Some weeks, there’s crucial work left over even after your full-time employees have put in their 40 hours. While you can ask your employees to complete extra work, it will cost you more than their usual hourly rate. We’ll explore overtime pay and what every small business owner should know to fulfill legal obligations and correctly compensate their employees.
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Employees who work more than 40 hours a week are entitled to a higher pay rate for the additional work. This is called overtime pay. Federal overtime laws require employers to pay certain employees who work more than 40 hours in a week at least time and a half for the extra time they put in. For example, an employee who makes $30 an hour would receive $45 for each hour of overtime they work. (Time and a half is the minimum amount you must pay for overtime work; you have the right to pay employees more than that if you choose.)
Overtime has been part of American workforce law since the U.S. Department of Labor’s Fair Labor Standards Act (FLSA) was passed in 1938. Though it initially ruled that overtime didn’t kick in until an employee had worked 44 hours a week, lawmakers amended the FLSA two years later to reflect the move to a 40-hour workweek, lowering the threshold for overtime pay.
These legislative changes came about after more than a century of workers’ rights activists and labor union groups calling for better working conditions. Workers in the 19th century regularly worked roughly 100 hours per week. It wasn’t until Henry Ford adopted five-day, 40-hour workweeks in his Ford Motor plants that the idea of “less work equals more productivity” took hold. However, the U.S. government had instituted eight-hour days for its employees as early as 1869.
To understand which employees are entitled to overtime pay, business owners must determine whether they’re categorized as exempt or nonexempt employees. The FLSA outlines how employers should classify employees; failure to correctly classify employees can result in costly penalties that can retroactively apply as far back as the employee’s hire date.
Laws regarding exempt versus nonexempt status vary slightly from state to state, so check your state’s specific requirements. However, there are some basic federal overtime rules to which you must adhere when classifying your employees.
According to the FLSA, an exempt employee can’t collect overtime if they are “paid on a salary basis at not less than $684 per week” and work as “bona fide executive, administrative, professional, and outside sales employees.” The Department of Labor also exempts “certain computer employees” from overtime pay regulations.
The duties that make an employee exempt include managing at least two other employees and having the authority to hire or fire employees. You can find the full list of exempt duties on the Department of Labor’s website.
Three basic tests can help you determine how to categorize your employees. An exempt employee will meet the requirements of all three tests, but you should still consult legal counsel to determine their applicability to your employee’s specific job role and compensation. None of these qualities alone guarantees exempt status.
According to the FLSA, overtime starts accruing the moment a nonexempt employee works more than 40 hours. It doesn’t matter if an employee works more than eight hours a day as long as they don’t exceed the 40-hour threshold for the entire week. However, some states also require daily overtime pay if an employee works more than eight hours in a 24-hour period.
Since the FLSA defines a workweek as “any fixed and regularly recurring period of 168 hours – seven consecutive 24-hour periods,” overtime can run as long as you need if you properly compensate employees for the additional time.
Under federal law, overtime compensation is at least 1.5 times the employee’s regular pay rate (time and a half). There’s no maximum amount a company can pay to compensate someone for their overtime work, so businesses sometimes offer double pay or higher for overtime – usually when the shift being considered for overtime is particularly undesirable.
Using the time-and-a-half rule of thumb, you’d calculate overtime pay by multiplying an employee’s hourly rate by 1.5 and then multiplying the result by the number of overtime hours they worked. You then add that total to the amount they make within a 40-hour workweek.
For example, if an employee who makes $15 an hour worked 45 hours in a week, this would be the equation:
The equation works regardless of how much overtime you offer your employees. Note that this equation applies to nonexempt employees only. The total pay for the week, including the additional payment for overtime, is subject to regular tax rates.
The right accounting software can facilitate the process of tracking and compensating overtime as well as other business expenses. Read our reviews of the best accounting software to find the right solution for your business.
Overtime gets confusing when it comes to salaried versus hourly employees. When most people talk about overtime, it’s typically in the context of a 40-hour workweek paid on an hourly basis. However, salaried workers aren’t paid by the hour.
>>Read More: Salary to Hourly Calculator
While it may be safe to assume salaried workers can’t collect overtime, Robert L. Föehl, business law and ethics professor at Ohio University, said that couldn’t be further from the truth.
“It is absolutely critical for employers to understand that paying a salary for a job does not automatically exempt that job from the overtime requirements of the FLSA,” he said. “Many employers do not intuitively understand this.”
According to Föehl, if you have salaried employees, you must determine whether they match the exemptions outlined in the FLSA, meaning “the minimum salary must be met and the required duties must be performed.”
As a small business owner, you don’t want to run afoul of the FLSA’s overtime rules. Failing to pay overtime opens you up to lawsuits from current and former employees, and you could also be liable for the unpaid overtime.
The Department of Labor’s Wage and Hour Division investigates companies that violate overtime laws. Investigators recommend changes to ensure such violations don’t happen again. The employer might have to issue retro pay to pay any back wages owed to the affected employees. The employer may also have to pay a “liquidated damages” penalty, often calculated as the amount of back wages owed.
As a result, failure to comply with the FLSA could cost 200% more than just paying the overtime in the first place.
Violations that appear to be committed on purpose could also result in fines of up to $10,000 and the threat of imprisonment if the business owner is a repeat offender.
Yes, an employer can require employees to work overtime. “As long as [the employer] pays the overtime rate of 1.5 times [the worker’s] regular wage, it’s legal,” said Grant Aldrich, founder and CEO of OnlineDegree.com. “The 40 hours for full-time workers set by the FLSA is a minimum, and the ‘maximum’ has no limit. As long as it doesn’t endanger the employee by putting their health at risk, the employer can require it.”
Though most of the conversation on overtime deals with a person’s salary or regular hourly rate, Föehl points out that you should factor in other forms of compensation, such as bonuses, when calculating an employee’s overtime pay. “If an employee gets a paid bonus based on work performance, that bonus must be included.”
Under the FLSA, any travel away from home for work purposes during an employee’s workday is considered work time. An important distinction is that the travel from an employee’s home to the train station or airport is not considered work time, as it’s not so different from a regular commute. When sending an employee to a remote location for work, you must count the hours they traveled as part of their 40-hour workweek.
Jocelyn Pollack contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.