If your business has employees who are paid hourly and classified as non-exempt, you must provide overtime pay for time worked beyond forty hours per week. The rules for employee overtime pay are laid out by the Department of Labor in the Fair Labor Standards Act (FLSA). 

Last year, the DOL issued a final rule updating the overtime standard for the first time since 2004. Most of the rule changes took effect on January 1, 2020; however, the final rule for the fluctuating workweek method of computing overtime was effective August 7, 2020. Let’s review the basics of overtime rates, exempt/non-exempt classifications, and overtime salary thresholds, then look at the fluctuating workweek method for calculating overtime.

Overtime basics and overtime rates

When an hourly, non-exempt employee works longer than forty hours in a work week, the additional minutes and hours qualify as overtime. The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime is worked on those days.

It’s important to note that some states—including Alaska, California, Colorado, and Nevada—may require employers to calculate overtime on a daily basis, rather than weekly. Keep this in mind if you offer employees an alternative work schedule, such as four 10-hour shifts each week or a biweekly schedule of three 12-hour shifts the first week followed by four 12-hour shifts the next.

• The Federal rate for overtime pay is 1.5 times an employee’s normal hourly rate. This is also referred to as ‘time and a half’.  

• California requires ‘double overtime,’ meaning all time worked beyond 12 hours in a single workday or beyond eight hours on a seventh consecutive workday must be paid at 2 times the employee’s normal hourly rate. 

• Although there is no legal requirement to pay extra, some employers choose to pay double overtime to employees who work on national holidays, weekends, or overnights.

Employee exempt and non-exempt classifications 

Every employee needs to be classified as exempt from federal and state overtime requirements or as non-exempt and therefore entitled to overtime. Whenever there are changes to wage and hour laws, it is a good time for employers to review their list of employees and ensure that all workers are properly classified. 

In order to be exempt from the federal overtime provisions in the FLSA, a salaried employee must earn more than the minimum overtime threshold amount and perform executive, administrative, or professional job duties, as defined by the FLSA’s job duties test. If you pay employees a piece rate for production or if you employ workers in certain industries, including agriculture and information technology, check your state’s classification laws for additional exemption rules.

If an employee earns more than $107,432, they are considered a Highly Compensated Employee (HCE). These employees qualify as exempt as long as they perform only office work (no manual labor) and the office work regularly includes either executive, administrative or professional job duties.

Current minimum salary thresholds for overtime exemption

Beginning January 1, 2020, the Federal overtime threshold was boosted from $455/week ($23,660/year) to $684/week ($35,568/year). Any of your employees who earn less than $35,568 per year must be paid overtime wages if they work more than 40 hours in a week. The new overtime rules allow employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the salary requirement. 

Here again, state laws can vary from the Federal overtime threshold:

• Alaska:  $791.20 per week

• California: $54,080 (annualized) for businesses with at least 26 employees and $49,920 for those with fewer. 

• Colorado: $778.85 per week ($40,500 per year) with increases each year.

• Maine: $692.31 per week

• New York: $58,500 per year (New York City); $50,700 per year (Nassau, Suffolk and Westchester Counties); $46,020 (all other New York counties)

How to handle conflicts between Federal and state overtime rules

When Federal labor laws conflict with state regulations concerning employee exempt status, overtime thresholds, and how to calculate overtime hours, the DOL instructs employers to use the laws/status/overtime calculations that provide the most benefit and protection to the employee.

The fluctuating workweek method of calculating overtime

The FLSA dictates how to calculate overtime pay for hourly employees, salaried employees, and piece-rate employees. If you have salaried yet non-exempt employees that work a varying numbers of hours each week, you may want to use the fluctuating workweek method of calculating overtime. 

The DOL final rule that guides how to use the fluctuating workweek method takes effect August 7, 2020. “The final rule clarifies that payments in addition to the
fixed salary are compatible with the use of the fluctuating workweek method of compensation, and that such payments must be included in the calculation of the regular rate as appropriate under the FLSA.” 

Employers can use the fluctuating workweek method in the following circumstances:

• Your employee works fluctuating hours from week to week yet receives a fixed salary as straight time compensation for whatever hours he or she is asked to work in a workweek, whether few or many. 

• Your company and the employee have agreed to this compensation with a “clear and mutual understanding.”

• The salary is sufficiently large so as to prevent the pay rate from falling beneath the applicable minimum wage during any given work week.

Employers must determine the rate of pay for a salaried employee week by week. To do this, divide the number of hours worked in the workweek into the amount of the salary. For example, if you have an employee that you pay $2,000 each week, and that employee worked a 60-hour workweek, you would divide $2000/60 for an hourly rate of $33.33. 

You should include any supplemental payments, such as bonuses, premiums and other additional pay, with the salary when you calculate the regular rate, unless those payments are specifically excluded under FLSA sections 7(e)(1)-(8). See 29 U.S.C. 207(e)(1)-(8).

If in any given workweek the calculation of regular rate fails to meet the applicable minimum wage, you must make an additional payment to bring your employee up to minimum wage.

Ensure your software calculates overtime pay correctly

When paychecks go out, you need to be sure overtime has been calculated correctly. Failing to properly pay for overtime is one of the three most common wage and hour violations committed by employers. Having the right technology can help you ensure employee pay is accurate. Time and attendance automation records proof of exactly when each employee starts and stops work for every shift. You will also need a reliable payroll software or service that delivers timely, accurate payroll calculations, processing, recordkeeping, and tax compliance.