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What You Need to Know About the Federal Overtime Rules

Max Freedman
Max Freedman

Failure to extend overtime pay to all eligible workers could land a business in hot water.

  • The Fair Labor Standards Act (FLSA) is the federal law guiding overtime pay.
  • The FLSA excludes some employees from overtime pay, but even these employees must receive overtime if their salaries are low enough.
  • Several states have their own overtime laws that supersede the FLSA.
  • This article is for employers looking for the latest updates on federal overtime law.

Which employees in your organization are entitled to overtime protections? It's a critical question for employers to answer, because failure to extend overtime pay to all eligible workers could land a business in hot water quickly.

Understanding which of your employees are entitled to overtime protections is a key requirement under federal (and, in some regions, state) law. Failure to extend overtime pay to all eligible workers could result in lawsuits, fines, and possibly even criminal penalties for repeated and willful violations.

Here's a look at current overtime regulations and the consequences of noncompliance.

What is the Fair Labor Standards Act (FLSA)?

The Fair Labor Standards Act is a federal law that establishes, among other provisions, when and how employers must pay their employees for overtime. As the rules stand today, any employee who is not considered exempt under the law must be paid overtime at a rate of 1.5 times their regular pay for every hour they work beyond 40 hours in one workweek.

The U.S. Department of Labor (DOL) defines a workweek as any "fixed and regularly recurring period of 168 hours," which essentially means seven full, consecutive days. Often, this workweek will be Monday through Sunday, as on a standard calendar. However, the FLSA does not explicitly require that employers adhere to the standard calendar for their workweeks. A Wednesday-through-Tuesday workweek is as valid as a Monday-through-Sunday workweek.

There is no limit to how many overtime hours an employee age 16 or older can work, so long as they are compensated appropriately. For any time a nonexempt employee works beyond that 40-hour maximum, they must be paid at the overtime rate of 1.5 times their standard rate. If not, the employer is in violation of the FLSA.

The FLSA does not count hours worked on Saturdays, Sundays and holidays as overtime. This means that if your employee works eight hours per day Tuesday through Saturday, their Saturday hours are not overtime. However, if the employee works a 41st hour on Saturday, that hour counts as overtime.

Key TakeawayKey takeaway: The FLSA requires that employers pay employees time-and-a-half for all hours worked over 40 in a workweek.

Current overtime regulations

As explained earlier, overtime laws are outlined in the FLSA, which is administered by the DOL. The DOL is responsible for interpreting the law and setting precise rules for businesses. These rules establish when employers must pay overtime to employees, the rate at which workers earn overtime pay, and which types of employees are exempt from overtime protections. [Interested in a solution that helps make sure you're compliant with the law? Check out our reviews of the best time and attendance system.]

"Employers with employees earning less than the overtime threshold need to keep accurate time and attendance records," said Sally Baraka, senior vice president and general counsel for Paycor. "This is especially important for employers with remote employees who work from home. Other employers may choose to increase the compensation of its employees who are earning salaries close to the threshold. While there is some time before the rule takes effect, it's important that employers get out ahead of this issue, and review their employee classifications and wages to determine impact."

Editor's note: Looking for information on time and attendance systems? Use the questionnaire below, and our vendor partners will contact you to provide you with the information you need:

 

There are two major consequences for employers that violate overtime laws. The first is potential employee lawsuits, which can quickly become expensive and generate negative publicity. For FLSA violations, employers are generally required to provide back pay to affected employees as well as liquidated damages equal to back pay owed. That immediately doubles the cost of compliance upfront, without taking into consideration any legal fees employers would have to cover.

The government could also act against noncompliant employers. The DOL's Wage and Hour Division can levy fines of up to $10,000 for willful FLSA violations that the agency uncovers. If it finds employers repeatedly, willfully violated the law, penalties could involve imprisonment. In other words, it pays to comply with the overtime laws the first time.

Federal overtime laws and the FLSA

There are two important sets of rules to keep in mind regarding the FLSA:

Exempt vs. nonexempt employees

There are employee exemptions to the FLSA. According to federal overtime laws, an employee is exempt when they fall into one of the below classifications, meaning employers are not required to extend overtime pay to them:

  • Executive: Executive employees are defined as those who make a salary of no less than $684 per week and whose primary duties include managing the company or a recognized department or subdivision of the company. Executive employees regularly direct the work of at least two full-time employees and maintain the authority to hire or fire other employees, or at least influence the process. 

  • Administrative: Administrative employees are defined as those compensated on a salary or fee basis of $684 per week or more. Their primary duties must be the performance of office or nonmanual work related to the management of general business operations of the employer or clients. They must also exercise discretion and independent judgment in significant matters.  

  • Professional: Professional employees are defined as those compensated on a salary or fee basis at a rate no less than $684 per week and primarily focused on the performance of work requiring advanced knowledge, intellectual in character, and requiring the consistent exercise of discretion and judgment.  

  • Computer-related: Computer employees are those compensated either on a salary or fee basis at a rate no less than $684 per week or, if compensated on an hourly basis, no less than $27.63 an hour. Their primary duties must include the application of systems analysis techniques and procedures, or the design and development of computer systems or programs.  

  • Outside sales: An employee meets the outside sales exemption if their primary duty is making sales, or obtaining orders or contracts for services. They must regularly work outside the employer's primary workplace.  

Maximum employee income for overtime

According to a new rule that the DOL started enforcing in 2020, all employees who make less than $35,568 a year must be paid overtime. This rule applies to both exempt and nonexempt employees.

Coupled with this rule is a provision that employers can use nondiscretionary bonuses and incentive payments such as commissions to meet up to 10% of the standard salary level outlined in the FLSA. These bonuses and incentives must be paid at least annually.

Did you know?Did you know? The FLSA does not apply to certain types of employees, though even these employees are covered if they make less than $35,568 per year.

State overtime laws

In addition to federal laws, employers should be aware of how state laws affect their policies. The federal overtime protection rules are just a minimum, and some states go above and beyond them. It's as critical to acquaint yourself with state law as with federal law, and failure to do so could result in penalties at the state level even if you're compliant with federal law.

The following states have overtime laws that supersede the FLSA:

  • Alaska
  • California
  • Colorado
  • Kansas
  • Maryland (certain industries)
  • Michigan
  • Minnesota
  • Nevada
  • New York
  • Pennsylvania
  • Vermont
  • Washington
  • West Virgina

In all other states, employers must follow the FLSA.

Federal overtime law changes

Federal overtime laws have changed in a few ways since 2016.

The Obama administration

Further complicating the overtime picture is a series of proposed rule changes that were raised, scrapped and then raised again. In 2016, the rules governing overtime protections seemed like they were about to change, but the rule change was scrapped at the eleventh hour.

In 2016, the Obama administration's DOL appeared ready to change the rules for employee exemptions. These changes would have tightened the definitions of each classification and raised the pay threshold to $913 per week, or a salary of $47,476. That change was expected to extend overtime protections to 4.2 million additional workers compared with the current regulations. Many businesses adjusted their policies in preparation for the change, which included shifting salaried employees to an hourly wage, but the rule change was ultimately scrapped after the Trump administration took office.

The Trump administration

In 2019, the Trump administration proposed an overtime rule change that would have set the income cutoff at $679 per week starting in 2020. This rule would have extended overtime protections to about 1 million more workers, leaving the status of workers making more than $679 per week unchanged.

However, one report found that this rule would exclude 8 million employees from overtime pay whom the Obama-era rules would have included. The proposed rule change would not extend to first responders, nurses or construction workers either.

Ultimately, the Trump administration's proposed changes were implemented with slightly different numbers. In September 2019, the DOL formally raised the maximum salary at which all workers must receive overtime to $684 per week ($35,568 per year) from its prior $455 a week. This change went into effect in 2020 and purportedly did, as expected, make 1 million more employees eligible for overtime pay.

Adam Uzialko contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

Image Credit: Firma V / Shutterstock
Max Freedman
Max Freedman
Business News Daily Contributing Writer
Max Freedman is a content writer who has written hundreds of articles about small business strategy and operations, with a focus on finance and HR topics. He's also published articles on payroll, small business funding, and content marketing. In addition to covering these business fundamentals, Max also writes about improving company culture, optimizing business social media pages, and choosing appropriate organizational structures for small businesses.