We previously talked about uncompensated overtime and what it means. (If you missed that blog, check it out here.) We also talked about a couple methods to deal with this; Options #1 and #2. Now, let’s look at another method: Pro-rate the standard hours per pay period (i.e. 40 hrs if paid weekly) based on the actual hours worked.
The last method of dealing with uncompensated overtime is to pro-rate the standard number of hours in a pay period using the actual hours worked and the employee’s standard hourly rate. The result of using this method is the same as Option #1 where the employee’s hourly rate is diluted for the OT hours worked. The difference is that under this method, the contractor dilutes the hours worked vs. the hourly pay rate.
Pros: This approach eliminates the need to adjust billing rates on invoices each time OT is worked.
Cons: This requires an extra step in the process of distributing the labor dollars since the contractor needs to pro-rate hours prior to determining the labor dollars charged to each labor category.
In conclusion, uncompensated overtime is tricky, but it’s something every contractor needs to account for. Purchase our Risk and Compliance Analysis and let us take a look at your accounting system to see if you’re doing it right. (Mention this blog post and receive 20% off your analysis.)