Knowing When to Pay Overtime & Making Sure It’s in Compliance with State Laws

Paying overtime is a requirement most employers tend to overlook. However, this legal mistake can be costly. Data shows that violations of the Fair Labor Standards Act (FLSA) have recently increased, with claims reaching more than $220 million in back wages. 

Overtime compliance is crucial if your organization is to operate on the right side of the law and have happy and satisfied employees. However, understanding the FLSA rules and calculating overtime can be challenging for most HR teams.

As per the FLSA, overtime should be typically billed for work done above 40 hours a week for a workweek. The employee should be remunerated at a rate of at least one and a half their standard pay.  

However, overtime pay rules vary across states, with each state applying a unique payment rate at least equal to the FLSA.

Here’s what you need to know about paying overtime and the consequences your organization may face for being non-compliant. 

What is Overtime?

Overtime, or mandatory overtime, is any work done above 40 hours a week in a workweek. According to the Fair Labor Standards Act (FLSA), a workweek covers 168 hours. Of course, some states have their own overtime calculations.

Employees covered by the FLSA are entitled to higher pay for the additional work they do over a 40-hour workweek. This higher pay is referred to as overtime pay. 

Employers must remunerate employees for overtime during the payroll period they earned it and on the same day they complete payroll.

Overtime is often calculated for hourly employees. However, salaried employees can also be eligible for overtime. The key is determining, via a job classification audit, whether an employee is exempt or non-exempt from overtime laws.

The Role of the FLSA

The FLSA is a broad federal law covering several areas of an employer/employee relationship. The law was passed in 1938. HR teams must be aware of many elements of the FLSA, with the overtime rule being one of the most important. 

According to data, over 143 million American workers are covered by the FLSA. These workers include:

  • Employees of any enterprise with at least two employees and that has an annual dollar volume of sales or business done of at least $500,000
  • Employees of hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies
  • Employees who do not work for a covered enterprise but are engaged in interstate commerce or in the production of goods for interstate commerce.

Smaller businesses making or receiving phone calls to and from another state, sending emails to a different state, or handling production and logistics across states qualify as doing interstate commerce.

Even if your organization is entirely local and therefore exempted from the FLSA, you may still have to comply with state labor laws that govern overtime.

What is the Rate for Paying Overtime?

According to the FLSA, employers must pay employees overtime at a minimum rate of one and one-half times (1.5) their standard pay. Therefore, an employee earning $30 an hour is entitled to a minimum pay of $45 per hour for every additional hour. 

All businesses in all states must abide by this federal law. However, states can implement additional overtime rules if they give the employee more benefits. 

For instance, in California’s overtime requirements, employees must be paid one and one-half times their regular rate of pay for all hours worked in excess of 8, up to and including 12 hours, in any workday. Additionally, employees must receive overtime compensation for the first 8 hours of work on the seventh consecutive day of work in a workweek.

Employees must also be paid double their regular rate of pay for all hours worked in excess of 12 in any workday and for all hours worked in excess of 8 on the seventh consecutive day of work in a workweek.

The FLSA also mandates that the regular pay rate is above the minimum wage. This standard rate includes all employment remuneration except payments the Act itself excludes. 

Payments excluded as part of the regular rate include pay for expenses incurred on the employer’s behalf, discretionary bonuses, premium payment for overtime work and true premiums for work done on weekends and holidays, paid time off, and gifts and payments during special occasions.

You must comply with federal and state laws, choosing the most favorable and generous to the employee. Employers reserve the right to pay more for overtime if they wish to do so.

How Should You Calculate Overtime?

All overtime calculations must be made on an hourly basis. Therefore, if you’re working with a fixed pay or salaried employee, you must break down their income into an hourly equivalent by dividing their total compensation by the total compensable work hours in a workweek. 

The overtime hours your employee has worked will typically include the following:

  • Unauthorized work time the employer knows or has a reason to know and will benefit from it
  • Time spent by the employee preparing or concluding activities such as putting on and taking off their gear
  • Time an employee was unable to use effectively for their purposes
  • Job-related training and meetings
  • Travel time
  • Other time spent at the discretion or request of the employer

If your HR team manages employees working in multiple locations with separate federal IDs, you must combine their overtime hours. 

Who is Exempted from Overtime?

The FLSA exempts a few classes of workers from its overtime law. Therefore, you’re not mandated to compensate them for additional hours over 40 in a single workweek. 

The most common exemption is the white-collar exemption. It applies to the following classes of employees:

  • Outside sales employees
  • Executive, professional, and administrative employees
  • Highly compensated employees
  • Employees in certain computer-related professions

Typically, HR teams conduct the following three tests to determine if an employee is exempt or non-exempt:

  • Salary level test – The employee must be earning a minimum of $684 weekly
  • Duties test – The employee’s primary responsibility must involve the work associated with the exempt status
  • Salary basis test – The employee must earn a fixed and predetermined salary that doesn’t reduce with quality or quantity of work.

All three tests must be passed for the employee to be deemed exempt. However, different state laws may offer additional exempt or non-exempt status conditions. Therefore, you should be aware of your state laws to remain compliant. 

What Are the Consequences of Breaching the FLSA Overtime Law?

Failing to comply with FLSA and state overtime laws comes with heavy consequences. Employers who fail to pay overtime typically owe the affected employees back wages, legal fees, and liquidated damages. 

The Department of Labor also wields power to punish violators. First-time offenders often pay $1000 per violation as a fine, with a violation being every employee who was shortchanged on overtime. Repeat offenders can pay up to $2,203 per violation, with the risk of facing criminal penalties.

Ensure You’re Always Compliant

Compliance with overtime laws is crucial for HR teams to ensure harmony between the business and its employees. Contact VirgilHR and learn about our automated and effective solutions to ensure you’re on the right side of the law.