Overtime Pay (India): Importance, Calculation, Common Mistakes

As the business world gets competitive, companies are looking for more and more ways to curb this competition. Getting the workforce to become more productive is one of the many ways to stay ahead of the race. Production can be increased by overtime working hours.

With overtime working hours or extended working hours comes overtime pay. It has existed for a long time now. But the knowledge of it or the correct guidelines regarding it have yet to be well known.

Getting paid for overtime hours is like a bonus for hourly workers when they put in more than the usual 40-hour workweek. So, if you work longer than 40 hours a week, you get extra money for those extra hours. It’s like a reward for your extra effort.

Why is it so important?

Accurate tracking of overtime hours is super important for a few key reasons.

It ensures that workers get paid right when they put in extra hours, which keeps them happy and motivated. Messing this up can lead to lawsuits and fines for employers.
It helps determine how well the team is doing and where we can improve. When we study overtime hours, we can spot areas that need improvement and make work smoother.
It helps us control labor costs smartly. By knowing when and why overtime happens, we can use our resources wisely and make changes to boost our profits.

In the following sections, we’ll learn about the basics of overtime pay along with its calculation methods. We dive more into the subject from two perspectives: employee and employer. Keep reading to discover tips and common mistakes regarding overtime hours and their pay.

What is Overtime Pay?

Overtime pay is the rate of payment employees receive for working extra hours in addition to their regular working hours. For instance, if the standard working hours in your state is 40 hours and you’ve worked for 45 hours, you’ll receive an extra payment for 5 hours.

The purpose of overtime pay is to provide a fair compensation measure for employees and to ensure that businesses comply with the appropriate labor laws. However, the payment differs across businesses and the kind of work done by employees.

In India, overtime pay rules are pretty clear. If you work more than 48 hours a week, you get paid double your usual wage for those extra hours. However, there are exceptions for certain job roles like government workers, contractual workers, and freelancers, who might not qualify for such pay.

There are two main laws governing these rules in India:

Minimum Wages Act, 1948: Under the Minimum Wages Act of 1948, when a worker’s hours go beyond their regular shift, they should get overtime pay per hour.
Factories Act, 1948: According to the Factories Act of 1948, if a worker puts in more than 9 hours in a single day or exceeds 48 hours in a week, they are entitled to receive overtime pay, which is twice their usual wage.

Overtime Pay Calculation Methods In India

In India, overtime pay is typically based on an employee’s basic salary and may include allowances like dearness allowance. However, bonuses and incentives are usually not factored into overtime calculations according to labor laws. It’s important to note that overtime hourly pay doesn’t consider the entire gross salary.

This section includes how to calculate the overtime pay for regular salaried employees and hourly employees.

The following formulas contain these elements:

Basic Pay: Basic pay refers to the fixed amount of money an employee receives as part of their regular salary. It doesn’t include any additional allowances, bonuses, or overtime pay.
DA (Dearness Allowance): DA is an allowance provided to employees to help them cope with the rising cost of living. It’s often a percentage of the basic pay and is periodically adjusted to account for inflation.
RA (Risk Allowance): RA is an additional allowance provided to employees who work in hazardous or risky conditions. Not all employees receive this allowance; it’s typically specific to certain job roles.
Total no. of days in a month: This refers to the total number of days worked in the month. It usually ranges from 26 to 30 days.
Maximum working hours: Maximum working hours represent the maximum number of hours an employee is expected to work in a single day. This can vary but is commonly 8 to 9 hours a day.
Overtime hours: Overtime hours are the additional hours worked by an employee beyond their regular working hours, which may trigger the eligibility for overtime pay. These extra hours are typically compensated at a higher rate than regular hours.

1. 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.

2. Hourly Employees

Overtime wage = Basic pay / (Total no. of days (26-30)) * Maximum working hours in a day (8-9 hours)

Overtime payment rules can differ based on the type of work and the state or union territory in India. For example, overtime rules in Karnataka might not match those in Gujarat. However, on average, for industries under central laws, the above overtime calculation formula is often used in India.

How to Calculate Overtime Pay (With an example)

The simple formula for calculating overtime pay for an employee is the regular rate of pay of the employee * 2 * hours worked overtime. Here is an example describing this calculation.

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 to Consider with Overtime Pay

Overtime pay policies can be more complicated than you imagine. It operates similarly to minimum wage regulations, where the employer is required to adhere to the higher standard. This means that employees working overtime hours must receive compensation based on the standard that results in a greater payout.

Even though the government has laid down the particular rules and acts that should be followed while calculating overtime pay, there are still a lot of factors at play.

The following are some of them:

1. Legal Regulations

The provisions and allowances of this remuneration differ across various legislations. Furthermore, it may not be the same for every state of the country as mentioned below. Also, there are different laws for different industries.

To name a few, here are some laws. This is not an exhaustive list and will be discussed in detail in the following sections.

The Code on Wages, 2019
Payment of Wages Act, 1936.
Minimum Wages Act, 1948.
Payment of Bonus Act, 1965.
Equal Remuneration Act, 1976.
Shop/ Establishment: Shops and Establishments Act of States/ UTs
Factories Act, 1948
Minimum Wages Act, 1948
Bidi and Cigar Workers (Conditions of Employment) Act, 1966
Contract Labor (Regulation & Abolition) Act, 1970
Building and Construction Workers Act 1996
Working Journalist and Miscellaneous Provisions Act, 1955
Plantation Labor Act, 1951

2. Overtime Pay Violations

In the US, unpaid overtime is one of the most frequent wage and hour violations. A striking 90% of back wage settlements resulting from Department of Labor investigations involved overtime violations. The data covers DOL investigations spanning the past eight years.

In India, The Factories Act, of 1948, outlines penalties for employers who violate its overtime rules. In such cases, employers may face imprisonment for up to 2 years, a fine of up to Rs. 1 lakh, or both.

Hence, it is important for businesses to be mindful not to violate these laws. Here are some suggestions on how to prevent violations:

Research overtime hour laws and legislations and draft clear policies.
Track overtime hours of employees regularly.
Set up an automated overtime hours payment system.
Leverage technology and payroll automation software to make things easier.

IceHrm’s attendance management system allows for biometric attendance integrated with time-tracking API, making tracking overtime hours easier. It is also integrated with the payroll management system, eliminating the need for you to switch between systems when processing monthly payroll.

3. Changes to Work Weeks

In India, a work week can extend up to 48 hours, which is 8 hours for 6 days a week. However, a lot of companies practice a 40-hour work week where employees work 8 hours for 5 days.

Recently, companies worldwide have also started accepting a 32-hour work week due to an increase in productivity levels benefitting both the employer and employee. When crafting overtime policies, it’s essential to take into account fluctuations in workweeks to ensure they are mutually advantageous for both employers and employees.

The idea behind a four-day workweek is to achieve the same results in fewer hours, so people have more time to pursue other interests, spend time with loved ones, and manage their lives.

– Amy Fontinelle.

4. Misclassification

Misclassification in the context of overtime hours and pay occurs when an employee is categorized incorrectly as either “exempt” or “non-exempt” from overtime regulations.

Exempt: These employees are typically salaried and exempt from overtime pay. Misclassification can happen when someone is labeled as exempt even though their job responsibilities and weekly hours qualify them for overtime.
Non-Exempt: These employees are eligible for overtime pay for hours worked beyond a certain threshold (usually 40 hours per week). Misclassification can occur if someone is labeled as non-exempt but doesn’t receive overtime hours pay when they should.

Getting these classifications right is crucial to ensure fair compensation and compliance with labor laws. It’s essential to consult with your organization’s legal department to avoid misclassification pitfalls.

Overtime Pay Laws & Rights For Corporate Employees

In India, each state has its own Shops and Establishment Act (SEA), which lays down rules for employees who work extra hours beyond their regular work schedule. This Act applies to a wide range of businesses but doesn’t apply to certain types of enterprises such as factories and mines.

Here’s a list of the types of businesses that fall under the purview of this act:

Retail establishments, including stores, malls, and warehouses.
Food establishments, hotels, movie theaters, and amusement parks.
Entities involved in amusement and entertainment.
Service-oriented organizations like those in finance, healthcare, pharmaceuticals, and hospitality.
Information technology (IT) companies.

The rules of this Act are applicable to all employees, whether they are managers or non-managers, in the type of businesses mentioned above.

Employees who work overtime in these businesses or establishments are compensated at a rate determined by the respective state or union territory. In some states, overtime hours are twice as long as regular working hours. Only the basic salary and allowances are considered to calculate the overtime pay rate, without including any bonuses.

Here are the key conditions that need to be met for overtime to be applicable:

Daily working hours typically range from 8 to 10 hours.
The total weekly working hours should not exceed 48 hours.
Overtime can vary from 1 to 3 hours on a daily basis.
Employees should not work continuously for more than 5 hours without a break.
The weekly limit for working hours ranges from 50 to 60 hours.
There is a quarterly limit of 50 to 150 hours for overtime.
The spread over limit for work hours ranges from 10 to 14 hours.

These rules help ensure fair treatment and compensation for employees who put in extra time at their workplaces.

Tips for Tracking Overtime Pay

One of the most important aspects of tracking time is its manual workload. With the onset of automated systems of time tracking and attendance, it’s time to move away from traditional methods of tracking your employees’ working hours.

Transitioning to automated time tracking brings several advantages.

It simplifies the process for employees to record their work hours
It streamlines the administrative tasks for HR or office staff
It ensures 100% accuracy in timesheets
It eliminates the need for rounding.

For instance, platforms like IceHrm’s Attendance Management System and Shift Management Software offer a time-tracking API that enables employees to easily log their work start times. It can also manage breaks lunches, and end-time ensuring they are consistently included in the recorded hours.

Additionally, you can establish rules to ensure employees work the required hours, neither more nor less. This shift to automation simplifies and enhances the accuracy of time tracking for paying employees for overtime hours.

Common Overtime Pay Mistakes to Avoid

Calculating overtime pay can become a little complicated especially when it’s not automated or integrated with some kind of overtime tracking software.

If things are done manually, mistakes are bound to happen. In this section, we discuss some common mistakes to avoid while calculating overtime hours:

1. Declining payment without pre-authorization

If non-exempt employees work over 40 hours, they must get paid for overtime, even if it wasn’t approved beforehand. A policy against unscheduled overtime doesn’t exempt the employer from paying overtime. While you can take disciplinary action for unauthorized overtime, you can’t withhold their payment.

2. Underestimating working hours

From an employer’s standpoint, the hours employees work encompass their productive work time and various nonproductive activities. These include things like rest breaks, travel, and training. It’s important to factor in all of this time when calculating whether overtime is warranted.

3. Ignoring state-specific laws

In India, overtime pay regulations vary from state to state. For instance, some states may require payment for overtime if an employee works more than a certain number of hours in a week or in a single day. Additionally, each state may have its own method for calculating overtime hours.

For example, in some states, like Maharashtra, different rules apply when calculating overtime for employees who receive fixed-sum bonuses. It’s essential for employers in India to be aware of and follow the overtime rules specific to their state.

4. Allowing untracked or unofficial working hours

As an employer, it is crucial to compensate employees for all the time they devote to work-related tasks. It’s not permissible to request or permit these employees to work without recording their hours. It’s advisable to establish a clear policy explicitly forbidding any off-the-clock work and implement measures to prevent it from happening.

5. Incorrect calculation of overtime rate

To calculate overtime rates correctly, employers need to take in a lot of factors other than the hourly rate. This regular rate encompasses not just their hourly wage but also includes the value of non-discretionary bonuses, shift differentials, and certain other types of compensation. Neglecting to include these additional forms of compensation can lead to underpayment of employees for their overtime hours.

Wrapping Up

Overtime pay is an important component to motivate employees for the extra effort put into their jobs. It’s not just about the money; it’s a fair acknowledgment of our dedication and hard work.

All people have bills to pay and dreams to chase and sometimes, these extra payments can make a real difference. Hence, knowing our rights and ensuring we’re paid for what we deserve can show respect for our time and commitment.

It’s a win-win when employers and employees work together to ensure fair compensation for those extra hours.

Every company faces challenges when it comes to overtime, but software like IceHrm is beneficial for every employer. It automates a large part of overtime recording and calculation and helps managers plan better.