Businesses are searching for more and more strategies to reduce competition as the business world becomes more competitive. One of the many strategies to keep ahead of the competition is to increase worker productivity. Overtime working hours can boost production.
Extended or overtime working hours are accompanied with overtime compensation. It has been around for a while. However, it is still not widely known what it is or what the proper rules are.
For hourly workers who work more than the typical 40-hour workweek, getting paid for overtime is similar to receiving a bonus. Thus, you receive additional compensation for working more than 40 hours each week. It functions as a sort of incentive for your extra work.
Important terms to consider while managing overtime pay
It guarantees that employees receive fair compensation for overtime, which keeps them content and inspired. If this is done incorrectly, employers may face legal action and penalties.
It assists in assessing the team’s performance and identifying areas for improvement. We can identify opportunities for improvement and streamline work when we examine overtime hours.
It enables us to effectively manage personnel expenses. We can make adjustments to increase our profitability and make efficient use of our resources if we understand when and why overtime occurs.
Concept of overtime pay
The amount that employees are paid for working beyond their regular working hours is known as overtime compensation. For example, if you have worked 45 hours and your state’s typical workday is 40 hours, you will be paid an additional 5 hours.
Overtime pay is intended to give workers a fair compensation measure and to make sure that companies are abiding by the relevant labor rules. However, the amount paid varies depending on the type of labor performed by employees and the firm.
India has very precise regulations regarding overtime compensation. You are compensated double your regular salary for any overtime over 48 hours per week. However, there are other occupational roles that may not be eligible for such compensation, such as contract workers, government employees, and independent contractors.
In India, these regulations are governed by two primary laws:
Minimum Wages Act, 1948: This law stipulates that employees shall get overtime compensation per hour when their work hours exceed their regular shift.
The Factories Act of 1948 states that employees are entitled to overtime pay, which is double their regular salary, if they work more than nine hours in a single day or more than forty-eight hours in a week.
Method of calculating overtime pay
Usually the basis for overtime pay in India is an employee’s regular pay; benefits like dearness allowance may also apply. But many times, labor rules exclude bonuses and incentives from overtime computation. Remember that the total gross pay is not included into overtime hourly pay.
These elements abound in the following recipes:
Basic Pay: Known as basic pay, an employee’s regular compensation is the predetermined sum of money. It leaves out bonuses, overtime pay, and other benefits.
A benefit offered to employees to enable them cope with the rising cost of living is a Dearness Allowance, or DA. Usually stated as a percentage of basic salary, it is periodically adjusted to represent inflation.
Workers in hazardous or dangerous conditions are qualified for a further benefit called RA (Risk Allowance). Usually limited to particular job responsibilities, this stipend is not awarded to every employee.
Total number of days: This is the month’s worth of worked days. It usually runs 26 to 30 days.
Maximum operating hours: The maximum working hours are the most hours an employee is obliged to work in one day. Though it varies, this usually comes out to be 8 to 9 hours every day.
Overtime hours—that is, the extra hours an employee works outside of their usual working schedule—may be eligible for remuneration.
Salaried Employees
Hourly overtime pay = 2 * [Basic Pay + DA + RA / (Total no. of days in a month (26-30 days)) * Maximum working hours in a day (8-9 hours)] * overtime hours.
Hourly Employees
Overtime wage = Basic pay / (Total no. of days (26-30)) * Maximum working hours in a day (8-9 hours)
Overtime Pay Calculation Example
Let’s calculate the overtime hourly pay for a salaried employee with a 6 LPA (Lakhs Per Annum) salary using the given formula:
Hourly overtime pay = 2 * [Basic Pay + DA + RA / (Total no. of days in a month (26-30 days)) * Maximum working hours in a day (8-9 hours)] * overtime hours.
Given Values:
- Basic Pay (Annual Salary): 6,00,000 LPA
- DA (Dearness Allowance): Rs. 5,000 per month
- RA (Risk Allowance): Rs. 2,000 per month
- Total no. of days in a month: 30 days
- Maximum working hours in a day: 8 hours
- Overtime hours worked: 5 hours
Calculate Monthly Basic Pay
Monthly Basic Pay = Annual Salary / 12
Monthly Basic Pay = 6,00,000 / 12 = Rs. 50,000
Hourly Overtime Pay = 2 * [(Monthly Basic Pay + DA + RA) / (Total no. of days in a month * Maximum working hours in a day)] * Overtime hours
= 2 * [(50,000 + 5,000 + 2,000) / (30 * 8)] * 5 Hourly Overtime Pay = 2 [57,000 / (30 * 8)] * 5
= (2 * 237.5) * 5
Hourly Overtime Pay = 475 * 5 = Rs. 2,375
So, an employee with a basic salary of 6 LPA who has worked 5 hours overtime will receive a total of Rs. 2,375.
Factors related to overtime pay
1.Lawful Requirements
Different laws have different requirements and allowances for this compensation. Additionally, as stated below, it might not be the same for each state in the nation. Additionally, different industries are subject to distinct legislation.
Here are some laws, to mention a few. This list is not all-inclusive and will be covered in more detail in the parts that follow.
The 2019 Code on Wages
1936’s Payment of Wages Act.
1948’s Minimum Wages Act.
Bonus Payment Act of 1965.
1976’s Equal Remuneration Act.
Establishment/Shop: The 1948 Shops and Establishments Act of the States/UTs Factories Act
1948’s Minimum Wages Act
The Bidi and Cigar Workers Act of 1966 (Conditions of Employment)
Act of 1970 on Contract Labor (Regulation & Abolition)
The 1996 Building and Construction Workers Act
The 1955 Working Journalist and Other Provisions Act
1951’s Plantation Labor Act
2. Violations of Overtime Pay
Unpaid overtime is one of the most common wage and hour infractions in the United States. Overtime infractions accounted for a startling 90% of back wage settlements that came from Department of Labor investigations. The information includes DOL investigations over the previous eight years.
Employers who break India’s overtime regulations face fines outlined in the Factories Act, 1948. In these situations, employers risk a punishment of up to Rs. 1 lakh, two years in prison, or both.
Businesses must therefore take care to avoid breaking these rules. Here are some ideas for avoiding infractions:
Examine rules and regulations pertaining to overtime hours and create explicit policies.
Employee overtime hours should be routinely tracked.
Install a system that pays for overtime automatically.
To make things simpler, use payroll automation software and technologies.
Tracking overtime hours is made simpler with Keka’s attendance management system, which integrates biometric attendance with a time-tracking API. Additionally, it is integrated with the payroll management system, so when processing monthly payroll, you don’t have to move between platforms.
3. Modifications to Work Weeks
In India, a workweek can go up to 48 hours, or eight hours every six days. Nonetheless, many businesses use a 40-hour work week, with workers putting in 8 hours over five days.
Due to increased productivity that benefits both the company and the employee, businesses all over the world have recently begun to accept a 32-hour work week. It is crucial to consider workweek variations when developing overtime regulations to make sure that both businesses and employees benefit from them.
4. Inaccurate classification
When it comes to overtime hours and compensation, misclassification happens when an employee is mistakenly classified as “exempt” or “non-exempt” from overtime laws.
Exempt: Since they usually receive salaries, these workers are not entitled to overtime compensation. When someone is classified as exempt when their job duties and weekly hours make them eligible for overtime, this is known as misclassification.
Non-Exempt: These workers are entitled to overtime compensation if they put in more hours than a predetermined amount, typically 40 hours a week. If someone is classified as non-exempt but fails to earn overtime compensation when they should, this is known as misclassification.
It is essential to correctly classify these in order to guarantee equitable remuneration and adherence to labor regulations. To steer clear of misclassification issues, it is imperative that you speak with the legal department of your company.
Tips for Tracking Overtime Pay
The manual burden associated with time monitoring is one of its most crucial features. With the advent of automatic time-tracking and attendance systems, it’s time to abandon the old-fashioned ways of monitoring your employees’ working hours. Making the switch to automatic time tracking has a number of benefits.
- It makes it easier for workers to keep track of their working hours.
- For office workers or HR personnel, it simplifies administrative duties.
- It guarantees that timesheets are 100% accurate.
- It does away with the necessity to round.
- Platforms like as Shift Management Software and Keka’s Attendance Management System, for example, include a time-tracking API that makes it simple for staff members to record the times they begin work.
- Additionally, it can handle lunches, breaks, and end times, making sure they are always included in the hours that are logged.
Furthermore, you can set guidelines to guarantee that workers put in the necessary number of hours—neither more nor less. The transition to automation streamlines and improves time tracking precision for compensating workers for overtime.
