How to Calculate Hours Worked for Payroll

Working out exactly how much to pay your hourly employees can be tricky; first you'll need to convert their clock in-and-out times into actual usable data, and figure out their hours worked and overtime.

This can get more complicated when you need to account for unpaid breaks and holiday hours, or if your payroll software requires time to be entered in certain intervals.

This guide provides a step-by-step guide on how to work out your employee's hours worked for payroll, but if you'd like to save the manual effort, cloud-based time tracking software can do this legwork for you.

Calculating actual hours worked

To work out your employee's hours worked, you'll need their exact clock in and out times, as recorded on their timesheet.

If you're using an old school paper timesheet or punch card, you'll need to manually work out the hours worked for each day.

If you're using a more automated time tracking solution, you should be able to pull this data relatively easily from the system.

When working out your employee's hours worked, you might find there are some odd fractions of hours - for example, if an employee worked 8 hours and 11 minutes one day, your payroll software might struggle to account for the unusual number of minutes. In this case, you might want to introduce rounding rules.

Generally, rounding rules are used to round time to more easily managed intervals - often 15 minutes. To make things fair, most businesses would opt to round times equally both ways. For example if an employee clocks in between 8:01-8:07, their time is rounded backwards to the nearest 15 minutes, and any time from 8:07 is rounded forward to 8:15.

By applying a fair rounding policy across the board, your employees aren't at a disadvantage, and you're left with neatly rounded times to run payroll with.

In the example above, applying the rounding policy to the nearest 15 minutes changes this employees hours worked for the week from 41 HR 12 MIN, to 41 HR 15 MIN - a negligible change in terms of time worked, but a much easier value to deal with when it comes to converting to decimals later on.

Deducting breaks from hours worked

In the UK, your employees are legally entitled to an uninterrupted 20 minute rest break when they have worked greater than 6 hours.

This break does not have to be paid, so you may need to deduct this time from your employee's hours worked before running payroll.

Many time clock systems can automatically deduct set breaks for you, depending on your employee's hours worked. If you're doing this manually though, you'll just need to take their actual hours worked (as we calculated above) and deduct your unpaid breaks from this total.

In the example above, the employee would qualify for a break every day. Deducting a 30 minute lunch break for each of the 5 work days equates to 150 minutes, or 2 hours 30 minutes.

This brings our employee's hours worked down to 38 HR 45 MIN (41 HR 15 MIN - 2 HR 30 MIN = 38 HR 45 MIN).

Working out overtime

Many businesses offer an overtime rate for any hours employees work above their contracted amount each day or week.

To work their overtime due, you'll need to look at both the employee's timesheet and their actual hours worked.

If our employee is contracted to work 8 hours a day (with a 30 minute lunch break), we'd only pay overtime where their actual hours before breaks totalled more than 8 HR 30 MIN.

On Tuesday we can see they worked 9 HR 15 MIN - which means they're due 45 minutes of overtime pay (9 HR 15 MIN - 8 HR 30 MIN = 45 MIN).

So overall for this week, they are due 38 hours of regular pay, and 45 minutes of overtime pay.

When overtime is paid at multiple rates which depend on the time of day or day of the week, it can be much more complicated to work out, but is very common in businesses where employees work long shifts. Automated systems are much better at handling such complex situations, as they are prone to human error when worked out manually.

Converting to decimal format for payroll

Now we have your employees hours worked minus breaks, and have their overtime amount too, we're almost ready to run payroll.

The final step is to convert their hours into a decimal equivalent. This is a necessary step, before we can multiply their time worked by their hourly rate in order to calculate their pay due.

To convert the HRS/MINS value into decimal, you'll need to divide the 'minutes' by 60 and then add on the hours. Or, you can use our handy calculator to do this for you.

Our employee is due 38 hours of regular pay, and 0.75 hours of overtime pay - values which can be easily entered into your payroll software of choice.

How to automate payroll

As you can see from the steps above, manually figuring out your employee's decimal hours in order to calculate their pay is incredibly time consuming - and this is multiplied for your whole team.

If you'd like to save time (and money), try a 14 day free trial of TimeKeeper. We'll automatically deduct breaks according to your rules, apply fair rounding that fits your own policy, and calculate their overtime at multiple rates too. Once you're ready to run payroll, reports can be exported in a few clicks and imported into your payroll software - without you needing to do a single manual calculation.