Overtime Compliance: Key Considerations for Employers
Navigating overtime requirements is a critical aspect of employment law that businesses must understand to ensure compliance and avoid costly penalties.
The Fair Labor Standards Act (FLSA) sets forth federal guidelines for overtime pay, minimum wage, recordkeeping and child labor. With the Wage and Hour Division of the U.S. Department of Labor enforcing these regulations, employers need to be well-versed in the intricacies of the FLSA to help protect their organizations from legal risks.
In part one of a three-part webcast series, Summer school: Hot topics in employment law compliance, ADP compliance experts Eric Ruden, senior counsel and Tracy Sigmann, senior legal compliance director, outlined the basics and best practices for overtime pay compliance.
FLSA compliance essentials
The FLSA applies to most workers in the United States. Enterprise coverage under the FLSA includes businesses with at least two employees and annual sales or business transactions of at least $500,000. Individual coverage applies to employees engaged in interstate commerce. For covered nonexempt employees, the Act mandates a federal minimum wage of $7.25 per hour and requires overtime pay at one- and one-half times the employee's regular rate for hours worked over 40 in a workweek. Employers must also adhere to state and local laws, which may impose higher standards, such as higher minimum wages or daily overtime requirements.
"Basically, if you're a worker in the United States, you're likely going to be covered by the Fair Labor Standards Act or the FLSA," says Ruden. "There's significant enforcement. In the fiscal year 2024, the Department of Labor concluded over 17,000 cases against employers, which was down from 20,000 in fiscal year 2023. There's also a high potential for penalties. In the fiscal year of 2024, the Wage and Hour Division imposed $36 million in penalties on employers, up from almost 26,000,000 in fiscal year 2023."
Employee classification compliance
A significant risk under the FLSA is the misclassification of employees as exempt or nonexempt. Exempt employees are not entitled to overtime pay, while nonexempt employees must be compensated for overtime.
The FLSA outlines specific criteria for classifying employees as exempt, including the executive, administrative, and professional exemptions. These exemptions require employees to meet certain salary and duties tests. For example, among other criteria, the executive exemption requires an employee to:
- Be compensated on a salary basis at a rate not less than $684 per week
- Have a primary duty of managing the enterprise or a recognized department
- Regularly direct the work of at least two full-time employees
- Have authority over hiring and firing decisions or suggestions and recommendations as to hiring and firing given particular weight
Read more about it in this simple Department of Labor fact sheet.
How to mitigate the risk of employee misclassification
Misclassification can lead to collective actions seeking unpaid overtime for up to three years, plus liquidated damages and attorney's fees, making it a costly mistake for employers. Therefore, employers should regularly review the classification of their employees, ideally with the assistance of legal counsel. Be sure that job descriptions accurately reflect the actual duties performed by employees, as courts and agencies will evaluate the duties rather than the job titles and descriptions. Additionally, improper deductions for lack of work can jeopardize an employee's exempt status, so employers must be cautious in their payroll practices. Staying informed about changes in regulations and court rulings is also essential, as demonstrated by recent developments in the salary threshold for exemptions and Supreme Court decisions impacting wage and hour laws.
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Factors affecting overtime pay calculation
Understanding the specifics of overtime pay is essential not only to help avoid legal and financial repercussions but also to maintain employee satisfaction. The FLSA mandates that nonexempt employees be compensated at one and a half times their regular rate of pay for hours worked beyond 40 in a workweek. Calculating overtime pay can be complex, particularly when considering state-specific regulations and various forms of compensation.
Workweek
The definition of a workweek is a key concept in overtime pay. Under the FLSA, a workweek is a fixed and regularly recurring period of 168 hours, or seven consecutive 24-hour periods. Employers must calculate overtime based on the defined workweek, not on the pay period. This means that even if an employee is paid biweekly or monthly, overtime must be determined weekly. Employers can change their workweek as long as the change is permanent and not designed to evade overtime obligations. It is essential to accurately track and report all hours worked by nonexempt employees to ensure proper overtime compensation.
"An employee must be paid for all time considered to be hours worked under the FLSA," Sigmann says. "This may include time spent engaged to wait on call, in training or traveling. Work not requested but suffered or permitted to work is work time. Make sure you are familiar with these definitions. As a best practice, we recommend paying nonexempt employees on a weekly or biweekly basis with an hourly rate of pay."
Regular rate of pay
The regular rate of pay is another critical factor in calculating overtime. This rate includes all employment earnings, such as hourly wages, non-discretionary bonuses, and shift differentials. It does not include payments excluded by statute, such as gifts or discretionary bonuses. The regular rate of pay is calculated by dividing the total compensation for the workweek by the total hours worked. This calculation ensures that employees are fairly compensated for overtime based on their actual earnings, not just their base hourly rate.
The impact of state laws on overtime calculations
State laws can add another layer of complexity to overtime calculations. Some states have more generous overtime laws than the federal standard, requiring overtime pay for hours worked beyond a certain number in a day or for work on consecutive days. For example, California mandates overtime pay for hours worked over eight in a day and double-time for hours worked over 12 in a day. Employers must comply with the law that is more favorable to the employee, whether it is federal or state law. This requires a thorough understanding of the specific overtime regulations in each state where employees work. If the employee is remote, it's important to keep in mind that the law of the state where the employee is performing the work is the law that applies to them, not the law of the state where the company headquarters are.
Non-discretionary bonuses and discretionary bonuses
Non-discretionary bonuses must be included in the regular rate of pay for overtime calculations. These bonuses are promised to employees based on specific criteria, such as performance or productivity, and employees expect to receive them regularly. Discretionary bonuses, on the other hand, are given at the employer's discretion and are not included in the regular rate of pay. When a non-discretionary bonus covers a period longer than one workweek, it must be apportioned back over the workweeks during which it was earned. This ensures that employees receive additional compensation for overtime worked during the bonus period. By staying informed and proactive, businesses can ensure correct and timely payment to employees, reducing the risk of legal penalties and fostering a positive work environment.
Ruden and Sigmann answered several questions on this topic submitted by live webcast attendees.
- Read this article for the Q&As: Beyond the Clock: Answering FAQs About Overtime Laws
- Tap into the rest of the employment law compliance webcast series, available on demand now.
