As an employer, you’re legally required to have workers’ compensation insurance for your employees. If you have employees who work overtime, you may wonder if their overtime hours should be included in your workers' compensation premium calculation.
In short, overtime hours count as wages for workers’ comp, but there’s a catch—that extra money you pay for overtime on top of an employee’s regular rate? That’s excluded.
This overtime surcharge is known as overtime excess, and it’s important to get it right so you don’t pay more for workers’ comp than you need to.
So, let’s dive into what, exactly, overtime excess is and how to calculate it.
What Does Overtime Excess Mean?
Overtime excess is the overtime pay your employee gets, minus their regular hourly pay rate. Another name for it is overtime surcharge or overtime premium.
In most places, overtime rates kick in when a team member works more than 40 hours per week, though in some states like California, it also includes any hours over 8 per day.
Let’s say your full-time employee earns $10 per hour, so when they put in a standard 40-hour workweek, their regular pay for the week is $400 ($10 x 40 = $400).
But if that same employee works 50 hours during a busy week, you have to pay time-and-a-half for those extra hours. So, for 10 hours that week, they’d earn $15 an hour instead of $10. That’s an extra $5 an hour.
The extra $5 per hour they’re making? That’s the overtime excess.
Do You Report Overtime Excess as Part of Your Workers’ Comp Wages?
The short answer is no, you don’t factor overtime excess into your workers’ compensation premiums.
However, you’ll still need to include an employee’s regular base pay for those extra overtime hours. This is also known as straight-time overtime.
Why is it important to exclude that overtime excess?
When reporting your employee’s wages to your insurance company, you’re influencing how much you have to pay for premiums. If you include too much money, you’ll have to pay more for your workers’ comp insurance policy. Since you’re legally allowed to subtract that extra pay earned while working overtime, you want to be sure to do that.
How Do You Calculate Excess Hours?
You can calculate the overtime excess by dividing overtime pay by three. That works when an employee is earning time and a half for their added hours.
Our employee from the previous section? They earned an extra $150 in overtime, so their overtime excess would be $50 ($150 / 3).
That means you’d subtract $50 from payroll when reporting their wages to workers’ comp.
Sound complicated? Hourly can do all this for you. The platform automatically syncs your real-time payroll with your workers’ comp, so your premiums are always accurate.
Finding the excess for double time is a matter of dividing the double time pay by two. Double time is when an employee gets paid twice as much as their regular rate of pay.
While not required in every state, in others like California, you have to pay double time when your employee works more than 12 hours in a single day, and for all hours after eight when an employee works seven consecutive days in a single workweek.
Example of Calculating Overtime Excess
Here’s an example of how to calculate overtime excess with traditional time and a half and double time pay.
Say your employee works 14 hours in one day because they’re covering a shift for a sick coworker. If they normally earn an hourly rate of $20, let’s look at how this breaks down.
- Regular pay: $20 x 8 hours = $160
- Time and a half: $30 x 4 hours = $120
- Double time: $40 x 2 hours = $80
- Total payroll: $360
Now, you have to find the excess pay for both the time and a half and the double time portions of the payroll.
- Time and a half excess: $120 / 3 = $40
- Double time excess: $80 / 2 = $40
So from the total $360 earned, $80 was overtime excess ($40 + $40). That means when you’re reporting this team member’s wages to workers’ comp, you’ll exclude $80.
FAQs
Now that you know all about overtime excess, let’s answer some of your burning questions about workers’ comp.
What’s Used to Calculate Workers’ Comp Premiums?
To calculate your workers’ comp premium for a policy period, insurers will typically look at:
- State requirements
- Classification codes
- Your business type (LLC, sole proprietor, etc.)
- Size of payroll
- Risks from your business (including risks inherent in your industry)
- Your accident record and the number of injured workers
- Average weekly wage (AWW)
The AWW is based on an employee’s earnings in the year directly before an injury happens. Knowing this amount helps the insurance carrier calculate how much it’d cost to replace this employee’s labor if they couldn’t go back to work after an accident. That’s why it’s so key to calculate overtime excess correctly!
Keep in mind that different agencies govern workers’ comp for different states. Therefore, criteria may change based on where you are, so work with your agent to make sure you fully understand what goes into your workers’ comp premiums.
What Income Counts Towards an Employee’s Average Weekly Wage?
While workers' compensation laws can vary from state to state, here’s a list of common wages that all count toward an employee's average weekly wage:
- Regular wages or salary
- Commissions
- Bonuses
- Profit sharing (except in certain cases)
- Vacation pay
- Holiday pay
- Sick pay
- Car allowances, which offset business use of a personal vehicle (this is not income if it’s a reimbursement for an authorized expense)
- The market value of any gifts you give your employees
- Piecework pay (when you pay based on the number of units completed)
- The straight-time portion of overtime wages (their normal hourly rate)
What’s Excluded from Workers’ Compensation Premium Calculations?
In general, overtime excess pay, tips, stock options, and meals are excluded from workers’ comp insurance premiums. That means you subtract these items from your employee’s gross wages when figuring out premiums.
Here are a few other common exclusions:
- Lodging (unless they’re provided instead of wages)
- Severance pay
- Employer contributions to retirement plans, stocks, or qualified insurance plans
- Stock options
- The value of a company car you give an employee
- Employee discounts
- Royalties earned for commercial appearances
- An allowance for uniforms
But again, state laws regarding workers' comp can vary. So what’s included in one state could be excluded in another.
How Long Can Employees Be on Workers’ Comp?
Each state sets laws regarding workers' comp, including for how long the benefits can last. Typically, employees can stay on workers' comp for three to seven years, depending on the severity of the injury.
In California, most employees who get injured on the job are eligible for 104 weeks (two years) of workers’ compensation benefit payments during the five-year period following the injury. Some severe injuries qualify workers for 240 weeks during this timeframe, which is just over four and a half years.
If workers still aren’t able to return to work after this time, long-term disability benefits or Social Security Disability Insurance (SSDI) can help.
Why Having an Accurate Payroll Is Key
It can be confusing to keep track of these numbers, but it’s important to keep accurate payroll records in case you get hit with a premium audit. You need to clearly show the number of hours your employee was paid overtime for and document the excess amount. That way, you won’t have any audit surprises.
Calculate Your Overtime Excess with Ease
When your employees work overtime, remember to subtract their overtime excess before reporting their wages for workers’ compensation.
To quickly find out how much to subtract, take the amount of money they earned while working overtime and divide it by three. Then, subtract that amount from their total gross pay.
At first, the calculation might seem strange, but pretty soon you’ll be able to do it with ease.
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
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Hello Jane,
My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
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Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
I look forward to speaking with you soon.
Cheers,
John Doe
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
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Hi Jane,
Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.
After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
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Cheers,
John Doe
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
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Hi Jane,
Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.
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Thank you again for choosing ABC Agency to insure Jane's Bakery.
Cheers,
John Doe
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
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Dear Jane,
Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
Do you want to discuss any of these policies?
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5. Introducing a New Product
A happy client may want to expand their business with you.
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Hello Jane,
I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
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6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
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Hi Jane,
You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
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As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
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7. Policy Renewal
If your client needs to renew their policy with you, send an email like this:
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Hi Jane,
I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.
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