Overtime work, Its Remuneration, and Its Tax Implication
Updated: Jul 30, 2020
Overtime is defined as “time worked in addition to one’s normal working hours.[i]” The International Labour Organisation (the “ILO”), whose mandate is to promote rights at work, enhance social protection, and strengthen dialogue on work-related issues; by setting international labour standards, developing policies and devising programmes to promote decent work; has set out some principles governing overtime in its Convention No. 116[ii] which include the following:
All hours worked in excess of the normal hours should be deemed overtime, unless they are taken into account in fixing remuneration in accordance with custom.
Competent authority or body in each member country should set limits to the total number of hours of overtime which can be worked during a specified period, with the exception of cases of force majeure.
Pregnant women, nursing mothers, handicapped persons and young persons under 18 years of age should be given due consideration in arranging overtime.
Overtime work should be remunerated at a higher rate or rates than normal hours of work.
The rate or rates of remuneration for overtime should be determined by the competent authority or body in each country in accordance with ILO conventions.
Ghana is a member of the ILO and has ratified mostof its conventions.
In Ghana employees are required by law to work for not more than eight hours within a day. Employees are also entitled to resting period for forty-eight hours within a week as well as rest during public holidays. Circumstances may however arise where it is expedient for an employee to work for more than the legally required hours.
Where an employee works overtime, he/she shall be entitled to overtime pay. Exceptional situations may however occur where overtime work will not attract overtime pay; for instance in event that there is an accident threatening human lives or the very existence of the business entity within which the employee works.
2. Legal Implications of Overtime
The Labour Act, 2013 (Act 651) of Ghana (“the Labour Act”), provides that, where an employee works after the hours of work fixed by the rules of the employer within the period required by law, the additional hours done shall be regarded as overtime work. An employee must not be compelled to do overtime work unless the business entity requires overtime in order to be viable; or there is an emergency that requires an employee to engage in overtime work.
An employee may not be required to do overtime work unless the employer has fixed rates of pay for overtime work[iii]. An employee may however be required to work overtime without additional pay in certain exceptional circumstances including where there is the need to prevent or avoid an accident threatening human lives or the very existence of a business entity[iv].
An employee has a right to have reasonable limitation of working hours and period of holidays with pay as well as remuneration for public holidays[v]. The hours of work of an employee must be a maximum of eight hours a day or forty hours a week. However, a work establishment may prescribe hours of work different from eight hours a day subject to the following[vi]:
where shorter hours of work are fixed, the hours of work on the other days of the week may be proportionately longer than eight hours but shall not exceed nine hours a day or a total of forty hours a week;
where longer hours of work are fixed the average number of hours of work reckoned over a period of four weeks or less shall not exceed eight hours a day or forty hours a week; or
in the case of an undertaking the work of which is of a seasonal nature, where longer hours of work are fixed, the average number of hours of work over a period of one year shall not exceed eight hours a day.
The Minister of Employment may prescribe shorter hours of work for manual workers in jobs likely to be injurious to their health and it shall be deemed to be equivalent to work done on the basis of eight hours a day.
Furthermore, where the normal hours of work are continuous, an employee is entitled to at least thirty minutes break in the course of the work, but the break forms part of the normal hours of work. On the other hand, where the normal hours of work are in two parts, the break should not be of less than one hour duration and does not form part of the normal hours of work[vii].
3. Rates for Overtime Pay
The ILO Conventions No.1 and No.30[viii] provide that the rate of pay for overtime shall not be less than one and one-quarter times the regular rate. In accordance with this standard, overtime pay rate is generally fixed at premia of 50% above the regular hourly wage rate around the world.
In Ghana there is no statutory specified rate of pay for overtime. The fixing of overtime pay rate, in practice, is in accordance with Article 6 of ILO Convention No.1[ix] and Article 7(4) of ILO Convention No. 30[x]. Generally the specific pay rate for overtime is a policy of a business entity/the employer or where there is a unionised labour, it is fixed by an agreement between the union and the employer, which is spelt out in a collective bargaining agreement (“CBA”).It has become the standard practice in Ghana to set the rate of overtime pay rate at one and half of or a hundred and fifty percent (150%) of the hourly rate for overtime work on weekdays; and two times of or two hundred percent (200%) of the hourly rate for overtime work on weekends or rest day of an employee and public holidays. Below is a summary of a guide to the standard practice:
3.1 Proposed Overtime Pay
Overtime pay rate may be pegged as follows:
Monday to Friday – one and a half times the hourly rate.
Weekends/rest day and public holidays – two times/double the hourly rate.
3.2 Proposed Calculation for Overtime
Divide daily wage by eight (8) hours = Hourly Rate
Negotiate/set overtime rate at a minimum of 1.3 and maximum of 1.5 for weekdays = Overtime Rate
Negotiate/set overtime rate at minimum of 1.8 and maximum of 2 for weekends/rest day of employee = Overtime Rate
Multiply Hourly Rateby Overtime Ratefor each hour worked beyond normal/regular workings hours = Overtime Pay/Amount.
The rate(s) of pay for overtime must be fixed by the employer and must be made known to the employee before the employee undertakes overtime work. In exceptional circumstances however including an accident threatening human lives or the very existence of the undertaking, overtime work is not required to be paid.
4. Overtime by Pregnant Women
A pregnant woman worker or a mother of a child less than eight months old shall not be engaged by an employer to work overtime, unless it is with the express consent of that woman worker.
5. Penalties for non-payment of Overtime
There are no specific penalties under the Labour Act for not paying remuneration for overtime work. However, an employee can file a complaint with the National Labour Commission (NLC) if an employer fails to pay overtime and the NLC has powers to make the necessary orders to compel the employer to comply with the provisions of the Labour Act.
Further, the Labour Act empowers labour inspectors to carry out inspections (without notice) of any workplace to ensure that the provisions of the Labour Act relating to the conditions of work and the protection of workers at their workplaces including, hours of work, wages, safety, health and welfare of employees are being enforced in accordance with Law[xi].
The labour inspectors are required to report to the Labour Department or the National Labour Commission (NLC) any unfair labour practice or abuse that is not specifically provided for under the Labour Act.
6. Tax Implications of Payment of Overtime to Employees
An employer is obliged to withhold tax from any payment of overtime made to an employee and must pay same to the Ghana Revenue Authority (“GRA”).
The Income Tax Act, 2015 (Act 896) (“Income Tax Act” or “ITA”)provides that the income of an individual from an employment for a year of assessment (for the purposes of tax) is the gains and profits of that individual derived from employment for the year or a part of the year[xii]. The gains and profits from employment include but not limited to the following:
Salary, wages, leave pay, fees, commissions and gratuities; and
Overtime pay and bonuses.
This means an employee shall pay tax on any overtime pay received.
7. Treatment of Overtime for Tax Purposes
Where an employer makes payment for overtime work to a “qualifying junior employee” during a year of assessment, the employer shall withhold tax from the total of that payment at the rate of five percent (5%) if the amount paid does not exceed fifty percent (50%) of the basic salary of that employee for the month; or
Where the amount paid exceeds 50% of the basic salary of that employee for that month, the excess will be taxed at 10%.
Tax withheld from overtime pay of a qualifying junior employee is a final tax; and cannot be included in the determination of an employee’s tax liability and tax paid by withholding satisfies the tax liability of the employee with respect to the payment and may not be reduced by any tax credits allowed to the employee under the ITA.
Where an employee who is not a qualifying junior employee is paid overtime, the payment shall be included in calculating the income of that employee from the employment and taxed in accordance with the graduated income tax rate for individuals set out in the first schedule of the ITA (as amended).[xiii]
It is only “qualifying junior employees” who benefit from a form of “reduced tax or tax rebate” when they receive overtime pay.
An employee who is a senior staff/employee does not benefit from any “reduced tax or tax rebate” on overtime pay received.
For the purposes of the Income Tax Regulations 2016, L.I. 2244, an employee is a “qualifying junior employee” if that employee is:
a junior staff memberof an entity; and
the qualifying employment income of that employee from the employment for the year of assessment does not exceed eighteen thousand currency points (GHS18,000) per year or GHS1,500 per month.
Where an employer makes a payment for overtime work to a “qualifying junior employee” during a year of assessment, the employer shall;
withhold tax from the total of that payment at the rate of five percent (5%), if the amount paid does not exceed fifty percent (50%) of the basic salary of that employee for the month; or
withhold tax from the excess of that payment at the rate of ten percent (10%), if the amount paid exceeds fifty percent (50%) of the basic salary of the employee for that month.
(i) Derek is a junior staff member of ABC Ltd. his monthly basic salary is GHS1,000 he was paid an overtime for the month of May, 2019 at GHS450. Compute the tax to be withheld by ABC Ltd. for the month of May, 2019.
Total basic salary for May, 2019 GHS1,000.
Percentage of overtime of GHS450 paid is (GHS450/GHS1,000) x 100) = 45% of her basic salary.
Therefore since the overtime payment is less than 50% of her basic salary her overtime payment will be taxed at 5%.
Tax on overtime payment is therefore 5% of GHS450 = GHS22.5 (Tax amount to be withheld by Employer and pay to GRA).
NB: the overtime should be paid Derek less the tax. i.e. GHS450 – GHS22.5 = GHS427.5
(ii) Patricia is a junior staff member of ABC Ltd. her monthly basic salary is GHS1,000 she was paid an overtime for the month of May, 2019 at GHS650. Compute the tax to be withheld by Employer Ltd. for the month of May, 2019.
Total basic salary for May, 2019 GHS1,000.
Percentage of overtime of GHS650 paid is (GHS650/GHS1,000) x 100) = 65% of her basic salary.
Therefore since the overtime payment is more than 50% of her basic salary, overtime will be taxed as follows:
50% of the basic salary is (50% x GHS1,000) = GHS500.
The GHS500 should be taxed at 5%;
Therefore (5% x 500) = GHS25
The difference (650 – 500) = GHS150.
The remainder of GHS150 which is in excess of the 50% of her basic salary will be taxed at 10%. Therefore (10% x GHS150) = GHS15.
The total tax on overtime of GHS650 is the GHS25 + GHS15 = GHS40 (tax amount to be withheld by Employer Ltd. and paid to GRA).
NB: the overtime should be paid by the employer to the employee less the tax. i.e. GHS650 – GHS40 = GHS610.
Where an employee who is not a qualifying junior employee is paid overtime, the payment shall be included in calculating the income of that employee from the employment and taxed in accordance with the graduated income tax rate for individuals.[xv]
8. Consequence for not withholding from Payment of Overtime
An employer is deemed a withholding tax agent.[xvi] Where an employer, as a withholding agent fails to withhold tax on overtime pay, that employer shall be liable to pay the tax that should have been withheld in the same manner and at the same time as tax that is withheld[xvii]. That said, in event that an employer fails to withhold tax on paid overtime, it shall be liable to pay interest for failing to pay tax[xviii] as well as a penalty for failing to file tax return[xix] that reflects the payment made for the overtime.
By and large the law frowns on overtime work, the occurrence of certain situations however make it indispensable. Where an employee works overtime, the employer is required to pay him/her higher than the regular hourly rate. Employers have an obligation to withhold tax from overtime payment made to employees andremit same to the GRA. Employers are advised to comply with this obligation to avert any payment of interest and penalties.
[i]Concise Oxford English Dictionary, 2002, Oxford University Press Inc. New York.
[ii]R116 – Reduction of Hours of Work Recommendation, 1962 (No.116)
[iii]The Labour Act, section 35(2)
[iv]Ibid., section 38
[v]Ibid., section 10 (c)
[vi]Ibid., section 34
[vii]Ibid., section 40
[viii]Ghana has ratified both Conventions
[ix]C001 – Hours of Work (Industry) convention, 1919 (No. 1)
[x]C030 – Hours of Work (Commerce and Offices) Convention, 1930 (No.30)
[xi]Labour Act., section 122
[xii]Income Tax Act, section 4
[xiii]Income Tax Act Regulations, 2016 (L.I. 2244), Regulation 5(4)
[xiv]Ghana Revenue Authority Practice Note (PN) on Gains or Profits from Employment – PN number: DT/2016/001
[xv]Income Tax Act Regulations, 2016 (L.I. 2244), Regulation 5(4); see first schedule of Act 896 (as amended) for the graduated tax rates
[xvi]ITA, section 114
[xvii]Ibid., section 117 (3)
[xviii]Revenue Administration Act, 2016 (ACT 915), section 71
[xix]Ibid., Section 73