How to Ensure Overtime Pay Is Legal, Fair, and On-Budget

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Overtime is a legal requirement for employers to pay certain employees. In addition to making sure you pay your employees properly, companies should also take steps to align their overtime policies with employee needs while fitting overtime pay into their budgets.

Below, I walk through how to do just that while also sharing important details about overtime law. 

Legal Requirements for Overtime

The Fair Labor Standards Act (FLSA) tells you everything you need to know about overtime law at the federal level. In short, the law requires employers to pay employees overtime at 1.5 times their regular pay rate for hours they work past 40 in one workweek.

Some employees are exempt from the law. These workers are also known as exempt employees. The FLSA exempts a few types of professionals, including high earners, executives, and outside sales employees.

Although the parameters for who is exempt vary by the type of role, the FLSA generally exempts those earning at least $684 per week. Everyone who doesn’t fit into an exemption becomes non-exempt, meaning that FLSA overtime laws cover them.

In the eyes of the FLSA, a workweek includes seven consecutive days. A company’s workweek can run from and to any day as long as it includes seven consecutive days. So, a company can have a Thursday to Wednesday workweek, a Sunday to Saturday workweek, and so on. 

The hours an employee works through the company’s workweek are used to determine overtime. Therefore, an employee working 45 hours during their company’s workweek from Thursday to Wednesday would be entitled to five hours of overtime pay. 

That pay needs to be at least 1.5 times their regular rate of pay. If that employee typically makes $25 an hour, their overtime rate becomes $37.50 ($25 x 1.5). 

Abiding by all these rules set by the FLSA is necessary for payroll compliance. Otherwise, a company can be subject to hefty penalties, including criminal violations carrying up to $10,000 in fines. Plus, the company will also be on the hook for retroactive pay for all unpaid overtime, which can add up quickly, depending on how far back and for how many employees overtime went unpaid or mishandled.

To sum up, you need to pay overtime when a non-exempt employee works at least 40 hours during your workweek, and you need to pay for those hours at 1.5 times the employee’s regular pay. It’s non-negotiable.

State Overtime Pay Laws

The FLSA sets the standard for overtime pay laws, but states can also add their own spin on overtime laws.

Generally speaking, state overtime laws are in addition to federal law. In most cases, companies should use whichever law is more favorable for employees. This is often state law, but not always.

Let’s look at a few examples.

California has, perhaps, the strictest overtime laws, but also the most favorable laws for employees. The state not only abides by the FLSA’s law that employees working more than 40 hours a week get paid 1.5x their regular rate for extra hours past 40, but it also has additional overtime requirements for hours worked daily and consecutive days worked.

In California, employees get 1.5x pay for hours worked past the eighth hour in one day and double time for hours worked past the 12th hour in one day. If an employee works for seven days in a row in one workweek, they’re also eligible for 1.5x pay for the first eight hours worked that day and double time for hours worked past eight hours.

Connecticut also has laws surrounding employees working seven days consecutively, but only those working in restaurants or hotels. They’re eligible for 1.5x their regular rate of pay for any hours worked on their seventh consecutive work day. 

As another example, Alaska follows the typical 40-hour workweek stipulation for overtime but also enacts the policy of paying employees 1.5x their regular rate when they work past eight hours in one day. However, companies with four or fewer employees do not need to follow either requirement by the state. 

So, a California employer would want to follow California’s overtime laws for California employees because they’re more favorable to employees than the FLSA and still meet the requirements of the FLSA.

However, small business owners in Alaska may technically be able to get away with not paying overtime if they have four or fewer employees when just following state guidelines. Still, companies should follow FLSA’s overtime laws to cover their bases.

Business owners should look into their home state’s overtime pay laws or the laws of states in which their employees live to ensure they’re in compliance.

Most payroll software considers federal and state overtime laws and runs these calculations for you every pay period in addition to base pay for each employee. This way, you can get alerts when laws change and ensure your payroll calculations are correct. 

Policies Ensure Overtime Pay Is Fair

Imagine you have five employees. Two of them usually have the option of working overtime for at least two weeks each month. The other three rarely have that opportunity, occasionally only getting a few hours of overtime near the holidays.

Or, perhaps the overseeing manager of the overtime-prone employees doesn’t pay much attention to overtime, allowing their workers to rack up hours unnecessarily. Meanwhile, the manager of the other three is a lot more strict with overtime hours, rarely letting anyone get extra time. 

Not all employees want overtime every week, which can lead to burnout and dissatisfaction. However, some eligible employees would like the chance to get some extra hours—and subsequent overtime pay—here and there to boost their paychecks.

Of course, these hours should be necessary for the company. Otherwise, overtime can become a frivolous luxury that can lead to practices that are unfair to both the company and its employees. 

Companies need to have clear overtime policies to ensure fair distribution of overtime, avoid unnecessary hours, and offer transparency about overtime. Make sure the following points are thoroughly covered in your overtime policy to keep overtime fair:

  • How many overtime hours can each employee have? A company overtime policy should have clear parameters regarding overtime. Setting a cap on the number of overtime hours is the best way to establish these guidelines, allowing employees to plainly see how many overtime hours they’re allowed per week, month, quarter, or year.
  • How does your company approve overtime? Managers should have to approve overtime to avoid workers taking advantage of overtime hours. Detail your company’s approval process, such as monthly meetings or individual requests from workers.
  • In what cases is overtime allowed? Do you allow employees to work through their breaks or come in an extra day to help someone else with a project to earn overtime? Outline cases in which overtime is or isn’t allowed.
  • Does your company have mandatory overtime? Some companies can make overtime mandatory, although it should be used sparingly. If your company has mandatory overtime, make its scope clear in your policy. 
  • How does the company monitor productivity during regular and overtime hours? Do you use software or require regular monitoring or evaluations to determine employee productivity? If so, let employees know how productivity influences their allowed overtime hours. For example, employees regularly falling below their goals may become ineligible for overtime.

Strategies for Keeping Overtime On-Budget

Overtime should always be factored into a payroll budget. When overtime isn’t closely monitored, it can have damaging effects on that budget. This is especially true with small businesses with a modest payroll budget.

Even when overtime generates extra revenue, it’s usually not for several weeks or months before the company sees the revenue boost. The company still needs to foot the bill for overtime, even if they don’t have the additional revenue yet.

There are a few ways you can make overtime more manageable and reduce unnecessary overtime to keep your budget intact. 

Start by setting a cap for overtime. Make it a monthly or annual cap that limits how many overtime hours you can distribute between all employees. Alternatively, you could set a cap per employee per month, such as five hours of overtime per month, giving everyone a clear boundary.

Next, cross-train employees to perform necessary company functions. By doing this, you have some overlap in positions, so when downtime occurs for some employees, they can dive into other priority tasks. The more hands you have on deck to cover tasks, the easier it can be to avoid overtime to complete those tasks.

Now, think of longer-term strategies to keep overtime at a minimum. Hiring part-time seasonal workers or independent contractors can be an excellent way to cross tasks off the company’s to-do list while avoiding overtime. Also, use payroll software with scheduling features to monitor staffing levels and needs, which could help you adjust your workers’ schedules to better meet the business’s demands.

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