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Most small business owners wear multiple hats and run around all day like a headless chicken trying to complete many different kinds of tasks. Your employees probably do the same thing.
It’s not unusual in a small business for your employees to go from working the register to stocking the freezer to driving goods to a customer’s house for delivery in the span of a few hours. If you work in construction, it can get even more complicated, with employees working at three different jobs on the same day.
In this article, we’ll go over how to do payroll and calculate overtime for employees who turn in hours for jobs at different rates throughout the week.
You are required to pay overtime rates, time and a half or 1.5 times the normal pay rate, for any hours worked over 40, which is an average workweek. For an employee who is paid at the same rate for all tasks, that’s easy to calculate. For other workers, the process is a little more complicated.
For example, construction workers often have different responsibilities at different jobsites. They may have pay for each job determined by government or union requirements.
In order to calculate time and a half for these types of workers, you use the blended rate formula. It enables you to calculate overtime for employees who have worked at different jobs or worked shifts with different responsibilities, earning different pay rates for each, during the pay period.
Josef Black is one of Use The Schwartz Construction’s most versatile employees. Most of his average work hours per year are spent as a laborer. But he can also do carpentry and drywall work when it is needed for various jobs. His pay rate as a laborer is $25 per hour. It gets boosted to $30 for carpentry, and $40 for drywall.
Here is a normal week’s time card:
Let’s go over the steps to calculate Josef’s total pay for the week.
First, calculate gross wages from base pay with no overtime charge. For Josef, that is the laborer rate of:
$25/hr x 51 hours = $1,275
The actual accounting term for extra pay is shift differential. Josef’s shift differential is $5 for carpentry and $15 for drywall. For this week, the calculation is:
($5 x 16) + ($15 x 16) = $320
The sum of steps one and two is the total pay:
$320 + $1,275 = $1,595
This total of $1,595 over 51 hours reflects a blended pay rate of $31.27. Normal pay over the 40-hour workweek is the blended rate times 40, which is $1,250.98.
Josef worked 51 hours this week, which means there will be 11 hours of weighted overtime pay. The blended overtime rate is equal to the blended rate multiplied by 1.5:
$31.27 x 1.5 = $46.91
Find overtime pay by multiplying that rate by the 11 hours of overtime worked:
$46.91 x 11 = $516.03
Finally, add the overtime pay to the normal pay to find what Josef should receive on his paycheck:
$1,250.98 + $516.03 = $1,767.01
The above calculations should all happen in your payroll software automatically. I would recommend also having a backup in your time card spreadsheet. It isn’t strictly necessary to calculate blended OT rates twice during the payroll process, but it is good to have the check figure.
In my experience, employees like nothing less than surprises on their paychecks. Giving them a way to see how their final pay is calculated is better than having them looking at an online overtime calculator that could be giving them the wrong answer.
The following graphic will show the time card from above as well as the formula for each step of the process. I’ll go over some Excel tips afterward.
Here are a few best practices for the spreadsheet.
Running a business is complicated, so anything you can do to make payroll less complicated is worth it. Learning how to calculate blended overtime brings you one step closer to fully understanding how payroll works.
Now you can be confident that you're paying the correct rates, and your employees can follow along and be confident that their paychecks won’t be short.
Our Small Business Expert
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