What is overtime? A simple guide to overtime pay and rate
Overtime is generally work undertaken outside the regular hours listed in an agreement, award interpretation or as stated in the employment contract. Therefore, an employee's typical and regular working hours do not attract rates for overtime.
A full-time employee can work for 38 hours per week unless their employer asks them to work extra hours. The extra hours are often payable as overtime. Yet, there are differences depending on the job's nature, the modern award, and the number of hours an employee works regularly.
Furthermore, many awards define overtime as work done outside the maximum weekly/daily hours or beyond the agreed number of hours in the employment contract. Such terms may apply to full-time, part-time, and contract employees.
What is an overtime rate?
Employees are entitled to an overtime rate whenever they work overtime, which may be higher than the average rate. The entitlement depends on the Industrial Instrument or Modern Award for employees in Australia. The applicable rate should be specified in the employment contract, award, or agreement, as the overtime rate may differ depending on the day or time it occurs.
Overtime rates compensate employees for the inconvenience of working extra hours, rewarding them for doing so.
Overtime rules
Every agreement and industry award has its own overtime rules, specifying when an employee works overtime and when the overtime rate applies. As their employer, you should be familiar with the overtime rules; otherwise, you could face a dispute and shall repay any money owed.
When is an overtime rate applicable?
Generally, an agreement, employment contract, or award will layout the overtime rate and dictate when it is applicable if an employee is:
- Working outside the regular hours of work
- Working beyond the agreed number of hours
You may not necessarily pay extra for "reasonable" overtime if your employee has a higher pay rate to compensate for award privileges as stated in their employment contract.
Some employers may grant an employee to take paid time off rather than having overtime pay, often known as "time-off in lieu." If your employee prefers this approach, you must establish it through writing with your employee's consent. It should also meet any agreement or award requirements.
What is reasonable overtime?
If you ask your employees to do overtime, you must consider their health and safety. Letting them work beyond the 38-hour working week may risk fatigue, stress, and personal injury.
It is sensible to ask your employees to work overtime, providing the following factors:
- The employee's circumstances, including but not limited to their responsibilities in the family
- The company's needs
- If there are risks to the safety and health that may arise from working overtime
- Employee compensation for having to work extra hours
- A notice that is given to the employee stating they may need to work additional hours
- If the employee has stated before that they cannot work extra hours
- The regular work industry patterns
Considering all reasonable factors above, your employee can turn down working overtime if the request says otherwise.
You should regularly assess whether your employees are compensated sufficiently for overtime by reviewing their regular pay rate to ensure Fair Work compliance.
What are the types of overtime pay?
Here are the different types of overtime pay that differ based on the rules of the different companies and states:
- Time off in lieu (TOIL)
Rather than paying your employees for working extra hours, you will provide them additional time off. You and your employee can negotiate the particulars of such an arrangement, including when they will take their time off and the duration.
- Double-time pay
Your employee will get double the amount they often get for regular hours. In addition, they can receive double time if they work on a holiday or overtime.
- Non-guaranteed overtime
If you provide this type of overtime, your employee will need to work the number of hours as explicitly expressed in the employee contract.
- Voluntary overtime
You offer your employees an option that they are free to accept or turn down the overtime with no penalty.
- Compulsory overtime
Compulsory overtime includes provisions in the terms and conditions of your employee's contract. Even so, there are specific regulations that your employee must follow to remain compliant.
If your employees are informed about overtime rules and paid accurately and adequately, it can keep staff happy and prevent unnecessary legal disputes.
Overtime vs reasonable additional hours
Your employee is not eligible to be paid for any "reasonable additional hours." Nonetheless, they are entitled to be paid overtime, penalty rates, or other forms of compensation for extra hours worked if an enterprise agreement or award covers them.
Enterprise agreements and modern awards
Suppose an enterprise agreement or modern award covers your employee. In that case, they are eligible for penalty rates, other allowances, and overtime pay for hours worked in addition to or outside their regular working hours. Moreover, employment contracts may consist of provisions regarding overtime.
Make sure you familiarise yourself with responsibilities under applicable agreements or awards. For example, if you don't wish to pay your employees in strict compliance with a modern award, ensure a formal contractual agreement is in place.
For example, employees paid an all-inclusive amount should have terms covering this in their employment contracts. Also, the contract should dictate whether the all-inclusive amount offsets against all monetary entitlements payable under an agreement, award, or industrial instrument.
All employers should ensure they pay the amounts they are entitled to under an applicable award or agreement. Failure to do so will lead to a breach of the Fair Work Act and monetary penalties.
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