Working with individuals you’ve hired as employees can be one of the most rewarding parts of business ownership, and yet, one of the most involved when it comes to payroll, documentation, and other HR small business practices. In fact, some of these responsibilities are regulated by federal and state law, making them all the more complicated. One such law, the Fair Labor Standards Act (FLSA) regulates both the minimum wage and overtime pay obligations employers have for their employees. With the complexities of the FLSA law—including not only the content of the law but also updates and changes—it can be difficult to parse through exactly how overtime regulations relate to your business and employees.
This overtime pay guide, therefore, is here to help. In this guide, we’ll break down everything you need to know about overtime as a small business owner. We’ll explain exactly what overtime pay is, sort through eligibility requirements and exemptions, and answer questions like “How much is overtime pay?” and “How is overtime pay calculated?”. Finally, we’ll offer tips to help you understand and manage overtime pay at your business most effectively.
What Is Overtime Pay?
In the simplest terms, overtime pay is what you pay your employees when they work extra hours. Generally, this means that employees who work more than 40 hours in their given workweek are entitled to overtime pay that is, at minimum, one-and-a-half times their regular pay rate.
As we mentioned, the specific regulations regarding overtime and overtime pay are governed at the federal level by the Fair Labor Standards Act—which is administered by the Wage and Hour Division of the U.S. Department of Labor. The FLSA dictates the overall requirements and provisions for overtime including:
- How overtime hours are defined
- Overtime rates and how overtime pay is calculated
- When employers must pay overtime
- The employees that are covered under FLSA law
- Exemptions to FLSA requirements
Additionally, depending on where your business is located, there may be overtime pay law at your state level. Although many states have simply adopted the FLSA or have not passed any specific overtime pay laws, others, like Nevada and Kentucky, have their own regulations. This being said, for the sake of this guide, we’ll be explaining overtime pay as it pertains to the FLSA—as all U.S. businesses are first and foremost held to the requirements set out in this law.
How Are Overtime Hours Defined?
The first important issue to address in order to determine your business’s responsibility for overtime pay is how overtime is defined. According to the FLSA, overtime hours are any hours worked in excess of 40 in a given workweek. A workweek, however, does not have to be what we typically think of as your standard workweek—Monday through Friday. The FLSA specifies that an employee’s workweek is a fixed and regularly recurring period of 168 hours—or seven consecutive-24 hour periods. Essentially, this means that a workweek could be Sunday through Saturday or Wednesday through Tuesday. The workweek that applies to your business, therefore, will be determined by you, as the business owner, and agreed upon by your employees when they accept employment.
Along these lines, you have the discretion to decide not only when a workweek starts, but also what hour of the day it begins. Moreover, the FLSA states that you can establish different workweeks for different employees or groups of employees. At the end of the day, then, FLSA law dictates that you’re responsible for overtime pay for any hours your eligible employees work in excess of 40 in a given workweek as you’ve defined it. The FLSA does not, however, regulate:
- How many hours employees 16 and older can work in any day or workweek
- How full-time or part-time employment is defined
- Changes to an employee’s work schedule
- Extra pay for weekend or night work
- Payment for time not worked (sick days, vacations, holidays)
All of these determinations—and how they relate to your business’s pay and scheduling policies—therefore, are left to be agreed upon between you and your employees.
How Much Is Overtime Pay?
Now that we’ve established how overtime hours are defined by the FLSA, let’s go through overtime rates and how overtime pay is calculated. Once again, for all eligible employees who work over 40 hours in a given workweek, you’re responsible for paying them overtime that is at minimum, one-and-a-half times their regular pay rate. This means, that if you have an hourly employee who makes $15 per hour, they would be paid for overtime at a rate of $22.50 per hour. Following these calculations then, if the same employee worked 50 hours during their workweek instead of 40, their pay would consist of the following:
Normal rate for 40 hours: $600 + overtime rate for 10 overtime hours: $225 = overall total of $825.
Similarly, if you have a salaried employee who is eligible for overtime, you would calculate their overtime rate based on the amount they make in a week. If your salaried employee makes $500 per week for a 40 hour week, you would divide 500 by 40 to get their hourly rate: $12.50. If the employee worked five extra hours in the week, you would then calculate their overtime pay just as we did above. You would multiply $12.50 by 1.5 to get the overtime rate of $18.75 and then you would multiply this overtime rate by the overtime hours, $18.75 times five, to get an overtime total of $93.75. Finally, you would add the overtime payment to the normal weekly payment for a final amount of $593.75.
It’s important to remember that the FLSA requires overtime pay at minimum one-and-a-half times an employee’s normal rate. If you choose to do so, therefore, you’re entitled to pay your employees more for overtime as you see fit. This is where the idea of “double time” comes into play. Double time, or two times an employee’s normal pay rate, is not regulated in any way under the FLSA. However, employers will often pay their employees double time for work on weekends or holidays. Moreover, depending on your location, your state may have specific regulations for double time. In California, for example, double time is required for any hour exceeding 12, worked in a single day. This being said, double time is most frequently an agreement between you and your employee.
Overtime Requirements and Exemptions for Small Businesses
Taking into consideration all that we’ve discussed thus far, let’s dive deeper into how the overtime regulations governed under the FLSA apply to your business—including which businesses are obligated under the law, which of your employees are covered by the FLSA, and which employees are exempt, or not covered, under the FLSA. Unfortunately, these are some of the most nuanced and complicated parts of understanding overtime pay and how it applies to your business. Therefore, if you’re ever concerned about your overtime responsibilities, you should talk to a business lawyer or contact your local Wage and Hour office for assistance.
Which Businesses Must Pay Overtime?
Generally, the majority of businesses are required to pay overtime. The FLSA specifies two main ways to determine if you, as an employer, are responsible for overtime pay for eligible employees:
- If your business makes $500,000 or more in annual sales
- If your business’s employees engage in interstate commerce (business between states)
It’s important to note that the FLSA defines interstate commerce very broadly, stating that qualifications can be as simple as regularly making phone calls to someone in another state or handling goods that will be sent out of state.
Additionally, the FLSA further specifies that hospitals, businesses providing medical or nursing care, schools, and government agencies are also responsible for overtime pay for their employees.
Furthermore, even if you run a small, local business that you don’t think falls under the obligations laid out in the FLSA, your business may still be responsible for overtime pay under state law.
Which Employees Can Receive Overtime Pay?
Although your business may be responsible for overtime pay under FLSA, this doesn’t mean that all of your employees are actually eligible to receive overtime. The FLSA details not only the employees that are covered under the law but also those who are exempt—meaning that they are not entitled to overtime pay from their employer.
Employees Covered Under FLSA Law
Generally, your employees are covered under FLSA law if your business meets any of the requirements we mentioned above and they do not fall into any exemption categories. Additionally, domestic service workers—like housekeepers, cooks, nurses, full-time babysitters—are covered under FLSA law if they receive at least $1,900 from one employer in a calendar year, or if they work a total of more than eight hours a week for one or more employers.
Employees Exempt Under FLSA Law
Perhaps the most convoluted part of the FLSA is sorting through the various exemptions for overtime pay and determining if your employees fit into any of these exemption scenarios. On the whole, however, the FLSA lays out exemptions based on specific industries and roles and details the exact terms and conditions for each exemption. This being said, some of the most common exemptions include:
- Executive, administrative, and professional employees
- Outside sales employees
- Certain skilled computer professionals
- Employees of seasonal amusement, recreational establishments, or movie theaters
- Employees of small newspapers and switchboard operators of small telephone companies
- Seamen employed on foreign vessels
- Employees engaged in fishing operations or newspaper delivery
- Farm workers employed on small farms
- Casual babysitters
- Criminal investigators
- Certain commissioned employees of retail or service establishments
- Announcers, news editors, and chief engineers of certain non-metropolitan broadcasting stations
- Certain railroad and air carrier employees, taxi drivers, employees of motor carriers, and local delivery employees
Executive, Administrative, and Professional Employee Exemption
The exemption that most often applies to small and large businesses alike is that of “executive, administrative, and professional employees.” For your employees to qualify as exempt (once again meaning they’re not entitled to overtime) under this provision, they must meet a few requirements depending on which of the three categories they fall into. For administrative employees, the following qualifications must be met:
- They must be paid on a salary basis at no less than $684 per week (as of Jan. 1, 2020).
- The employee’s primary duty (or most important function of their job) must be office or non-manual work, directly related to the business operations of the employer or the employer’s customers.
- The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. Although this last point is rather vague, it means, in essence, that your employees have the authority, in their job, to make independent choices without immediate direction or supervision.
For professional and executive employees, they must also be paid on a salary basis at no less than $684 per week (as of Jan. 1, 2020), but they also must meet higher-level requirements regarding their job duties. Professional employees have to meet the following:
- The employee must perform work requiring advanced knowledge, defined as work which is intellectual in character.
- The employee’s advanced knowledge must be in a field of science and learning.
- The employee’s advanced knowledge must be acquired by a prolonged course of specialized intellectual instruction.
Executive employees, on the other hand, must meet these qualifications:
- The employee’s primary duty is managing the enterprise, department, or subdivision.
- The employee must regularly direct the work of at least two or more other full-time employees of their equivalent.
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations in regards to these matters must be given particular weight.
Once again, for all three of these categories, your employee must meet each of the respective requirements to be considered exempt under FLSA law. If your employees are exempt, you are not required to give them overtime pay.
Exempt vs. Non-Exempt
When you’re hiring your employees, therefore, you will have to determine if they will be considered exempt or non-exempt under FLSA law. As we’ve explained, exempt employees will fall into one of the categories we’ve just discussed and meet all of the qualifications for that particular category. As an example, if you hire a marketing manager who you’re going to pay a salary of $50,000 per year, this individual would qualify as exempt, and therefore, they would not be entitled to overtime pay.
If an employee is covered under FLSA law, on the other hand, they would be considered non-exempt and you would be obligated to pay them for overtime. In this case, an office manager that you hire on a salary basis would be considered non-exempt. Although this person may meet some of the administrative qualifications, they don’t meet all of them—because this person is paid on an hourly, not salaried, basis they would be entitled to overtime pay.
Overtime Pay Tips for Small Business Owners
As you can see, the government regulations for businesses concerning overtime pay are lengthy and not always the most straight-forward. Luckily, there are a few actions you can take to help ensure that your business is compliant with overtime obligations.
- Use payroll software. A great way to make sure that you’re keeping track of your employees’ hours and paying them correctly is to utilize payroll software, a timekeeping tool, or accounting software. Using any of these products will allow you to streamline your payroll processes—making it easier to monitor overtime pay. Many of these services, in fact, will be able to calculate overtime hours and rates for you automatically based on the employee information you provide.
- Keep thorough employee records. The FLSA requires that you keep certain records for all of your covered employees. Even for employees that do not qualify for overtime, you should keep thorough records regarding their exemption status, job description, wages, hours worked, etc. Maintaining these records, although often a typical part of general business operations, will also help you in the case of a government audit. Once again, many payroll or HR software solutions provide digital record keeping as part of their service.
- Utilize online resources. The Department of Labor has numerous resources online related to overtime pay and other FLSA requirements for businesses. If you’re looking to do some research on your own, these resources may be able to answer questions and provide insight into how overtime regulations apply to your business. Additionally, the Wage and Hour Division lists local state offices and their contact information online, whom you can contact for specific assistance regarding federal or state overtime law.
- Consult a professional business advisor. With all of the nuances involved with overtime pay and FLSA law, it can be difficult to sort through on your own. Consulting a professional, like an HR expert or business lawyer, therefore, can give you an opportunity to ask questions and receive advice for your business specifically. These professionals will be able to help explain the law and how it relates to your business—so that you can make sure you’re compliant when it comes to overtime pay for your employees.
Overtime Pay: The Bottom Line
At the end of the day, if your business has employees, you’ll more than likely be responsible for determining their FLSA coverage and adhering to overtime pay regulations as necessary. To recap: overtime pay is given to qualified employees who have worked more than 40 hours in a workweek as you’ve defined it. Overtime pay should be, at minimum, one-and-a-half times the employee’s regular hourly rate.
If your business meets either of the FLSA coverage qualifications, either by annual sales or interstate commerce, all of your employees are eligible to receive payment for overtime hours unless they fall into an exemption. Exemptions are broken down by specific jobs and industries, but most commonly employees fall into the “executive, administration, and professionals exemption.” Although each of these three categories has its own set of qualifications that must be met, generally, employees who are paid on a salary basis (making at least $684 per week as of Jan. 1, 2020), who work in support of the business’s operations, and who exercise judgment on the job will be considered exempt from overtime pay.
Ultimately, as FLSA and state overtime law are complex and always changing, it’s best to maintain thorough records, utilize accounting, HR, or payroll software, and consult a business professional if need be. Although remaining compliant in regards to overtime pay may seem daunting at first, after you’ve gone through the process with a few employees, there’s no doubt it will become just another routine piece of your business operations.