What is Overtime?
When an employee works longer than what is considered standard (eight hours a day, 40 hours a week), employers are required to provide extra compensation in the form of overtime pay. Employers are required to pay overtime by federal law. This law was first introduced in 1938 as part of the Fair Labor Standards Act (FLSA). The concept of overtime pay was established as a way to reward employees for working longer hours, to prevent employers from taking advantage of their employees, and to encourage employers to hire more workers (the idea being that taking on another employee would be more affordable in the long run than forcing their existing employees to constantly work overtime).
State Laws Vs. Federal Laws
All states must abide by the federal law regarding overtime rules; however, states are allowed to implement their own overtime laws as long as they are more beneficial to the employee. For example, federal law states that any employee on an hourly wage must be paid time and a half (meaning, 1.5 times their regular rate of pay) for every hour that they work past 40 hours a week but some states, such as California, have additional overtime requirements as well.
Calculating an Employee’s Overtime
Calculating how much you owe your employee for the overtime they've worked can be tricky, especially since not all employees are entitled to overtime pay based on how they are classified. Take these steps to properly determine and calculate whether or not you owe your employee overtime and how much you owe.
Classify Your Employee
There are two types of employee classifications--exempt and non-exempt. Non-exempt employees are required by both state and federal law to be paid overtime if they work overtime. Exempt employees are not required to be paid overtime although you can still choose to pay them overtime if you wish to do so. It's up to the employer. However, make sure that you classify your employees on a case-by-case basis instead of classifying them based on their job titles or you could find yourself in trouble.
Exempt vs. Non - Exempt
Exempt employees are workers who have positions that are not covered by the FLSA. This means they are excluded from overtime regulations. Employees that are exempt are paid a salary instead of an hourly wage. Common positions that are considered exempt include professional, supervisory, executive, and outside sales positions.
Non-exempt employees must be paid overtime if they work it. They are generally paid an hourly wage and are in non-management or supervisory roles. Usually, they have little decision-making responsibilities. However, employers can choose to pay such employees salary instead of an hourly wage. Paying an employee a salary doesn't automatically make them exempt. To be exempt from overtime pay, salaried workers must make more than double the minimum wage. Being paid at least double minimum wage is just one of the requirements for an employee to be considered exempt from overtime.
Identify the Numbers
Paying the proper amount of overtime requires that you know what your employee is being paid hourly. This can be a bit more difficult if the employee is on a salary.
Hourly Rate or Wages, Plus Bonuses
To determine overtime, you will need to take into account the employee's hourly wage or salary. . Under some circumstances the FSLA requires that non-discretionary bonuses be included in overtime calculations. Most bonuses are considered discretionary and are not included in overtime calculations.
Regular Rate of Pay
For someone who is working an hourly wage, their regular rate of pay is easy to identify. However, if you're paying a non-exempt employee salary, it's a little more difficult. The general rule of thumb is that the typical employee works 40 hours a week, which comes to 2080 total hours of work per year (which includes 50 weeks of work and two weeks of vacation). You'll need to take what your employee earns in a year (if they're on salary) and divide it by 2080 to get their hourly wage.
Overtime for Hourly Employees
In California, overtime for hourly employees is calculated in the following ways:
- Employees that work more than 40 hours in a single workweek must be paid time and a half (1.5x their hourly rate) for every additional hour they work. This means that if they worked 45 hours at $12 an hour, they should be paid $18 an hour for the five hours of overtime that they worked.
- Employees that work seven days in a row in a single workweek must be paid time and a half for all hours worked on the seventh day. Even if they only work five hours a day for seven straight days, the five hours that they work on the seventh day will be time and a half.
- Employees who work more than eight hours in a single workday must be paid time and a half for every additional hour that they work. If they worked 10 hours at $12 an hour, they are owed $18 an hour for the two overtime hours they worked.
- Employees who work more than 12 hours in a single workday must be paid double for every additional hour that they work. If they're paid $12 an hour, they'll be paid for eight non-overtime hours ($96), four time and a half overtime hours ($72) and two double time hours ($24).
- Employees who work more than eight hours on the seventh consecutive day of work within a single workweek must be paid double. This means that if, on their seventh consecutive day of work, an employee making $12 an hour works 10 hours, they'll be paid for double time ($24) for those two hours in addition to overtime ($18) for the 8 hours.
Common Mistakes in Calculating
As you can see, if you're not careful, you could make mistakes when calculating what you owe in overtime pay to your employees. Common mistakes made when calculating overtime that you'll want to avoid include:
There are several forms of negligence when it comes to making overtime calculation mistakes, including:
- Negligence by design - Employers will sometimes require employees to self report their hours which does not provide the assurances of having overtime properly calculated.
- Negligence by rationalization - Getting your employees to work overtime without being paid overtime is a form of negligence, even if your employees agree to do so because they need the hours. You can't make the argument that you're doing your employee a favor because it's still against the law.
- Negligence via off-the-clock work - Telling employees they can't count hours towards their workday or workweek that they spend preparing for work or traveling for work (not counting normal commutes) is a form of negligence.
Lack of Familiarity to Laws
Many employers don't realize that just because an employee is on salary does not mean they are automatically exempt. They may still be non-exempt, which means they'll be owed overtime. Even those employers who properly classify their employees can make mistakes due to their lack of familiarity with the law. For example, they may not realize that additional forms of compensation, such as non-discretionary bonuses, count towards an employee's pay rate and must be taken into account when calculating their overtime pay. Additionally, when determining the pay rate of a salaried employee, you can't discount sick days and holidays. Since these are paid days off, they need to be counted towards the pay rate.
Constant Mistakes are Costly Mistakes
It's very important that you calculate the overtime pay owed to your employees correctly for numerous reasons.It's against the law not to pay your employees correctly. If the employee files a complaint, you would not only owe back pay for the overtime pay they are owed, but you may have to pay liquidated damages, statutory penalties, and the attorney fees of your employee. You may end up having to pay civil penalties of up to $1,100 per violation. Additionally, your reputation can take a hit, making it more difficult to attract highly qualified employees.
Obviously, you're much better off making sure that you calculate your employees' overtime pay correctly in the first place. Familiarize yourself with the federal and state overtime laws, take the time to properly calculate overtime payments and make sure any exempt employees are properly classified.