What is overtime pay

Overtime pay is the additional compensation granted to employees who have worked beyond the standard full-time working hours as defined by an employer or labor laws.

The following content refers to US overtime laws. Overtime pay requirements and processes will vary depending on the jurisdiction you hire in.

Eligibility for overtime pay

Under the US Department of Labor (DOL) Fair Labor Standards Act (FLSA), overtime pay is required for hours worked exceeding 40 in a workweek at a minimum rate of 1.5x an employee's regular pay rate.

Generally, non-exempt employees are eligible for overtime pay. These are workers who are not exempt from the minimum wage and overtime requirements of the FLSA.

Exempt employees—often executives, professional employees, administrative workers, and those who meet certain criteria regarding their job duties and compensation—are not entitled to overtime pay. It's crucial for HR professionals to correctly classify employees to ensure compliance with labor laws.

However, overtime laws vary across the US and globally, as each country has its own labor laws and regulations regarding overtime pay.

What is the “No Tax on Overtime” deduction?

The “No Tax on Overtime” deduction is a federal tax provision introduced by President Trump in July 2025 that allows eligible workers in the US to exclude a portion of their overtime earnings from federal income tax. 

Under this rule, eligible employees can deduct up to a capped amount of qualified overtime compensation (generally the premium paid above their regular rate) when filing their federal tax return. The deduction is subject to income limits, applies only for tax years from 2025 through 2028, and does not remove payroll taxes or state and local taxes from overtime pay.

Types of overtime pay

Overtime pay can be structured in different ways depending on local labor laws, collective agreements, and employer policies. Here are the main types of overtime pay and how each one is calculated:

Time-and-a-half

Also known as standard overtime, time-and-a-half is the most common form of overtime pay. It compensates employees at 1.5 times their regular hourly rate for hours worked beyond a standard threshold (often 40 hours in a workweek).

How it’s calculated:

• Regular hourly rate × 1.5 × number of overtime hours
• Example: An employee earning $20 per hour would receive $30 per hour for each overtime hour worked

Double-time

Double-time overtime pays employees at twice their regular hourly rate. This type is typically reserved for specific situations, such as working on public holidays or exceeding a higher overtime threshold.

How it’s calculated:

• Regular hourly rate × 2.0 × number of double-time hours
• Example: An employee with a $20 hourly rate would earn $40 per hour under double-time pay

Daily

Daily overtime applies when an employee exceeds a set number of hours in a single workday, regardless of total weekly hours. This structure is common in jurisdictions with strong daily work-hour protections.

How it’s calculated:

• Hours worked beyond the daily limit are paid at an overtime multiplier (often 1.5x, with higher rates such as 2x applying after additional thresholds are exceeded).
• Example: If daily overtime starts after 8 hours, the 9th and 10th hours may be paid at 1.5x, while hours beyond that may qualify for double-time

Compensatory

Compensatory time, or comp time, provides paid time off instead of immediate overtime pay. This arrangement is common in the public sector and heavily regulated or restricted in many private-sector jurisdictions.

How it’s calculated:

• Employees earn time off at an overtime-equivalent rate, often 1.5 hours of paid leave for every overtime hour worked
• Example: 4 overtime hours worked would result in 6 hours of comp time

Fixed or blended rate

A fixed or blended overtime rate uses a pre-calculated rate that already factors in the overtime premium. This approach is often used when employees receive bonuses, commissions, or shift differentials.

How it’s calculated:

• The employer determines the employee’s “regular rate” by averaging total earnings over total hours worked, then applies the overtime multiplier to that rate. This ensures overtime pay reflects all eligible compensation, not just base wages
• Example: An employee earns $20 per hour plus a weekly bonus. After working 45 hours in a week, their blended regular rate is calculated at $22 per hour. The 5 overtime hours are paid using this blended rate, with an additional 0.5x premium applied to each overtime hour

Overtime pay’s impact on teams and business needs

Overtime pay can both positively and negatively impact a team and business.

On the positive side, it can provide additional compensation to employees, boosting morale and potentially increasing productivity. 

However, excessive overtime can lead to employee burnout, decreased productivity, and increased labor costs. Balancing the need for overtime work with employee well-being and budget considerations is essential for maintaining a healthy work environment and ensuring business sustainability.

Measuring the impact of overtime on employees and business performance

The impact of overtime on employees and business performance can be measured through various metrics such as:

• Employee satisfaction surveys
• Turnover rates
• Productivity levels
• Financial analysis of labor costs versus output

Regularly reviewing these metrics can help HR professionals assess whether current overtime practices are sustainable and beneficial to both the employees and the company.

Potential legal or compliance issues associated with overtime pay

Failure to correctly pay overtime or properly classify employees can lead to legal and compliance issues, including lawsuits, fines, and penalties.

Employers must adhere to labor laws, maintain accurate records of hours worked, and ensure that all eligible employees receive their rightful overtime compensation. Regular audits and staying informed about changes in labor laws can help prevent compliance problems.

Managing overtime pay for global, remote teams

Overtime pay can affect global hiring and the global workforce by influencing where companies choose to locate certain job functions based on the cost of labor and legal requirements for overtime in different countries.

It can also impact the attractiveness of job offers to potential candidates who may prioritize compensation for extra work hours. Understanding local labor laws and competitive compensation practices is vital for companies operating in multiple countries.

With remote work, managing and compensating for overtime can be more challenging, as remote employees might work flexible hours or outside the traditional 9-to-5 workday. Employers must establish clear guidelines and tracking mechanisms for remote work to ensure accurate recording of work hours and appropriate compensation for overtime, while also respecting work-life balance.

How to improve overtime management

Here is a practical list of actions you can take to improve overtime management and ensure a positive employee experience:

• Track hours in real time: Require digital time-stamps with manager approvals and geo/time-zone accuracy for remote staff
• Forecast demand: Use historical workload data to forecast peaks and deploy temporary staff or shift swaps
• Policy controls: Publish an overtime policy that states when overtime is allowed, approval process, rate calculation method, and comp time rules
• Fair distribution: Rotate overtime opportunities and use a simple points or sign-up system to avoid perceived favoritism
• Automate payroll: Integrate time tracking with payroll so overtime calculations (including blended-rate rules) are automated and auditable
• Audit regularly: Conduct quarterly audits to detect misclassification or missed premium pay and correct payroll quickly

Overtime pay FAQs

Can overtime pay be substituted with compensatory time off?

In some cases and jurisdictions, employers can offer compensatory time off (comp time) in place of overtime pay, allowing employees to take paid time off at a future date.

However, this practice is subject to labor laws and may not be permissible in all cases. Employers must adhere to the legal provisions governing the use of comp time and ensure employees are given a choice and agree to this arrangement.

How does overtime pay impact different types of employment contracts?

Overtime pay provisions may vary depending on the type of employment contract.

For instance, unionized workers often have specific overtime rules negotiated in their collective bargaining agreements, which can differ from standard legal requirements.

Contract and part-time workers may also have distinct overtime terms compared to salaried employees. HR professionals must understand and manage the complexities of various employment contracts to ensure proper overtime compensation.

Who is exempt from overtime pay?

Exemptions depend on job duties and salary tests under the FLSA (executive, administrative, professional, outside sales, computer employees) and special categories (police, firefighters). Meeting a salary threshold alone is not sufficient—duties matter. Consult the Department of Labor (DOL) and your local counsel for borderline cases.

How can I reduce overtime costs without harming morale?

Forecast peaks and hire temp staff or contractors, redistribute hours, use flexible scheduling, and incentivize voluntary time-off before offering overtime. Monitor overtime KPIs and address root causes (such as understaffing and inefficient workflows).

How to streamline overtime pay processes

Employers can use various tools and platforms to streamline overtime pay processes, such as automated time-tracking systems, payroll software, and scheduling tools that help manage employee hours and calculate overtime accurately.

These technologies can reduce errors, save time, and ensure compliance with labor laws. Additionally, analytics tools can help HR professionals analyze overtime trends and make informed decisions about labor management.

By using Deel to manage global payroll, HR professionals can effectively manage their workforce, comply with legal requirements, and contribute to the overall success of the business.

Book a free, 30-minute demo to learn more about how Deel can help you better manage overtime pay for your global organization.