Overtime work is common in most industries, and most salaried employees exceed their stipulated schedule of eight hours a day or 40 per week at least some of the time.
If an employee works just an hour or two overtime each week, it can add a significant amount of overtime over the course of a year. And companies need to compensate employees for the extra hours they put in, according to applicable labor laws.
But how does overtime pay work? What are the eligibility criteria for overtime pay? What are the consequences of non-compliance? And how much should overtime compensation be?
This guide answers all these questions about the overtime pay, and provides some best practices related to paying overtime that you can adopt for your organization.
What Is Overtime Pay?
Overtime pay is a form of compensation that qualifying employees must receive for working beyond 40 hours per week. In most cases, overtime is paid at 1.5 times the employee’s usual hourly wage. However, there are exceptions to this rule.
The U.S. Department of Labor’s Fair Labor Standards Act paved the way for the introduction of overtime law in 1938. The threshold limit was 44 hours per week initially before overtime would kick in. However, that was lowered to 40 hours two years later.
Overtime pay regulations vary from country to country and even within countries themselves. For example, in the United States, federal law states that employers must pay non-exempt employees time-and-a-half for working more than 40 hours per week. However, some states have stricter regulations regarding overtime pay.
In most cases, employers must pay non-exempt employees overtime when they work more than 40 hours per week, 8 hours per day, or whatever their regular workday is. There are some exceptions to this rule, however. For example, if an employee volunteers to work extra hours, those hours will not count as overtime.
Who Is Entitled to Overtime Pay?
Not every employer needs to pay overtime. Whether or not you’re required to pay it depends on the business you conduct and the employment opportunities you provide.
You can check the federal Fair Labor Standards Act to confirm your overtime obligations. Other relevant federal and state wage laws applicable to your jurisdiction also determine whether overtime must be paid.
Overtime Pay: Eligibility and Exemption
Not every employee is eligible for overtime compensation. Various factors determine an employee’s eligibility, such as the industry they work in and the type of work they perform.
The FLSA categorizes employees as either ‘exempt’ or ‘non-exempt’ from overtime pay:
- Non-exempt employees must be paid for overtime they work. These employees perform what FLSA considers to be repetitive work, like manual labour or customer service, and they typically receive an hourly wage, though that is not a requirement.
- Exempt employees don’t qualify for overtime pay. These employees are typically white-collar professionals, administrators, or managers, and must receive a minimum salary of USD 684 per week.
Note that contractors are ineligible for overtime since they are paid for completed tasks, and workers in industries such as rail, air, and farming also do not qualify for overtime pay.
When Is Overtime Required?
According to the Fair Labor Standards Act guidelines, you need to pay overtime as soon as a non-exempt employee’s working hours exceed 40 hours per week. It doesn’t matter if the employee works more than eight hours a day. If the weekly threshold limit crosses 40 hours, overtime applies. However, states like Alaska, California, and Nevada require daily overtime payments if an employee works more than eight hours.
What Hours Count as Overtime?
The Fair Labor Standards Act outlines the overtime pay considerations that employers need to follow. It states that overtime is the additional hours that a non-exempt employee works in a standard 40-hour week of seven consecutive days.
If a non-exempt employee works for 45 hours during the week starting on Monday and ending on Sunday, this amounts to five hours of overtime, which the employer will have to compensate for. However, the overtime threshold also depends on employee roles and state regulations. It is thus best to check the local laws applicable to your business.
Employers sometimes refer to hours clocked by their employees outside of their regular schedule as overtime. But, in this scenario, the number of working hours might not exceed 40 in a week. If an employee does not actually work for more than the 40 hours stipulated in the Fair Labor Standards Act, there is no reason for an employer to compensate for unscheduled hours.
However, due to local laws, employers might need to pay overtime for hours worked beyond 8 in a day. Similarly, as a goodwill gesture, some employers may compensate their employees for additional hours even if they’re not required to do so.
A Brief History of Overtime Law
The concept of overtime was introduced in 1938 in the Fair Labor Standards Act. The situation of an average American worker was quite different before that. Employees often worked anywhere between 10 and 16 hours a day. Sub-par living conditions meant that employees had to work for long hours to make ends meet.
The hardship caused by the Great Depression in 1929 was another catalyst for streamlining employees’ working hours. To help alleviate this hardship, US President Franklin D. Roosevelt implemented his campaign promise of reforming the labor laws, and introduced the Fair Labor Standards Act, which established various reforms like minimum wage, fair working hours, and labor safety.
Who Enforces Overtime Laws?
Federal and state divisions of the Department of Labor (DOL) govern overtime compliance with the FLSA, which is continually revised to meet the changing requirements of the workforce. Employees can file unpaid overtime claims with their local DOL office to seek missed wages; The DOL recovered around $31.7 million in back wages for food service industry workers in the fiscal year 2021. The DOL also works with employers to ensure they comply with the applicable laws.
What Are the Penalties for Failing to Pay Overtime?
The DOL has established strict rules for violation of the Fair Labor Standards Act (FLSA) . Companies with willful intent to violate laws face criminal prosecution and a fine of up to USD 10,000. A repeat offense can even lead to imprisonment. Similarly, companies that repeatedly violate overtime requirements can face a penalty of up to USD 1,000 per violation.
Whether their violation was intentional or not, companies are liable for the shortfall in pay and for liquidated damages, which can be double the amount of the unpaid wages.
How Is Overtime Calculated?
Federal laws state that employers need to compensate their employees for overtime at the rate of at least 1.5 times the regular pay rate, also known as time and a half. There is no upper ceiling for the amount an employee can be compensated for overtime. Organizations may pay double the regular pay rate or even more if the work shift is undesirable. Generous overtime acts as a perk for employees in such cases.
To calculate an employee’s overtime pay, multiply their hourly rate by 1.5, or whatever factor you’ve chosen. Then, multiply the result by the number of overtime hours. Finally, add that total to their standard weekly 40-hour amount.
Let us consider that your employee has a wage rate of USD 50 per hour and worked 40 hours during the week.
- The regular pay rate will be 40 hours x USD 50 = USD 2000.
- Let’s also assume that the employee worked 10 extra hours during the week.
- The overtime pay rate would be USD 50 x 1.5 x 10 hours = USD 750.
- The overall payment for that week would thus be USD 2000 + USD 750 = USD 2750.
Tips for Paying Overtime
Overtime payment problems can quickly snowball into bigger issues and lead to friction between you and your employees. Here are some best practices that will help you overcome these challenges.
Encourage your employees to maintain timesheets
Timesheets are essential as they help you determine how much time the employee spent on a task and identify areas for improvement. You can also use timesheets for payroll purposes.
A better option is to use timekeeping software. Here are some tips to help you succeed with employee timesheets:
You may be looking for ways to avoid compensating your employees for their extra working hours. However, avoiding payment will only erode trust. Once that starts happening, it could give rise to other issues. Furthermore, you will be on the wrong side of the law.
One complaint by an employee could put your employer brand under the spotlight.. It is thus best to maintain complete transparency with overtime pay and abide by all regulating laws.
Employees working beyond their regular working hours is a common phenomenon. It is almost inevitable.
However, a bigger problem may be too many overtime hours; Your employees may be at risk of burnout.
Overtime pay can become a critical issue for your organization if not handled well. Not only will you be on the wrong side of the law, but your employees will also stop trusting you if you do not compensate them adequately. One of the better solutions to overcome this problem is through timesheets.
Time and attendance tracking software like Replicon comes with advanced capabilities that let you capture 100% accurate time data. You can customize the timesheets according to your requirements and ensure they meet all regulatory compliances. Multi-level approval workflows allow enough managerial reviews to monitor employee working hours.
Contact us today to get a free demo of Replicon software.
Frequently Asked Questions Around Overtime Pay
1. Can salaried employees be paid for overtime?
Overtime is applicable for employees working a 40-hour week and getting paid on an hourly basis. Salaried employees do not fall in this bracket as they do not get paid by the hour.
2. What is the difference between regular and overtime pay?
Regular pay is the fixed sum that employees receive for fulfilling their work duties. Overtime pay is the additional sum paid by employers when their employees work beyond the stipulated time of 40 hours in a week.
3. How do you define overtime pay?
Overtime pay is the compensation employers offer to their employees for extending their work activities beyond the stipulated time. An employee may need to clock 40 hours in a week but ends up working 50 hours. That employee is eligible to receive compensation for those extra 10 hours at rates suggested by the Fair Labor Standards Act.
4. At what rate is overtime paid?
The Fair Labor Standards Act guidelines define overtime pay criteria. The overtime rate is time and a half or 1.5 times the hourly wage rate of the employee. Here’s what the calculation looks like.
Weekly wage= hourly rate x 40
Overtime rate= hourly rate x 1.5
Overtime wage= overtime rate x overtime hours
Overtime payment= weekly wage + overtime wage.