How to Determine Overtime Hours for Restaurant Workers (including tipped wages)

Being a business owner is certainly not for the faint of heart. There are scores of issues to consider and manage, like building space, marketing, inventory, and a slew of taxes. Not to mention the ongoing challenges of finding and retaining great talent. Add to all of that the uniqueness of restaurant employment – with tipped wage rates and multiple locations – and it’s easy to feel like something important could get overlooked. One such “something” that can have serious ramifications is proper payment of overtime hours. Let’s talk through some ways you may be mishandling this important issue, what can happen if you are, and how best to ensure it won’t happen to you. 

How to measure a work "week"

A common misconception is to think of overtime in terms of your pay frequency rather than a workweek. For example, if you pay your employees every two weeks (bi-weekly), then hours beyond the normal 80 would be considered overtime.  However, according to the Fair Labor Standards Act (FLSA), “overtime” is defined as “hours worked over 40 in a workweek,” which is further defined as “a fixed and regularly recurring period of 168 hours – seven consecutive 24-hour periods.” Ultimately, it doesn’t matter if your workweek runs from Sunday to Saturday, or Wednesday to Tuesday, but it DOES matter whether an employee has worked more than 40 hours within that specified “week” period. This means that if an employee were to work 30 hours the first week, and 45 hours the second week, he would have 70 Regular hours and 5 Overtime hours in that bi-weekly pay period, even though the total hours worked were less than 80. Having a clear record of hours for each workweek, then, is essential to guaranteeing that your employees are being paid properly. 

How to calculate overtime with tipped wages 

The next area of confusion comes from how overtime is calculated for tipped wages (aka, those less than the Federal minimum wage). Again, the FLSA states that overtime hours are required to be paid “at a rate not less than time and one-half regular rates of pay.”  This is simple enough for most hourly rates, such as if an employee makes $10/hour, then any overtime hours are paid at $15/hour. However, when opting to pay employees the tipped wage rate of $2.13/hour, the overtime calculation factors in the tip credit, which is the difference between Federal minimum wage and the lower hourly rate:  

Fed Min Wage = $7.25/hr - $2.13/hr (tipped wage rate) = $5.12 (tip credit) 

So, where regular overtime would be calculated at 1.5x the hourly rate, tipped wage overtime begins with one-and-a-half times the minimum wage rate minus the tip credit: 

($7.25 x 1.5) = $10.875 - $5.12 = $5.755/hour 

Therefore, employees earning $2.13/hour, should be paid $5.755/hour for all overtime hours, not $3.195/hour ($2.13 x 1.5). Being sure your payroll software accommodates for this nuance is critical to avoiding underpaying your tipped-wage employees. 

How to calculate overtime for an employee with multiple locations

Even more issues can arise when we add the complexity of employees working at multiple locations or performing work at different rates of pay. If their hours are being calculated individually at each location, or if the work being performed when they exceed 40 hours in the workweek is not being considered correctly, it is very likely overtime is being mishandled. Here’s an example to help examine these types of situations: 

• Fictitious Delicious Restaurant has three local locations – Stores A, B, and C. 
• Joe Employee works as a server (making $2.13/hr) at each location, as needed.   

• For the first week of the pay period, he worked 15 hours at Store A and 30 hours at Store B.   
• During the second week, he worked 35 hours at Store C and 10 hours at Store B.   

Therefore, for both weeks of the pay period, Joe accumulated five hours of overtime, and his pay is calculated accordingly: 

Week 1:  40 hours at $2.13/hr + 5 OT hours at $5.755/hr = $113.98  

Week 2:  exactly the same 

Joe’s Gross Wages for the pay period = $227.96 

But let’s say that his hours were not considered as a whole, as above, but only per location each week.  In that case, he would not have “worked overtime” at all, since at each Store his hours never exceeded 40 within the workweek.  In this case, his pay would be incorrectly calculated as: 

Week 1:  (Store A) 15 hours at $2.13/hr + (Store B) 30 hours at $2.13/hr = $95.85 

Week 2:  (Store C) 35 hours at $2.13/hr + (Store B) 10 hours at $2.13/hr = $95.85 

Joe’s Gross wage for the pay period = $191.70 ($36.26 short) 

A similar problem is caused when the employee works multiple jobs that earn different rates. Using the previous example, let’s say that Joe works as a bartender at Store B, making $6.00/hr instead of the standard $2.13.  Since each workweek concludes with him working at Store B, his overtime rate should be based on his bartender rate, not his server rate. Applying the Tipped Wage Overtime rule, the proper overtime rate then is:  

$7.25 (min wage) - $6.00 (tipped rate) = $1.25 (tip credit) 

($7.25 x 1.5) = $10.875 - $1.25 = $9.625/hr 

…and Joe’s pay is correctly calculated as: 

Week 1:  15 hours at $2.13/hr + 25 hours at $6/hr + 5 OT hours at $9.625/hr = $230.08 

Week 2:  35 hours at $2.13/hr + 5 hours at $6/hr + 5 OT hourst at $9.625/hr = $152.68 

Joe’s Gross Wages for the pay period = $382.76 

But let’s say that since Joe worked more hours as a server than as a bartender (50 vs. 40), his overtime hours were paid out based on the server rate instead. In this case, his pay would be incorrectly calculated as: 

Week 1:  15 hours at $2.13/hr + 25 hours at $6/hr + 5 OT hours at $5.755/hr = $210.73 

Week 2:  35 hours at $2.13/hr + 5 hours at $6/hr + 5 OT hours at $5.755/hr = $133.33 

Joe’s Gross wage for the pay period = $344.06 ($38.70 short) 

While less than $40 over a two-week period does not seem like that big of an error to make, this small oversight can easily turn into an enormous headache. If a complaint is issued, the Department of Labor’s Wage and Hour Division will conduct an investigation of the employers’ compliance with FLSA rules. These investigations include a thorough examination of time and payroll records as well as private interviews with employees. If it is determined that employees were not compensated fairly, the employer will be responsible for paying all back wages owed within the two-year statute of limitation, and possibly required to cover applicable court costs and attorney fees. Worse yet, if the violation is determined to be willful or repeated, a penalty of up to $1000 per violation can also be incurred. This means making a mistake such as the ones exampled above—over the course of just one year, affecting just ten employees—can cost over $20,000. 

With all that said, you may be asking yourself… 

Am I using the correct overtime rate?  

Have I accounted for overtime across all of my locations?  

How can I know what job my employees were doing when they crossed over into overtime?  

Use better payroll software to calculate and keep track of earnings

Using the right software for your payroll needs is key to having peace of mind for these questions. Whirks utilizes the robust iSolved platform, a system designed to accurately calculate and keep track of earnings for tipped wages and tipped wage overtime. This not only ensures that the correct overtime rate is used, but also guarantees compliance with minimum wage regulations when an employee does not earn sufficient tips. Within our Timekeeping service, employees can specify their Location and/or Job through detailed punching when clocking in (not to mention record their take-home tips when clocking out). This allows all hours during the pay period to be correctly tracked for overtime compliance while still providing allocation of hours for labor costing, as well as the application of the proper base rate when overtime occurs. Best of all, with all hours recorded in our software, payroll preparation is drastically simplified. No need to pull a report from your POS system that must then be reformatted for importing or (worse yet) manually keyed into the Time Entry Grid. With the click of a couple of buttons, all hours are downloaded from employees’ timecards into the appropriate earning buckets with the correct rates, and you’re done with payroll!  

If this sounds too good to be true, I recommend reaching out to your Whirks Client Success Specialist. With all that’s at stake, making sure you are handling overtime correctly is worth the time and investment to ensure you are doing it correctly.  

Looking for other restaurant tips and tricks? Check out our article The 3 Biggest Mistakes Restaurants Make with Payroll.  Ready to talk to a payroll specialist?