Which employees in your organization are entitled to overtime protections? It's a critical question for employers to answer, because failure to extend overtime pay to all eligible workers could land a business in hot water quickly.
Understanding which employees in your organization are entitled to overtime protections is a key requirement under federal law. Failure to extend overtime pay to all eligible workers could result in lawsuits, fines, and possibly even criminal penalties for repeated and willful violations.
Further complicating the overtime picture, however, is a series of proposed rule changes that have been raised, scrapped and then raised again. In 2016, the rules governing overtime protections seemed like they were about to change, but the rule change was scrapped at the eleventh hour. Now the Trump Administration has proposed a rule change that would change the rule again.
Here's a look at current overtime regulations, the consequences of noncompliance and what we know about the potential rule change on the horizon.
Current overtime regulations
Overtime laws are explained in the Fair Labor Standards Act (FLSA), which is administered by the U.S. Department of Labor (DOL). The DOL is responsible for interpreting the law and setting a precise set of rules that businesses are required to follow. These rules establish when employers are required to pay overtime to employees, the rate at which workers earn overtime pay and which types of employees are exempt from overtime protections. [Interested in time and attendance software to make sure you're compliant with the law? Check out our best picks.]
As the rules stand today, any employee who is not considered exempt under the law (more on exemptions below) must be paid overtime at a rate of 1.5 times their regular pay for every hour worked beyond 40 hours in one workweek. The U.S. DOL defines a workweek as any "fixed and regularly recurring period of 168 hours," which basically means seven full, consecutive days.
"Employers with employees earning less than the overtime threshold need to keep accurate time and attendance records. This is especially important for employers with remote employees who work from home," said Sally Baraka, senior vice president and general counsel for Paycor. "Other employers may choose to increase the compensation of its employees who are earning salaries close to the threshold. While there is some time before the rule takes effect, it's important that employers get out ahead of this issue, and review their employee classifications and wages to determine impact."
There is no limit to how many overtime hours an employee can work so long as they are compensated appropriately. Any time a nonexempt employee works beyond that 40-hour maximum, he or she must be paid at the overtime rate of 1.5 times, or the employer is in violation of the FLSA.
There are employee exemptions to this rule, however. If an employee falls into one of the below classifications, employers are not required to extend overtime pay:
- Executive: Executive employees are defined as those who make a salary of no less than $455 per week and whose primary duties include managing the company or a recognized department or subdivision of the company. Executive employees regularly direct the work of at least two full-time employees and maintain the authority to hire or fire other employees, or at least influence the process.
- Administrative: Administrative employees are defined as those compensated on a salary or fee basis of $455 per week or more. Their primary duties must be the performance of office or nonmanual work related to the management of general business operations of the employer or clients. They must also exercise discretion and independent judgment in significant matters.
- Professional: Professional employees are defined as those compensated on a salary or fee basis at a rate no less than $455 per week and primarily focused on the performance of work requiring advanced knowledge, intellectual in character, and requiring the consistent exercise of discretion and judgment.
- Computer-related: Computer employees are those compensated either on a salary or fee basis at a rate no less than $455 per week or, if compensated on an hourly basis, no less than $27.63 an hour. Their primary duties must include the application of systems analysis techniques and procedures, or the design and development of computer systems or programs.
- Outside sales: An employee meets the outside sales exemption if their primary duty is making sales, obtaining orders or contracts for services. They must regularly work outside the employer's primary workplace.
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There are two major consequences for employers that violate overtime laws. The first is being subject to employee lawsuits, which can quickly become expensive and generate negative publicity. For FLSA violations, employers are generally required to provide back pay to affected employees as well as liquidated damages equal to back pay owed. That immediately doubles the cost of complying upfront, without taking into consideration any legal fees employers would be required to cover.
The government could also act against noncompliant employers. The U.S. DOL's Wage and Hour Division can levy fines of up to $10,000 for willful FLSA violations the agency uncovers. If it finds employers repeatedly, willfully violated the law, penalties could involve imprisonment. In other words, it pays to comply with the overtime laws the first time.
Overtime rules are in flux
In 2016, the Obama administration's DOL appeared ready to change the rules governing employee exemptions. These changes would have tightened the definitions of each classification and raised the pay threshold to $913 per week, or a salary of $47,476. That change was expected to extend overtime protection to 4.2 million additional workers compared with the current regulations. Many businesses adjusted their policies in preparation for the change, including shifting salaried employees to an hourly wage, but the rule change was ultimately scrapped after the Trump administration took power.
Now, the Trump Administration is working on an overtime rule change that, if approved, would set the income cutoff at $679 per week starting in 2020. That would extend overtime protections to about one million more workers but leave the status of workers making more than $679 per week unchanged. The proposed rule change would not extend to first responders, nurses and construction workers, however.
"The proposed rule change is the first of its kind since 2004 and will increase the salary threshold for overtime compensation from $23,660 annually to $35,308 annually," Baraka said.
In addition to rule changes, employers should be aware of how state laws affect their policies. The federal overtime protection rules are just a minimum, and some states go above and beyond. Becoming acquainted with state law is as critical as federal law, and failure to do so could result in penalties assessed at the state level even if you're compliant with federal law.