What Is Blended Overtime (and How To Calculate It)?

Overtime is a difficult but essential part of payroll. For most cases, the calculation is straightforward (1.5x the regular rate of pay) — but what happens when someone is paid multiple hourly rates in the same workweek? Which rate do you multiply?

According to the Fair Labor Standards Act, employees who earn multiple wages (or extra earnings like tips and commissions) must be paid using a blended average rate. This means taking the weighted average of the employee’s wages to determine an average hourly rate.

To payroll experts, blended rates may seem simple enough. But like any payroll calculation, it’s essential to get it right. Let's walk through how to calculate blended overtime, when to use it, and some tips for successful overtime calculations.

What Is Blended Overtime?

Blended (or weighted) overtime is a method used to calculate overtime pay when an employee earns multiple wage types in a week. It takes the weighted average of all wages to establish the “blended” rate of pay. This is then multiplied by 1.5 to determine the overtime premium pay. This approach ensures compliance with overtime laws in unique wage scenarios.

NOTE: To remain compliant, the blended overtime rate must be at least 1.5x the employee’s average regular rate of pay.

This calculation benefits employees who work in different roles and those who earn extra wages like commissions and tips, since it accounts for all earnings fairly. Using a blended rate guarantees that overtime compensation is balanced, no matter what tasks are performed during those extra hours.

To clarify this, let’s look at how overtime is calculated in general.

The Basics of Overtime

Blended overtime is calculated just like regular overtime, but with an extra consideration. Here’s how to calculate overtime normally (with one wage type).

Regular Rate of Pay

Overtime is based on an employee's regular rate of pay, or how much an employee is paid hourly under normal circumstances. An example would be an employee paid $15.00 per hour, which is their regular rate of pay.

Note that even salaried (nonexempt) employees have a regular "rate" of pay. For example:

• If a salaried employee works 40 hours and makes $1000 per week, their regular rate of pay is $25 per hour (1000/40 = 25).
• However, if they work 39 hours but still make the same amount ($1000), the regular rate of pay (hourly) is now $25.64. Even though they still make the same salary, their regular hourly rate has technically gone up (1000/39 = 25.6410).

It's crucial to understand that the regular rate of pay also includes commissions and tips. So if someone makes $1000 in a week but also makes $200 in tips or commission, you need to calculate their hourly / regular rate of pay based on $1200.

• Example: 1200 / 40 = 30. This person’s regular rate of pay is $30.00 per hour.

This comprehensive view of an employee's earnings is essential for accurate overtime calculations, especially when dealing with blended rates.

FLSA Overtime Rules

The Fair Labor Standards Act (FLSA) sets the federal standards for overtime pay. Here are the basics:

• Overtime must be paid at 1.5 times the regular rate for hours worked over 40 in a workweek.
• The "regular rate" includes all forms of compensation (hourly wages, commissions, bonuses) except certain exclusions.
• Employers must account for different rates if employees work multiple jobs, using a weighted average to calculate overtime pay accurately.

This last point is where blended overtime comes into play.

Federally and in many states, overtime is calculated on a weekly basis, meaning overtime pay is only required for the hours worked beyond 40 in a given workweek.

For example, an employee may work 9, 10, or even 15 hours in a day and still only be paid their regular hourly rate (as long as they have not exceeded 40 hours in the week). If that employee works 10 hours each day for four days (totaling 40 hours), they will receive their regular pay.

However, if they work 10 hours each day for four days and then 5 hours on the fifth day, the additional 5 hours are considered overtime, paid at 1.5 times the regular rate.

Overtime Exemption Rules

Employees are generally classified into two groups regarding overtime: exempt and nonexempt. While classifying employees can get a bit complicated depending on your industry and the nature of the position, here are the basic rules:

• Exempt Employees: These employees are exempt from overtime pay under the Fair Labor Standards Act (FLSA). Exempt employees are typically salaried and work in executive, administrative, or professional roles. They must earn a minimum salary and meet specific job duty requirements to qualify for exemption.
• Nonexempt Employees: These are regular FLSA-qualified employees who must be paid overtime for hours worked over 40 in a week. Their roles generally involve manual labor or non-managerial duties, and their compensation structure is more strictly regulated under FLSA guidelines.

For more information on how to classify employees for overtime, check with the Department of Labor or a lawyer experienced in employment law.

How To Calculate Blended Rate for Overtime

Now that we've covered the basics, let's dive into calculating blended overtime rates. Remember, the key to this calculation hinges on the regular rate of pay ("RP" in the following formula).

Here’s a basic formula for calculating the blended rate:

((RP1 x Hours1) + (RP2 x Hours2)) / Total Hours Worked

Here’s how the variables break down:

• RP1, RP2, etc.: These are the different hourly pay rates. For example, RP1 might be $15/hour, and RP2 could be $10/hour. You can include more than two rates if necessary.
• Hours1, Hours2, etc.: These are the hours worked at each rate. For example, if someone worked 15 hours at $15/hour and 2 hours at $10/hour, you’d plug those numbers into the formula.
• [Extra Wages]: Commissions or tips can be included by adding them to the total wage calculation. For instance, if someone works 20 hours at $10/hour, 22 hours at $12/hour, and earns a $1000 commission, you multiply the hourly rates by the hours worked and add the $1000 afterward.

The first part of the formula gives you the total wages. Then, you’ll divide that number by the total hours worked to get the blended rate. From there, here’s how to calculate overtime:

1. Use the blended rate from the formula.
2. Multiply the blended rate by 0.5 to find the overtime premium.
3. Multiply the overtime hours (anything over 40 in a workweek) by the overtime premium to get the overtime pay.
4. Add everything: Regular Pay for Rate 1 + Regular Pay for Rate 2 + Blended Overtime Pay to get the total pay for the week.

Blended Overtime Example

Let's walk through an example to make this clearer:

John occupies two roles at the same company. In one workweek, John works 30 hours as a cashier at $15/hour and 20 hours as a stocker at $18/hour. That’s a total of 50 hours (10 hours of overtime).

1. Calculate the base pay: ($15 x 30) + ($18 x 20) = $810
2. Calculate the blended rate: $810 / 50 = $16.20 per hour
3. Calculate the overtime premium rate: $16.20 x 0.5 = $8.10 per hour
4. Calculate overtime pay: 10 hours x $8.10 = $81.00
5. Total Pay: $810 + $81.00 = $891.00

This calculation ensures that John is fairly compensated for his overtime work, taking into account both of his pay rates.

When Is a Blended Overtime Rate Required?

A blended overtime rate is required any time a nonexempt employee is paid two or more different wage rates or types and works more than 40 hours in a workweek. This situation arises in various industries and scenarios:

• Restaurants – You might use blended overtime for an employee who works as a hostess one night and a waitress the next few nights. The different roles often come with different pay rates (and tips), making a blended rate necessary for overtime calculations.
• Sales Employees - You may need to calculate a blended rate for an hourly nonexempt employee who makes commission or tips, such as someone who performs certain sales duties. Since those are considered regular wages, they must be accounted for in the overtime rate. NOTE: This 7i exemption is also relevant here.
• Construction / Engineering - This is particularly relevant for union employees. You may have workers who perform different jobs with varying skills and capacities, requiring different pay rates. This is especially true when working across multiple union locals.
• Multi-Location Workforces - When your company operates in different states, you may need to pay different minimum wages based on local regulations. This can result in employees earning different rates even for similar work.

Blended Overtime Examples

To better understand how blended overtime works in practice, let's walk through a few detailed examples:

Example 1: Basic Blended Overtime

Let's say an employee works the following schedule:

• Regular Hours: 30 hours @ $20/hour = $600
• 2nd Shift Hours: 15 hours @ $25/hour = $250
• Total Hours: 45 (5 hours overtime)

Step-by-Step Breakdown

1. Calculate the base pay ($20 x 30) + ($25 x 15) = $975
2. Calculate the blended rate: $975 / 45 hours = $21.67 per hour
3. Calculate the overtime premium rate: $21.67 x 0.5 = $10.84 per hour
4. Calculate overtime pay: 5 hours x $10.84 = $54.20
5. Total Pay: $975 + $54.20 = $1029.20

Example 2: Blended Overtime (With Commission)

Now let's look at a more complex example involving commission (or some kind of extra income).

• Regular Hours: 30 hours @ $40.00/hour
• 2nd Shift Hours: 15 hours @ $42.00/hour
• Total Hours: 45 hours (5 hours overtime)
• Commission: $600

Step-by-Step Breakdown

1. Calculate the base pay: ($40 x 30) + ($42 x 15) + $600 = $2430
2. Calculate the blended rate: $2430 / 45 hours = $54.00 per hour
3. Calculate the overtime premium rate: $54.00 x 0.5 = $27.00 per hour
4. Calculate overtime pay: 5 hours x $27.00 = $135
5. Total Pay: $2430 + $135 = $2565

Example 3: California Daily Overtime Blended Rate

California has unique overtime laws that require daily and weekly overtime calculations. Any shift that exceeds 8 hours in a single workday must include overtime at 1.5x, while hours in excess of 12 must be calculated at double-time (2x). In addition, any hours worked over 40 non-overtime hours in a week must be calculated at 1.5x, the first 8 hours worked on a 7th consecutive day in the workweek must be calculated at 1.5x, and any hours worked over 8 hours on a 7th consecutive day must be calculated at 2x. 

Here's an example using California's daily overtime laws with a blended rate:

Let’s consider a single day where an employee works a 10-hour shift.

• 1st Wage Hours: 7 hours @ $15.00/hour
• 2nd Wage Hours: 6 hours @ $20.00/hour
• Total Hours: 13 (4 hours regular overtime, 1 hour double-time)

Blended Rate Calculation:

• Calculate the base pay: ($15 x 7) + ($20 x 6) = $225
• Calculate the blended rate: $225 / 13 hours = $17.31per hour
• Calculate the overtime premium rate: $17.31 x 1.5 = $25.96 per hour
• Calculate the double-time premium rate: $17.31 x 2 = $34.62 per hour
• Calculate regular pay: $17.31 x 8  = $138.67
• Calculate overtime pay: 4 hours x $25.96 = $103.85
• Calculate double-time pay (2x): 1 hour x $34.62 = $34.62
• Total Pay (1 Day): $138.67 + $103.85 + $34.62 = $277.14

Blended Overtime Tips / Mistakes To Avoid

As you navigate the complexities of blended overtime calculations, keep these tips in mind to avoid common pitfalls:

Use Separate Blended Rates for Bi-Weekly Payroll Cycles

If you operate on a bi-weekly payroll cycle, calculate blended rates for each week individually. The FLSA defines a workweek as any fixed and regularly recurring period of 168 hours (7 consecutive 24-hour periods). This means that even if you pay employees every two weeks, you must calculate overtime separately for each week.

However, it's important to note that state and local payroll laws may vary. Always check your local regulations to ensure compliance with all applicable laws.

Pay Attention to California Overtime

California's overtime laws are notably more complex than federal regulations. If you operate in California, overtime is calculated based on both daily and weekly hours worked. This means that the blended rate may be necessary even within a single day if an employee works at different rates during that day.

For instance, California requires overtime pay for:

• Any hours worked beyond 8 in a single day
• The first 8 hours worked on the 7th consecutive day in a workweek
• Any hours worked beyond 40 in a workweek

Moreover, California mandates double-time pay for:

• Any hours worked beyond 12 in a single day
• Any hours worked beyond 8 on the 7th consecutive day in a workweek

Even without using blended rates, California overtime laws can get a bit complicated — but compliance is essential. Check out our guide to learn more.

Use the Right Payroll Software

Calculating blended overtime rates by hand is not only time-consuming but prone to costly errors. It's also wildly inefficient, especially considering there are better options available. Payroll is complicated — and it always will be, especially as your company and employee roster grows. You need a platform that supports all of your unique requirements and facilitates the reporting you need after the fact.

With Criterion HCM, you can easily process payroll for employees with multiple wage rates and classifications automatically. Just set up your employee info in our HR module, configure your system exactly how you need it, and let employees log time as normal. The system does the rest, with many required calculations already built in for compliance.

Final Thoughts

Calculating overtime is an essential function of any payroll or HR team. For employees who earn multiple wages, blended overtime is the only way to remain in compliance with labor laws and ensure fair compensation.

While blended overtime calculations might be simpler than some other complex payroll calculations, consider this for several employees, employee types, and wages. In that case, your payroll team faces a significant workload. Manual errors could lead to compliance issues and put major strain on employee relationships.

With Criterion HCM, you can easily calculate payroll for any situation you may encounter. We specialize in complexities of payroll calculations related to union workers, multiple locations, and diverse employee types. That’s why we give you access to all the backend tables and the support to configure your payroll process exactly how you want it.

If you're looking for a better payroll and HR system that can handle the unique requirements of your business, Criterion HCM is the solution for you. Built on a single unified database, you can ensure all the data related to your employees is completely connected, so time tracking, payroll, reporting, and more are all streamlined and automated.

You can also integrate Criterion with any third-party software, allowing you to connect all your data and put people at the center of your operations.

Want to learn more? Book a Criterion demo today and discover the power of a payroll software that's designed for your business.