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Check out our weekly blog posts and see the latest news and discussions happening in the HR world of business.

Is Paying Your Employees Overtime Mandatory?

In this blog’s infancy, we discussed a question that comes up regularly as we talk to clients, which is, do I have to pay my employees overtime? As with all things, where both federal and state guidelines apply, the answer isn’t all that clear cut, but in the following blog, we’ll do our best to give you a framework to best answer that age-old question. 

In general, whether a person is eligible for overtime is decided by the Fair Labor Standards Act (FLSA). The FLSA “establishes minimum wage, overtime pay, record keeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments,” and all of this is overseen by the Wage and Hour Division (WHD) of the US Department of Labor (DOL). There are outliers, but those tend to be folks working for the state and local government. For the most part, we are going to focus on the private sector since that’s what most of our clients work within. 

So let’s break it down:

Who is eligible for overtime?
Under the FLSA overtime rules, you are required to pay your nonexempt employees for all hours worked over 40 in any given workweek. Exempt employees, however, are not eligible for overtime under the FLSA rules.

How much do we pay them?
Per the DOL, “overtime must be paid at a rate of at least one and one-half times the employee’s regular rate of pay for each hour worked in a workweek in excess of the maximum allowable in a given type of employment.” But some employees are paid by the hour, some are salaried, and some receive a piece rate. Here is how the DOL calculates: 

  • Hourly rate: If more than 40 hours are worked, the employee gets paid at least one and a half times their regular hourly rate. So, if your employee is paid $15 an hour, they would be eligible to receive an hourly rate of $22.50 for every hour worked over 40 hours.
  • Salary rate: Under this model, you divide the salary by the number of hours for which the salary is intended to compensate. The employee would then receive an additional one and a half times this rate for each hour over 40.
  • Piece rate: This one is less known but refers to employees who are paid a fixed rate for each unit they produce. To calculate their overtime rate, you would divide the total weekly earnings by the total number of hours worked. For any hours worked over 40, you would pay the employee one and a half times this rate.

Now, we use the term ‘workweek’, but some companies pay their employees a salary based on a different unit of time, such as biweekly or monthly. In these cases, to determine overtime, you would still calculate the weekly pay to calculate the regular rate and thus the overtime pay. A monthly salary, for example, would be multiplied by 12 and then divided by 52 to get the weekly rate, and then you would calculate overtime by multiplying by 1.5.

What constitutes a ‘workweek’? 
Seems obvious that a week would be a seven-day period, but where does the week start? Glad you asked, because the DOL makes this one overly complicated too! According to the powers that be, “an employee’s workweek is a fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods.” They note that it need not “coincide with the calendar week but may begin on any day and at any hour of the day” and that “different workweeks may be established for different employees or groups of employees.” However, the workweek must be its own stand-alone period of time, meaning you can’t average one busy week and one slow week to avoid paying overtime to your workers. 

Is there a cut off for how much overtime a person can earn? 
Per the FLSA rules, there is no limit on the number of hours an employee can work in a given week, provided that they are age 16 or older. Because multiple hours of overtime can certainly rack up your payroll spending, you’ll want to closely monitor the work hours of your employees and think strategically about how you can maintain operations without having to rely heavily on employees working overtime (not to mention, you don’t want your employee to burn out!) 

Do you have to pay overtime for weekends and holidays? 
Per the DOL, you do not technically have to pay overtime for work performed on weekends, holidays, or other “days of rest” unless these days count as overtime outside of the employee’s regular 40-hour workweek.

When do I have to pay overtime? 
As a rule, overtime pay earned during a workweek must be paid on the regular pay day for the pay period in which the wages were earned. Therefore, if your payday is every Thursday for the previous week ending Wednesday, any overtime earned for that seven-day period must be paid out at that time. 

Are there any new changes I should know about? 
While we were all curled up in our Covid-19 cocoon, evidently the DOL was hard at work, issuing a new rule that may change the way your company calculates its overtime. The most recent rule, which went into effect on May 20, allows employers to pay bonuses or other incentive-based pay in addition to a traditional salary to non-exempt employees who have schedules that cause their hours to fluctuate from week to week. This rule follows an additional change to the FLSA which clarifies what perks and benefits employers may exclude when calculating a workers regular rate of pay and thus determining how much they should be paid as overtime. The rules are a bit complex and specific, so here’s a link that can help you make the appropriate determination. 

Still feeling a little confused about how to classify your employees and calculate your overtime rate? Reach out to Abel HR today and we’ll be happy to talk to you about our special employee software system that takes all of the guesswork out of logging employee hours and calculating their overtime pay.

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