Does Overtime Excess Count as Wages for Workers' Compensation?

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. 

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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. 

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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. 

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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.

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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.

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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). 

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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. 

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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. 

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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.

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Why is it important to exclude that overtime excess?

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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. 

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Our employee from the previous section? They earned an extra $150 in overtime, so their overtime excess would be $50 ($150 / 3).

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That means you’d subtract $50 from payroll when reporting their wages to workers’ comp.

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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.

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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. 

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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. 

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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. 

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• ‍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

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Now, you have to find the excess pay for both the time and a half and the double time portions of the payroll. 

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• Time and a half excess: $120 / 3 = $40
• Double time excess: $80 / 2 = $40

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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) 

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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!

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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:

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• 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. 

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Here are a few other common exclusions:

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• 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 

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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. 

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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. 

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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. 

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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. 

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At first, the calculation might seem strange, but pretty soon you’ll be able to do it with ease.