How to calculate overtime for salaried employees in Ontario

I was recently asked this question about overtime for salaried employees in Ontario. If the regular hours of work are 37.5 and employees work past the overtime threshold of 44 hours per work week, how are the hours between 37.5 and 44 treated? Does the employer have to pay for these and, if so, at what rate?

First of all, let’s define our terms. As for many other payroll items, “salary” or “salaried” may often be used without clearly defining what they mean or how they apply.

A “salary” is a fixed payment, established on either an annual or pay period basis. Similarly, the term “salaried” describes employees who receive such fixed payments, rather than any one receiving an hourly wage, commission, bonus or other incentive earnings.

The most important characteristic of a salary is that it doesn’t vary based on employee efforts or output. For example, if the regular hours of work are 40 hours per week, the Ontario pay for a “salaried” employee wouldn’t vary whether the person worked 35, 37 or 43 hours that week. Similarly, if a salaried employee is a sales person, weekly compensation wouldn’t vary whether the person’s sales were short of, met or exceeded expectations for that week.

In practice, the terms “salary” and “salaried” are often used for employees with quite different compensation arrangements, for variances from the regular or normal hours of work:

  1. Salaries are not adjusted whether employees work less or more than the normal hours of work.
  2. An hourly equivalent is calculated and salaries are adjusted for every hour worked less or more than the defined work schedule.

I would argue that despite being often termed a salary, employees paid based on point 2 above are really paid an hourly wage.

Although this might seem like being picky over words, there are widely varying overtime requirements in Ontario for the “salaried” employees covered by the points above.

In Ontario, there is no requirement to pay employees who fall into point 1 above for any hours between the normal hours of work and the 44-hour overtime threshold. In other words, nothing is owing to a truly salaried employee until the work-week overtime threshold of 44 hours has been met.

By contrast, employees, whose contract of employment requires that their “salary” be adjusted for variances from the scheduled work hours, must be paid for any hours they actually work, not just those above the Ontario work-week overtime threshold.

This also impacts the hourly overtime rate that must be used in Ontario.

In Ontario, the effective overtime rate for truly salaried employees, those covered by point 1 above, is less than for employees whose “salaries” are adjusted based on hours worked.

Example: Iris is paid a fixed bi-weekly salary. Her compensation does not vary based on the time she actually spends at work, nor what she accomplishes during any particular pay period. Iris is paid $4,000 each bi-weekly pay period. Her employment is not exempt from the requirement to pay overtime in Ontario. When she works more than 44 hours in a work week, Iris must be paid $68.18 an hour, for every hour worked over this threshold ($4,000 / 2 / 44 x 1.5).

Example: John is also paid a $4,000 bi-weekly salary. However, his terms and conditions of employment allow the employer to lower John’s pay when he works less than the normally scheduled 37.5 work-week hours. Similarly, when John works more than these hours, he receives straight-time overtime, for any hours worked between 37.5 and the Ontario overtime threshold. John is not exempt from overtime in Ontario and his hourly overtime rate is $80 ($4,000 / 2 / 37.5 x 1.5)

Note the difference in how Iris’ overtime rate is calculated, as compared to John’s. Both calculations are identical, except that for Iris the work-week overtime threshold is the divisor, whereas for John this divisor is the normally scheduled work hours.

This difference stems from the fact that Iris is truly a salaried employee, while John, despite being paid something termed a “salary”, is really paid by the hour. These differences in compensation mean that John must be paid more than Iris for the same hours worked. More on two counts: first, John gets paid for every hour worked, and, second, John gets paid overtime at a higher hourly rate.

While the above is specific to Ontario, you also have to be aware how these differences are treated in other employment standards jurisdictions. For example, in BC, the divisor to get the hourly base rate for salaried employees is the lower of either the normal or average hours of work. In BC, this would mean that Iris and John, in the examples above, would both be paid overtime at the same $80 per hour rate. However, some jurisdictions, such as Alberta and Quebec, don’t provide any guidance on how the base hourly rate is calculated for salaried employees.

Alan McEwen is a payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@cogeco.ca, (905) 401-4052 or visit www.alanrmcewen.com for more information. This article first appeared on Canadian HR Reporter and Canadian Payroll Reporter on March 5, 2013.

 

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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One Response to How to calculate overtime for salaried employees in Ontario

  1. Leon says:

    Thank you, it’s very helpful.

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