Basic Guide to Employee Overtime Pay
Editor's note: This information was valid as of its original publication date (above). On Sept. 24, 2019, the Department of Labor adopted its Final Overtime Rule. Read the article
Overtime may be inevitable for startups preparing for their first big product launch. While everyone's working to meet deadlines, management shoulders the responsibility of making sure employees are fairly compensated in accordance with applicable laws. The primary source of federal legislation to be followed with regard to employee overtime pay is the Fair Labor Standards Act (FLSA). The FLSA stipulates who must be paid for extra hours and the pay rate calculation to be applied to those hours. Setting an overtime policy, classifying employees properly, and tracking hours worked are critical for small businesses to help ensure they are meeting applicable overtime pay requirements.
Are small businesses required to pay overtime?
Generally, businesses with $500,000 or more in annual gross receipts are covered by the FLSA, in addition to hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies. Yet, even businesses falling outside these coverage guidelines may need to pay employees overtime if their work regularly involves them in interstate commerce. The FLSA covers individual workers who are "engaged in commerce or in the production of goods for commerce." State and local laws may have varying coverage guidelines and requirements.
Which employees must be paid overtime?
The FLSA requires employers to classify employees as exempt or non-exempt from the minimum wage and/or overtime provisions of the FLSA. Non-exempt employees must be paid overtime at a rate of time and one-half their regular rate of pay for all hours worked over 40 in a workweek. Exempt employees must meet certain tests regarding their job duties and in most cases be paid on a salary basis at not less than $455 per week. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department of Labor’s regulations. The DOL provides fact sheets on the various exemptions, including executive, administrative, professional, computer and outside sales employees.
What goes into an employee overtime policy?
Many employers include their overtime policy in an employee handbook. The overtime policy should be based on applicable local, state, and federal laws and regulations which can vary. For example, according to the FLSA, overtime must be paid to a nonexempt employee who works more than 40 hours in the same workweek. In certain states, however, employers may also be required to pay certain employees overtime for hours worked over 8 in one workday.
Tracking time and overtime pay
Covered employers are responsible for maintaining the time and employment records that serve as the basis for determining regular and overtime pay. The FLSA allows businesses to designate their own record keeping process, such as the use of punched time cards, manual or computerized reporting. Managers should consider reviewing and signing off on employee time and attendance reports. Tracking hours worked, including overtime, may also be helpful for analytical and budgeting purposes. That way, the amount of annual overtime costs can be evaluated as part of overall company productivity and profitability. The amount of employee overtime pay may also provide support to management when staffing decisions arise.
Small businesses should strive to understand their responsibility for employee overtime and ensure they are in compliance with local, state, and federal laws and regulations. Online payroll and accounting systems have the capability to assist management by tracking, recording, and analyzing employee overtime pay.