Overtime Pay and What It Means for Your Workers

Learn what Overtime Pay is and how you should dole it out to your employees.

• With limited exceptions, any labour performed by an employee in excess of 40 hours per week is subject to overtime compensation.
• Beginning in 2020, the U.S. Department of Labor adopted new regulations that increased the exemption income level to $684 per week.
• To determine the overtime compensation for your employees, utilize a straightforward calculation.
• The readers of this page are small business owners, HR experts, and payroll specialists who want additional details about overtime compensation and the circumstances under which workers are entitled to it.

Even after your full-time staff have put in their 40 hours in certain weeks, there may still be important work that has to be done. You can request more work from your staff, but it will cost you more than their standard hourly pay. We’ll talk about overtime compensation and what every small company owner needs to know to comply with the law and fairly reward their staff.

What is overtime pay?

A greater compensation rate is due to employees who put in more than 40 hours a week of work. It is known as overtime pay. Federal overtime regulations mandate that some employees who clock in more than 40 hours per week be compensated by their employers at a rate of at least time and a half. For instance, a worker earning $30 per hour would be compensated $45 for each hour of overtime. (You must pay employees at least time and a half for overtime labour, but you are free to pay them more if you so want.)

Since the Fair Labor Standards Act (FLSA), which is administered by the U.S. Department of Labor, was enacted in 1938, overtime has been covered under American labour law. Even while it initially held that overtime wasn’t paid until an employee had put in 44 hours a week, Congress changed the FLSA two years later to reflect the switch to a 40-hour workweek, reducing the bar for overtime compensation.

After more than a century of demands for improved working conditions from labour union groups and workers’ rights campaigners, these legal amendments were finally implemented. In the 19th century, workers often put in around 100 hours every week. Less labour = higher production wasn’t widely accepted until Henry Ford implemented five-day, 40-hour workweeks in his Ford Motor factories. However, the American government started requiring its employees to work eight-hour days as early as 1869.

Which employees are entitled to overtime pay?

Business owners must establish whether employees fall under the exempt or nonexempt category in order to understand which workers are eligible for overtime compensation. The FLSA specifies how companies must categories workers; failure to do so can result in expensive fines that may apply retrospectively as far back as the employee’s date of hiring.

Check your state’s unique laws for exempt vs nonexempt status since they differ widely from state to state. However, while categorizing your personnel, you must abide by a few fundamental federal overtime regulations.

Exempt employees: Exempt personnel are not entitled to overtime compensation. Instead of receiving an hourly rate, they are typically paid a salary. Instead, then receiving pay depending on the total number of hours worked, they receive a set income. Salary-based compensation alone, however, does not determine exempt status.

Nonexempt employees: On the basis of the number of hours they worked during a certain pay period, they are normally paid by the hour. Every time they work more than 40 hours a week, they are entitled to overtime compensation.

How do you determine an exempt employee?

The FLSA states that an employee who is exempt from overtime pay and who is employed as “bona fide executive, administrative, professional, and outside sales personnel” cannot be paid less than $684 per week on a salary basis. Additionally, “some computer employees” are excluded from the overtime compensation laws according to the Department of Labor.

Managing at least two other workers and having the power to recruit and fire personnel are among the responsibilities that qualify an employee for exemption. On the website of the Department of Labor, you may discover the whole list of exempt responsibilities.

You may determine how to categories your staff using three straightforward tests. Although an exempt employee will pass all three standards, you should still seek legal advice to ascertain if they apply to the particular work position and salary of your employee. None of these characteristics by itself may ensure exemption.

Salary level test: An employee’s annual salary exceeds $35,568 ($684 per week).

Salary basis test: Regardless of the number of hours actually worked, an employee is guaranteed a minimum wage.

Duties test:  such as regularly supervising two or more employees, performing intellectual work that requires the use of discretion and judgement and specialized education, and performing significant support operations that call for the use of discretion and judgement, are required of an employee who satisfies the exemption requirements of tests one and two.

When does overtime start for nonexempt employees?

The FLSA states that once a nonexempt worker clocks in for more than 40 hours, overtime compensation begins to accrue. As long as an employee doesn’t clock more than eight hours each day for the whole of the workweek, it doesn’t matter if they work longer than that. However, if a person works more than eight hours in a day, several jurisdictions additionally mandate daily overtime compensation.

If you adequately compensate employees for the extra time, overtime can go as long as you need it to since the FLSA defines a workweek as “any fixed and regularly recurring period of 168 hours – seven consecutive 24-hour periods.”

How do you calculate overtime pay?

According to federal law, overtime pay must be at least 1.5 times the employee’s hourly wage (time and a half). Businesses may provide double pay or higher for overtime since there is no cap on the amount, they can pay employees in compensation. This happens most often when the shift that is being evaluated for overtime is extremely unfavourable.

According to the time-and-a-half rule of thumb, you would multiply an employee’s hourly rate by 1.5 and then multiply the result by the number of overtime hours they worked to determine their overtime compensation. Then you double that sum by how much they earn in a 40-hour workweek.

For instance, the calculation would be as follows if a worker who earns $15 per hour worked 45 hours per week:

Regular pay rate: 40 hours x $15 = $600

Overtime pays: $15 x 1.5 x 5 hours = $125

Total pay for the week: $600 + $125 = $725

No matter how much overtime you provide your staff, the calculation remains valid. Keep in mind that this formula only applies to nonexempt workers. Regular tax rates apply to the whole week’s compensation, including the extra money received for working overtime.

Do salaried workers ever get overtime pay?

When it comes to salaried vs hourly staff, overtime might be difficult to understand. Most people usually discuss overtime in terms of a 40-hour workweek that is compensated hourly. Salary employees aren’t compensated hourly, though.

Although it may be reasonable to believe that salaried employees cannot be paid overtime, Robert L. Foehn, an Ohio University corporate law and ethics expert, said that couldn’t be further from the reality.

Paying a wage for a position does not immediately exclude that work from the FLSA’s overtime rules, he said, adding that this is “very crucial for companies to understand. Many employers lack a basic understanding of this.

If you have paid staff, you must assess if they qualify for the FLSA exemptions, which means “the minimum wage must be fulfilled and the required responsibilities must be done,” according to Föehl.

What are the penalties for failing to pay overtime?

You don’t want to violate the overtime regulations of the FLSA as a small business owner. If you don’t pay overtime, you risk being sued by current and past workers as well as being held financially responsible for the unpaid overtime.

Companies that break overtime regulations are subject to investigations by the Department of Labor’s Wage and Hour Division. Investigators suggest modifications to make sure that similar infractions don’t occur again. To pay any back wages owing to the impacted employees, the business could have to offer retroactive compensation. A “liquidated damages” fine that is frequently equal to the sum of unpaid wages may also be imposed on the employer.

Because of this, breaking the FLSA might result in costs 200% more than simply paying the overtime.

If a company owner repeatedly violates the law, they risk jail as well as fines of up to $10,000 for violations that appear to be intentional.

Frequently asked questions about overtime pay

Can an employer require an employee to work overtime?

Yes, an employer is allowed to demand that workers put in extra time. According to Grant Aldrich, founder and CEO of OnlineDegree.com, “as long as [the company] pays the overtime rate of 1.5 times [the worker’s] usual compensation, it’s lawful.” “The FLSA’s requirement of 40 hours per week for full-time employees is a minimum; there is no cap on the ‘maximum. The employer may require it as long as doing so won’t put the employee’s health in danger.

How do bonuses and commissions affect overtime rules?

Foehn makes the point that you should include other sources of remuneration, like as bonuses, when determining an employee’s overtime pay, even if the majority of the discussion on overtime is around a person’s income or normal hourly rate. “A bonus that an employee receives based on their success at work must be included.”

How does travel time factor into overtime?

Any time spent away from home for job-related purposes during an employee’s workday is regarded as work time under the FLSA. The fact that an employee’s trip from home to the train station or airport is not counted as work time since it is so similar to a typical commute is a crucial distinction. You must include the time spent travelling when sending an employee to a distant location for work in the 40-hour weekly calculation.