Some people believe that employees are no longer eligible for overtime if they get paid a salary. This isn’t always the case, and employees and employers need to know why.
The following four scenarios are where employers tend to get into trouble. Here’s when employers must pay salaried workers overtime and how to calculate it.
4 Times Salaried Employees Get Overtime
Payroll compliance relies on several factors, one of which is the proper management of overtime pay. According to the Fair Labor Standards Act (FLSA), salaried employees who fall into any one of these four scenarios may be eligible for overtime for hours worked past 40 in a week.
1. Employee Earnings Are Less Than $684 Per Week
One of the easiest ways to know that your salaried employee should be getting overtime is if they don’t meet the FLSA’s salary level test. This test requires a salaried employee to earn a salary of at least $684 per week, which works out to $35,568 per year, to be exempt from overtime.
Professionals who qualify for the FLSA’s computer employee exemption, which I’ll discuss in the next section, can be exempt with an hourly rate of at least $27.63.
If employees are exempt based on their profession but don’t meet the required salary thresholds, they must receive overtime pay. The FLSA requires overtime pay at a rate of 1.5 times the regular rate of pay for any hours worked past 40 in a workweek.
These threshold amounts became effective in January 2020 as a final Department of Labor (DOL) rule. However, the DOL revisits these amounts regularly and provides periodic updates to account for wage increases and inflation.
Is the earnings threshold going up in 2024?
It could, as there’s a new proposed rule in the works. If it passes, the rule would increase the salary threshold to $1,059 per week or $55,068 annually. It would also allow for an automatic increase of this threshold every three years.
2. Employee Gets a Salary, But Their Payments Sometimes Fluctuate
Imagine an employee gets paid a salary of $60,000 a year. That’s over the current and potential new salary threshold that an employee needs to be exempt from overtime pay.
However, the FLSA requires that the employee not just earn enough to be over the threshold, but also meet its standards for a salary basis. Here’s the FLSA’s definition of salary basis:
Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.
So, if an employee earns $60,000 a year, they’d make $1,153.84 per week. You can pay that weekly, bi-weekly, or according to whatever pay schedule you have. However the employee needs to continue making that predetermined amount for each pay period.
If you reduce their pay because they miss a week of work due to an illness or as a corrective measure for reduced work quality, that employee would no longer qualify for the FLSA’s exemption.
3. Employee Gets a Salary But Doesn’t Pass the Duties Test
In addition to meeting salary requirements, an exempt employee under the FLSA must also qualify for one of the following profession-related exemptions:
- Executive
- Administrative
- Professional
- Computer Employee
- Outside Sales
- Highly-compensated employees who don’t perform manual labor
For the executive exemption, a salaried employee needs to meet the weekly pay requirement of at least $684, have the primary duty of managing an enterprise or a department of an enterprise, manage at least two other employees, and have at least some say in the hiring or firing of employees.
To qualify for an administrative exemption, an employee has to meet the weekly pay requirement, have office or non-manual primary duties relevant to the company’s operations, and be allowed to make important decisions on various issues they’re responsible for handling.
The professional exemption covers both learned and creative professions. A learned profession requires advanced knowledge in a science or learning discipline, while a creative profession includes jobs requiring artistic and creative skills. Salaried employees covered by this exemption must also meet the FLSA’s weekly pay requirement.
Under the FLSA, an exempt computer employee is a salaried person who’s employed in a skilled computer discipline, like computer analysis or computer programming, who earns at least $684 per week or $27.63 per hour.
An outside sales representative can be exempt from overtime pay if they routinely perform their duties outside of the company’s place of business and their primary duty is to make sales.
Highly-compensated employees are those earning a salary of at least $107,432 per year—which must also equal a salary basis of at least $684 per week—who perform at least one duty of an exempt executive, administrative, or professional employee.
If a salaried employee meets the salary requirements but doesn’t meet even one other requirement for their position’s exemption, that employee is still eligible for overtime pay regardless of their status as a salaried employee.
4. Employee Meets Salary Requirements But Has a Non-Exempt Career or Performs Non-Exempt Duties
The types of professions I mentioned above are simplified versions of how the FLSA categorizes exempt and non-exempt workers. Things get a little more complex in reality.
In each of those categories, there are specific types of careers or duties that still don’t qualify someone as being exempt from overtime. So, let’s say someone falls into the administrative exemption and meets the FLSA’s salary requirements. However, if they don’t fit the FLSA’s more specific criteria for that exemption, they won’t qualify.
For example, insurance claims adjusters can sometimes fit into the administrative exemption, but not always. If an insurance claims adjuster holds that title but isn’t allowed to use their independent judgment to make important decisions within their wheelhouse, then they don’t meet all criteria for the administrative exemption.
There are other specifications for blue-collar workers, first responders, technicians, construction workers, financial services professionals, nurses, journalists, and highly compensated workers.
For instance, registered nurses paid on a salary may qualify for the learned profession exemption, but those paid on an hourly basis are eligible for overtime. And construction workers perform manual labor and, therefore, can’t be exempt from overtime, even if they’re paid on a salary basis.
Review the Wage and Hour Division Fact Sheets for information specific to your workers, and be sure to speak with an employment attorney for the most precise guidance about classifying your workers properly.
How to Calculate Overtime for Salaried Employees
Calculating overtime for hourly employees is relatively straightforward. Take their regular rate of pay and multiply it by 1.5 to get their overtime rate. Then, calculate the number of overtime hours they worked by that overtime rate to determine their overtime pay.
But how does calculating overtime for salaried employees work when they don’t have a regular rate of pay?
There are a few more steps involved, but they’re necessary to find the employee’s regular rate of pay, as this is what’s required to determine overtime. Here’s how to do it when an employee’s hours vary each week:
- Calculate the employee’s regular rate of pay by taking their salary for the pay period and dividing it by the number of hours they worked. Example: Joan worked 42 hours the first week and 44 hours the second week of a pay period and earned $2,000 according to her salary of $52,000 a year. $2,000 / 86 = $23.26.
- Calculate the employee’s overtime pay rate by taking the regular pay rate and multiplying it by 1.5: $23.26 x 1.5 = $34.89.
- Calculate the employee’s regular pay and overtime pay and add them together. Regular pay: $23.26 x 80 regular hours = $1860.80. Overtime pay: $34.89 x 6 overtime hours = $209.34. Total pay: $1860.80 + $209.32 = $2,070.14.
If a salaried employee has a set number of agreed-upon hours to work based on their contract with an employer, you’ll divide their salary by the total number of hours per year to get their rate of pay.
For example, someone with a salary covering 40 hours a week (2,080 a year) would have their salary divided by 2,080 to determine their rate of pay.
Now, depending on the state you’re in, you might have to calculate overtime a bit differently.
Some states don’t go by the typical overtime pay for hours worked past 40. For example, California requires employers to pay overtime when an employee works past eight hours in a single day.
Using the example above, you’d need to find out what days Joan worked past eight hours and calculate overtime that way rather than on a weekly basis.
For example, if she worked 11 hours on Monday and Wednesday, six hours on Tuesday and Thursday, and eight hours Friday, she’ll still work 42 hours for that week. However, she’s actually eligible for six hours of overtime based on Monday and Wednesday’s overtime hours, according to California law.
Reliable payroll software stays updated with all these overtime and payroll tax rules to ensure accurate calculations, regardless of the states you operate in.
Misclassifying Salaried Employees To Avoid Paying Overtime
You can’t afford to misclassify your salaried employees, whether purposefully or by accident. Unpaid overtime is illegal.
Not paying overtime correctly can lead to serious fines, like civil money penalties of up to $1,000 per violation and criminal prosecution with fines of up to $10,000 per violation. Plus, you’ll need to pay your employees back wages for unpaid overtime, which can be costly enough.
Employers must keep up with DOL rulemaking, state overtime laws, tax laws, etc., because they can—and often do—change year by year. Your employees who weren’t eligible for overtime in 2023 could possibly become non-exempt in 2024.
Review your compensation policies and employee pay at least once a year to keep everything aligned with current laws.
