When your employees start putting in extra hours, it’s time to consider how to compensate them. Should you offer banked hours or overtime pay? Let’s explore the options to see what best suits your business.
The Fair Labor Standards Act, which was enacted in 1938, was made to protect workers right. It introduced overtime laws to make sure employees are treated fairly for their hard work and receive compensation for extra hours worked. Under this law, there are two easy-to-manage additional work times which are, banked hours and overtime pay.
Let’s get to more details on this:
Banked hours refer to time that is accrued by employees when they work beyond their regular hours. Think of it as a time off savings account in which employees can store all the hours they’ve worked extra to use later. This concept, also known as hours bank arrangement, can be a flexible approach for both employees and employers. It’s like a banked holiday, time off earned in advance.
If you still need clarification on what is an hours bank arrangement, exactly? In short, it’s a way for employees to earn additional leave instead of immediate pay for extra hours worked.
On the other hand, overtime pay offers immediate financial compensation for hours worked beyond the standard schedule, typically calculated at higher overtime rates. Many businesses use an overtime calculator to determine these rates accurately. According to California overtime law, overtime usually kicks in after eight hours in a day or 40 hours in a week, although these thresholds can vary by state.
Banked Hours vs. Overtime Pay: Know the Difference
Whenever employees work extra hours, they look for overtime pay to compensate for it. According to the FLSA, any time worked more than 40 hours in a week is considered overtime and those employees are eligible for overtime pay.
This workweek is a consecutive set of seven days, as outlined in the employment contract. Typically, overtime is calculated at 1.5 times the regular hourly rate, though some states may have additional rules.
For example, if an employee earns $18 per hour and works 46 hours in a week, their paycheck would break down as follows:
Regular rate: 40 hours x $18 = $720
Overtime rate: $18 x 1.5 = $27
Overtime pay: $27 x 6 hours = $162
Total pay: $720 + $162 = $882
Banked hours, on the other hand – also called ‘time off in lieu’ or TOIL is a bit different. In this method, instead of getting paid for working extra hours, employees get additional time off. For each hour of overtime worked employees will get 1.5 hours of time off.
If an employee works 50 hours in a week, here’s how it works:
Regular hours: 40 hours
Overtime hours: 10 hours
Banked hours: 10 overtime hours x 1.5 = 15 hours
After this week, the employee will have accumulated 15 hours of paid vacation time.
Banked Hours
In addition to cash payments, some companies offer banked hours as a form of compensation for overtime work. Banked hours allow employees to accumulate extra hours worked for future use, such as additional time off or other benefits. The banking of hours can vary significantly depending on company policy and regional regulations:
1x Banked Hours: In some cases, employees might receive one banked hour for each hour of overtime worked. For example, if an employee works 10 overtime hours, they may bank 10 hours for future use.
Understanding how to manage banked hours versus overtime pay involves knowing not just the calculation methods but also any applicable state-specific labor laws. These laws may impose limits on the amount of banked time an employee can accrue and dictate how it can be used. Always ensure compliance with both federal and state regulations to maintain fair and transparent compensation practices.
What is Double Time Pay?
One important concept to understand is what double-time pay means. This occurs when employees are paid double their regular hourly rate, often for working excessive hours or during holidays. Knowing how many hours until overtime applies is crucial for planning work schedules and compensation.
Choosing between banking hours and offering overtime pay involves weighing your company’s needs against state-specific labor laws. In California, for instance, strict labor laws require careful consideration of exempt and non-exempt employees to ensure compliance. Non-exempt employees must receive overtime pay, whereas exempt employees may not be eligible.
Deciding whether to offer banked hours or overtime pay requires careful consideration of your company’s needs and employees’ preferences.
What Can You Do with Accrued Banked Overtime?
How does one use these banked hours?
Using banked hours can be a win-win for both employees and employers. For employees, it offers additional paid vacation time, while for employers, it can help manage cash flow, especially in small businesses. However, when workers are deciding between banked hours and overtime pay, the main question is: how can these banked hours be used, and what rules apply?
Just because an employee has accumulated banked hours doesn’t mean they can use them whenever they want. Using banked time is often similar to requesting regular paid vacation and must be approved according to the terms set out in the employment contract. Some employers may allow employees to use their banked hours soon after they’ve earned them to offer relief after a particularly demanding week, but this is not mandatory.
One critical consideration is not to accumulate too many banked hours at once. Typically, employees can bank their overtime until they reach a total of 200 hours, which amounts to roughly 25 paid days off. Once this limit is reached, any additional overtime must be paid out at the overtime rate of 1.5 times the regular pay rate, also known as time-and-a-half. This rule helps protect employees from having their hours banked indefinitely, which could lead to delayed payments.
State-specific legislation also plays a vital role in how banked hours can be managed. While the Fair Labor Standards Act (FLSA) sets the general 200-hour limit, some states have their own specific rules.
Case Study: Rewarding Overtime with AttendanceBot
In 2022, the Austrian company Datascience Services faced significant challenges with tracking employee overtime using traditional spreadsheets. Every employee had an individual contract with different overtime specifications and pay periods, which meant not only a full-time position to keep track of overtime but also frequent cases of employees being underpaid and others overpaid.
To fix both overspending and – more often – underpayment of employee overtime, the company implemented AttendanceBot to automatically keep track of overhours, accomplishing:
- Transparency: AttendanceBot provided clarity on how and when hours were tracked, allowing employees to see and monitor their own overtime, and ensuring transparency in payroll.
- Multiple FTE savings: By automating overtime hour tracking, the company saved both a full-time position and countless employee hours trying to correct and address payroll discrepancies. No more managing spreadsheets or correcting mistakes.
- Payroll accuracy: With transparent and automatic tracking, the company achieved true payroll accuracy, which meant not overpaying undue hours, and not underpaying when employees were owed.
Ultimately, this payroll fix had the secondary benefit of creating a much healthier culture around overtime! Employees were no longer averse to spending extra hours when needed because they knew their hours would be appropriately captured and paid out, which meant more projects stayed on track and more deliverables on deadline.
To Sum Up
To make the most of overtime benefits, both employers and employees need to be well-informed about the applicable laws. Understanding the nuances of banking hours versus paying overtime ensures compliance and fairness, allowing companies to make smarter decisions that align with both business needs and employee preferences.
