As a business owner, it’s important to stay on top of your labor budget; based on the number of hours your employees are slated to work each week, you know how much you’ll need to set aside to cover their wages—and in order to keep your business financially healthy, you want to stick as closely to that budget as possible.
But chances are, there are going to be times when your employees work more hours than you anticipated. For example, maybe there’s a big project that needs to get completed by the end of the week—and so you have a few employees who end up working 50 hours during the week to get it done instead of their usual 40.
The question is, when that happens, what are the rules around overtime? Do you have to pay your employees for overtime hours worked—and, if so, how much?
And, most importantly, is not paying your employees overtime illegal?
Let’s take a look into when you’re legally obligated to pay overtime (and when you’re not).
When do you legally have to pay your employees overtime?
First things first—what does federal law say about paying your employees overtime?
According to the United States Department of Labor (DOL), under the Fair Labor Standards Act (FLSA):
“Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. There is no limit in the Act on the number of hours employees aged 16 and older may work in any workweek. The Act does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime is worked on such days.”
Under the current federal overtime laws, if you have non-exempt employees and those employees work overtime hours in any given workweek (whether those overtime hours are approved or not), they’re entitled to overtime wages for that work time—and, as an employer, not providing overtime compensation in that scenario is illegal.
When are you exempt from paying employees for overtime hours?
So, current labor laws dictate that not paying overtime is illegal—but only in certain circumstances. There are a variety of situations where you’re exempt from the above overtime requirements and are not actually obligated to pay your employees overtime wages.
But the question is—what, exactly, are those overtime exemptions?
If you have employees that are a) paid on a salary basis, and b) make a salary of at least $684 per week, those employees are exempt from overtime (sometimes called a “white collar” exemption). While most salaried employees are exempt, it’s important to note that if you have a salaried employee who makes less than $684 per week—which works out to less than $35,568 per year—they are entitled to overtime payments.
Another case where employers are exempt from paying an overtime rate is in working with independent contractors. Because independent contractors are not employees (and generally have more control over their schedule and work hours), the overtime rules don’t apply to them. And, as an employer, you’re not required to pay an overtime rate to independent contractors—regardless of how many hours they work in a workweek.
What happens if you don’t comply and pay required overtime?
So, as mentioned, if you have non-exempt employees that work for your company—and those employees end up working overtime hours—you’re legally required to pay them overtime wages (which is at least one-half times the employee’s regular rate of pay) for the number of overtime hours worked. And it’s extremely important that you provide that overtime pay—because otherwise, you’re looking at some serious penalties.
If you fail to comply with the Federal Fair Labor Standards Act and don’t pay your eligible employees for overtime hours worked, not only will you be liable to pay for those unpaid overtime hours, but you could find yourself facing hefty fines from the state and/or the Department of Labor, including liquidated damages (which provides pay to your employees) and civil penalties. You may also have to foot the bill for the costs your employee incurred while seeking legal advice and counsel—and if you continually fail to pay overtime, you could face criminal charges.
The point is, the penalties for not paying overtime pay are far greater than just paying for the overtime from the get-go—so make sure you’re compensating your employees for any overtime hours during the pay period those hours were worked.
What are some scenarios where you would be required to pay for overtime—and what are some scenarios where overtime pay would not be required?
Clearly, there are cases where employment law requires you to pay overtime. But there are also cases where you’re not required to pay overtime—regardless of how many hours your employee works.
So, what do those two different scenarios look like in action?
Let’s say you have an employee that gets paid an hourly rate of $20 per hour. Typically, the employee works 40 hours per week, but during one workweek, they end up working 12 additional hours—for a total of 52 hours. Because the employee is paid by the hour and is considered non-exempt, you would be required to pay overtime for those 12 additional hours at a rate of one and a half times their regular rate—or $30 per hour.
So, in that scenario, the employee would get paid their regular weekly wages ($20 x 40 = $800) plus 12 hours of overtime ($30 x 12 = $360) for a total of $1160.
Now, let’s say you have the same scenario—but instead of an hourly employee, the 52 hours are worked by an exempt employee that’s salaried at $900 per week. Because they’re exempt, and paid on a salary basis (and their salary is higher than $684 per week), they’re not entitled to overtime. So, even though they worked more than 40 hours in the workweek, as an employer, you only have to pay them their regular salary (which, in this case, is $900 for the week)—and you’re not legally obligated to pay them overtime wages.
Bottom line: Is failing to pay your employees overtime actually illegal?
So, bottom line—is not paying overtime illegal?
It depends. If your employees are entitled to overtime wages in accordance with state law and federal law, then it is illegal not to pay them overtime—but if employment law considers them exempt from overtime pay, then you’re not legally required to pay for overtime.
If you have any concerns over how your employees are classified and whether you’re required to pay overtime, it’s important to seek legal advice; as mentioned, there are serious penalties for not paying overtime when it’s required—so you want to be crystal clear on when you’re legally obligated to compensate employees for overtime (and when you’re not).
And if you want to be proactive about keeping track of your overtime, try Hourly. With Hourly, you can easily track overtime hours, manage overtime compensation, and ensure your business is compliant with all relevant overtime laws—and you can do it all with a few swipes on your mobile phone. Want to experience for yourself how Hourly can make it easier to manage payroll for your business? Sign up for your free 14-day trial today!