Unpaid overtime is illegal. There’s no way around it.
Companies that break overtime laws pay huge sums of cash in unpaid overtime benefits and civil or criminal penalties. Mistakes can happen when calculating overtime, but when unpaid overtime becomes a regular occurrence with a company, that company can—and should—face expensive lawsuits. Employees deserve to get paid fairly for the time they work, plain and simple.
Continue reading this guide to learn how companies make the mistake of not paying overtime and what they can do to resolve the problem before they become the target of a lawsuit.
Unpaid Overtime Example: What Not To Do
Under the Fair Labor Standards Act (FLSA), employees are entitled to at least 1.5x their regular pay rate for any hours worked past 40 during a workweek.
Companies can determine how their workweeks run so long as they include seven full days. For instance, Wednesday to Tuesday is considered a full workweek through the FLSA’s lens, and an employee working 45 hours through that workweek gets five hours of overtime paid at 1.5x their regular rate.
The FLSA exempts some people from the law if they fit specific criteria. Generally, exempt workers are those in executive and administrative roles earning at least $684 per week, although there are a few other types of professionals who may be exempt.
Exempt workers do not need to get paid overtime, but employers can still choose to pay overtime to those workers if they’d like.
Not paying overtime to non-exempt workers, however, goes against the law.
As an example, a home healthcare agency in Philadelphia, Pennsylvania, was ordered to pay $1.6 million in back wages and damages for skirting its overtime responsibilities.
In fact, the agency made several mistakes leading to unpaid overtime for nearly 300 workers, including not paying the workers for travel time between clients’ homes and not combining the hours aides worked for all their clients. The agency also paid their workers their regular rates, regardless of how many hours they worked.
Because the employer chose to make these moves, it was found to have wilfully neglected their responsibilities regarding overtime. Therefore, the agency was also ordered to pay another $56,218 in civil penalties.
This surely isn’t a fun spot to be in, which is why companies need to know, understand, and follow the law.
Common Mistakes That Lead To Unpaid Overtime
Thankfully, the example above isn’t super common. In most cases, companies at least try to pay their employees correctly.
However, mistakes still happen, especially when employers don’t do their due diligence to ensure that they comply with every aspect of overtime law.
Here are the most common mistakes leading to unpaid overtime.
1. Misclassifying Workers
I mentioned that non-exempt workers are entitled to overtime while exempt workers aren’t, although employers can still opt to pay exempt workers overtime if they’d like.
Misclassifying workers as exempt when they’re actually non-exempt is one of the worst mistakes you can make. Fortunately, it’s also one of the easiest to avoid as long as you know how the law classifies each type of worker.
The FLSA breaks it down simply in Fact Sheet #17a. It outlines sections for all types of potentially exempt workers and the pay and work criteria they need to meet to truly be exempt from overtime.
For example, executives, administrative employees, and professionals must earn at least $684 per week and meet specific job-related criteria to be exempt. Meanwhile, an outside sales representative can be exempt if their primary duty is to make sales and they work away from the place of business.
Now, if you have an employee who doesn’t meet one of the exempt requirements for their position, they are considered non-exempt under the FLSA and, therefore, qualify for overtime.
2. Averaging Hours Between Workweeks for One Pay Period
The FLSA requires employers to determine overtime based on each full workweek. This is true even if you pay your employees biweekly.
So, if you believe that you can total an employee’s hours for the two weeks and average them to determine overtime, you’re wrong.
For example, if an employee worked 42 hours for the first week of the pay period but only 38 hours for the second week, you can’t say that because they worked an average of 40 hours each week, they don’t get overtime. This employee is entitled to two hours of overtime for the week they worked 42 hours.
No matter what pay period you use, you still need to consider an employee’s entire number of hours worked each week when determining overtime pay.
3. Using Compensatory Time Off in Place of Overtime
Compensatory time is given by some employers as a form of paid time off. Although comp time is allowed for some employers, private sector companies cannot legally use compensatory time in lieu of paying overtime. It’s all outlined in section 7(o) of the FLSA.
In fact, it’s illegal to use any kind of PTO in place of overtime.
To keep things as simple as possible and avoid getting yourself into hot water, don’t use anything to replace actual overtime. If an employee earns overtime, pay them overtime.
4. Not Adding Travel Time Into Overtime Calculations
Not surprisingly, the FLSA considers travel time for work during normal work hours as compensable time. If an employee travels one hour each way to another office because he’s required to do so during his workday, then those two hours need to be included in his pay.
When it comes to overtime pay, those travel hours count. So, if the employee’s two hours of travel push him past 40 hours for the week, those two hours need to be paid as overtime.
Remember the lawsuit involving the home healthcare agency I mentioned earlier? One of the big mistakes the agency made was not paying its employees for their travel time between clients’ homes. With those travel hours added in, the employees likely could have had enough hours to move into overtime territory.
5. Disorganized Recordkeeping
If you started your company with just one or two employees, you may have tracked everything manually. That could work in the very beginning, but as soon as you can afford to switch to payroll software, do it.
Disorganized recordkeeping is a key problem in companies that are on the hook for not paying employees properly. If your records aren’t regularly updated and you don’t track time reliably, then there’s no way of knowing whether you’re including the right number of hours for every employee.
Update your employee records at least once a year, which will help you classify your employees correctly. Then, check employee hours every pay period. Your payroll software can help you do this by alerting you when it detects potential inaccuracies.
6. Not Paying Attention to State Laws
Some states have overtime laws that differ from FLSA laws. If you operate a business in one of those states, you’ll need to make sure you abide by state laws.
For example, a few states, like California and Alaska, have daily overtime laws, meaning that employees working a certain number of hours per day can get paid overtime for additional hours. In Alaska, that’s eight hours in one day, and in California, employees get paid 1.5x pay for hours worked past eight in a day and double time for hours worked past 12.
Review your state’s laws regarding overtime annually, as they do change from time to time.
The U.S. Department of Labor lists all state minimum wage and overtime laws as a helpful guide to bookmark.
What To Do If You Discover Unpaid Overtime
Companies with routine auditing processes can sometimes uncover payroll mistakes; it happens, and that’s why audits exist. In other cases, an employee might notice unpaid overtime and approach the company with their concerns.
Regardless of what leads you to find an overtime mistake, you need to work quickly to correct it. That means paying retroactive pay as soon as possible. Also, let employees know exactly what issue caused the problem and the amount they were missing and are now being paid as a corrective measure.
You should also be able to outline a clear plan for employees as to how the company will correct the problem to reduce the risk of it happening again. Document everything you’ve given to employees, including their retroactive paychecks and communication regarding the mistake.
Keep an open-door policy with your employees, allowing them to speak with a company representative, like the HR manager, to voice their concerns or ask questions. Employees should also freely have information about how to file a complaint.
By acknowledging the source of the problem and keeping the lines of communication open with your employees, you could avoid costly and lengthy lawsuits. But the onus is on the company to take the necessary steps to prevent similar problems in the future.
