Federal Overtime Rules

When used properly, overtime is an excellent tool for motivating employees and meeting workload demands. But asking them to complete additional work will cost you more than what you usually pay them. Any extra work an employee does beyond scheduled working hours is subject to overtime pay.

However, there are some exemptions. Eligibility for overtime pay depends on several factors, including state law, job duties, and work hours. Which workers in your organization are entitled to earn overtime?

That’s a critical question to answer. Failure to correctly compensate eligible employees for their overtime work can put your business in trouble. The US Department of Labor (DOL) enacted rules for when employers should pay overtime. They also have the power to issue penalties for recurrent or willful violations.

In this article, we’ll walk you through everything you need to know about the new federal rules on overtime pay below.

Understanding the Fair Labor Standards Act

The US federal government established the Fair Labor Standards Act or FLSA to protect workers from unfair work standards or pay practices. Passed in 1938 after the Great Depression, the FLSA is one of the most complex workplace laws.

The FLSA has undergone numerous amendments to address workplace developments. The majority of the revisions and interpretations have expanded the law’s coverage. That includes establishing specific requirements on how and when employers should compensate for overtime work.

Section 207 of the FLSA provides the rules for overtime pay. Initially, the limit before overtime would come into effect was 44 hours per week. However, there have been many changes in the federal overtime rules.

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For instance, lawmakers lowered the threshold for overtime pay to 40 hours worked. An employer who requires or authorizes an employee to work over 40 hours a week must pay overtime. However, this only applies to businesses covered under the FLSA.

These are businesses that have $500,000 or more in annual sales. Smaller companies also have to pay overtime if they engage in interstate commerce. Entities covered by the FLSA, regardless of the amount of gross sales volume, include the following:

  • Hospitals
  • Resident medical or nursing care establishments
  • Schools
  • Public agencies

FLSA-covered employers must pay overtime to all eligible employees unless they fit within the law’s exemptions. Still, even if the FLSA does not cover your enterprise, you may have obligations under state overtime law. It would be best to contact your state labor department and find out the rules that apply to your business.

Which employees are eligible for overtime pay?

Only some employees are entitled to overtime compensation. The industry they work in and the kind of work they perform are some of the factors that determine the employee’s eligibility for overtime pay. Federal overtime rules categorize employees as either exempt or nonexempt from overtime pay.

While laws concerning exempt and nonexempt status vary by state, they cannot contravene federal rules on overtime pay. Learn how the FLSA classifies exempt and nonexempt employees below.

Exempt employees

The FLSA does not apply to specific types of employees. Exempt employees don’t qualify for overtime pay even if they typically work more than the standard 40-hour week. Instead of being compensated based on their total number of work hours, exempt employees have a predetermined regular salary.

Most exempt employees work in executive, professional, or administrative positions. For example, lawyers for domestic violence fall under the learned professional exemption of the FLSA. But other employees like outside salespeople and some computer professionals also fall under the exempt category.

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Nonexempt employees

Nonexempt employees are eligible for earning overtime pay when they work beyond 40 hours in a workweek. Typically, they perform work that FLSA considers repetitive.

These employees often work on an hourly wage basis. But they can also earn a regular salary less than the minimum amount determined by the FLSA. Below are typical examples of nonexempt positions covered by the FLSA.

  • Contractors
  • Freelancers
  • Interns
  • Servers
  • Retail associates
  • Customer service
  • Manual labor

How to determine employee exemption status?

Employees' Overtime Pay

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Consulting with an employment lawyer is the best way to determine the exemption status of employees. But three basic tests can help you classify whether an employee is exempt. Employers can claim exemptions from the FLSA requirements for workers who meet the following criteria.

Salary basis test

To be an exempt employee, the employer must pay the worker a predetermined and fixed salary. This means their pay stays the same, regardless of the quality or quantity of their work. However, simply paying them a paycheck doesn’t relieve the employer from their overtime pay obligations.

Salary level test

The salary that employers pay to workers must also meet the specified minimum amount to claim exemption status. According to the new federal overtime pay rules, the salary-level threshold for exemptions increases to $684 from $455 a week. This extends overtime protections to more than one million workers who were not eligible for overtime under the old rules.

Job duties test

The salary level and basis tests don’t solely determine exempt status. An employee must also perform exempt job duties to qualify for an exemption. The following are three typical categories of exempt job duties under the FLSA.

  • Executive job duties primarily involve regularly managing the enterprise and supervising two or more employees.
  • Professional job duties refer to those that require specialized education and exercising discretion and judgment. Examples of these functions include doctors, dentists, teachers, lawyers, and architects.
  • Administrative job duties primarily involve non-manual work to keep the business running. These positions may include labor relations, human resources, payroll, and finance.
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How To Calculate Employees’ Overtime Pay

Federal and state laws govern the calculation of overtime pay. Under Section 5542 of the FLSA, employers must pay nonexempt employees at least one and a half times their regular hourly rate. Generally, employers multiply the employee’s hourly wage by 1.5, multiplied by the total overtime hours worked.

Calculating overtime pay for nonexempt employees

For instance, a nonexempt worker earns $20 per hour and works 45 hours weekly. Based on the FLSA hourly overtime calculation, the employer must pay the following:

  • $20 x 40 hours= $800 base pay
  • $20 x 1.5= $30 overtime pay rate
  • $30 x 5 overtime hours= $150 overtime pay
  • $800 base pay + $150 overtime pay= $950 total pay per week

Calculating overtime pay for salaried employees

Not all salaried workers are exempt from overtime compensation. Salaried workers who don’t meet the exemption criteria must still receive overtime pay for working beyond 40 hours per week.

When calculating overtime pay for salaried employees, employers must convert their wages to an hourly rate.

Let’s say a worker earns a weekly salary of $500 and works 50 hours per week. Based on the FLSA salary overtime calculation, this employee must earn the following:

  • $500 / 50 work hours= $10 per hour, regular pay rate
  • $10 per hour x 1.5= $15 per hour, overtime rate
  • $15 overtime rate x 10 overtime hours= $ 150 overtime pay
  • $500 regular salary + $150 overtime pay= $515 total pay

Comply with Overtime Pay Rules

Businesses must ensure compliance with the new federal rules on overtime pay. Those who neglect to pay overtime compensation properly will likely pay damages, penalties, and fines.

Evaluating employee compensation data and updating employee handbooks are a few ways to maintain compliance with the FLSA overtime regulations. It’s also best to seek legal assistance to ensure your business operations follow overtime rules and other employment practices.

Workers also need to understand their rights to overtime pay. Consult an employment lawyer if you believe you are eligible for overtime and don’t receive proper compensation.

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