Overtime premium the additional amount awarded for overtime hours for employees. This is the amount calculated on the basis of the hourly rate. The rules for the overtime premium vary depending on the country in which they are in force. Usually to receive an overtime premium we add 50% of the basic rate. For example, if a worker’s getting a rate of $20 per hour the overtime premium is$10 per every extra working hour. If worker works for 41 hours in a week, the salary will be $830 for this . ($800 for 40 hours of standard working hours plus \$30 for one hour of overtime)[1].

Employees are protected by a regulation that sets standard working hours and overtime. Otherwise, they would have to work more without any benefits[2]. The company should pay an overtime premium to compensate the employee for the disutility of ‘involuntary’ extra working time. The Fair Labor Standards Act (FLSA) in addition to setting a minimum wage, requires that employees who are insured be rewarded an overtime wage of at least one and one-half times in relation to the standard pay per hour of work, if their weekly working time exceeds 40 hours. FLSA was signed in 1938 in United States. At that time, the regulations were designed to discourage employers from using a long workweeks and, instead, to create new jobs. Until today, it is not known whether these provisions bring the expected effect - it remains a matter for discussion[3]. The incidence of overtime premium is largely dependent on institutional and societal standards. The distribution of wages and the amount of overtime premiums may affect both the supply and demand[4].

Key findings

Regulation regarding the overtime premium:

Pros[5]:

• Some employees may get higher rates per hour of work due to the shorter standard workweek.
• Protection of employees who would otherwise be required to work longer.
• Potential rise employment because of reduced working week (especially among women).
• Workers receive more time, which they can utilize to rest or perform duties related to their private life.
• Limiting overtime can bring benefits to employees in management positions because of reorganization of working time.

Cons[6]:

• Due to the reduction of overtime, the employment of skilled and unskilled employees may be reduced.
• Potential employees will not always be satisfactory of substitutes which overtime workers may get.
• Shortening the normal workweek increases competition for jobs for unemployed workers.
• Costs rises when the standard workweek is shortened. It can lead to employment reduction.

Footnotes

1. Robert A. Hart, Yue Ma., (2008), Wage-Hours Contracts, Overtime Working and Premium Pay,IZA Discussion Papers, No. 3797, p.6-8
2. Ronald L Oaxaca, (2014), The effect of overtime regulations on employment,IZA World of Labor
3. Trejo, Stephen J., (2001), Does the Statutory Overtime Premium Discourage Long Workweeks?,IZA Discussion Papers, No. 373, p.5-6
4. Anxo D., Karlsson M., (2019), Overtime work: A review of literature and initial empirical analysis, p.37
5. Ronald L. Oaxaca, (2014), The effect of overtime regulations on employment,IZA World of Labor
6. Ronald L. Oaxaca, (2014), The effect of overtime regulations on employment,IZA World of Labor

References

Author: Sabina Łach