The Fair Labor Standards Act is the federal law that sets forth the requirements of when overtime wages must be paid. A common misconception among businesses is that you don’t have to pay salaried employees overtime. However, in most situations, that’s not what the FLSA requires.
The FLSA does not distinguish between salaried and hourly employees when it addresses overtime. Instead, it speaks of exempt and non-exempt employees. Employers are not required to pay overtime to exempt employees. But with few specific exemptions, employers are required to pay overtime at a rate of one and a half times the regular rate of pay for overtime hours worked by non-exempt employees.
An employer is required to keep accurate records of all employee hours worked. If you don’t keep these records, it’s next to impossible to refute claims by employees (or more likely former employees) that they weren’t properly compensated for the hours they worked. Many employers don’t like requiring salaried employees to complete a time card or punch a time clock. I certainly don’t. However, you will eventually regret not doing this.
I also learned that paying an employee a sizable bonus does nothing to eliminate the time and a half overtime requirement.
Under the FLSA, an employer is liable for all unpaid overtime for at least two years (and possibly three, if the violation is deemed willful). In addition to the unpaid overtime, the employer is liable for damages in an amount equal to the unpaid overtime, plus the employee’s attorneys’ fees and court costs. Employers also may be subject to potential criminal penalties in extreme cases.
While an additional $50/week in unpaid overtime may not seem a lot, consider that over the course of a two-year statute of limitation period, that’s $10,400 in additional expense wages and damages per employee (assuming that you settle with the employee without involving an attorney or filing suit).
Employers should take the time to learn the overtime computation and payment rules. A couple of hours with an experienced labor law attorney will almost certainly save you tens of thousands of dollars in the future.
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When is $900 per week really $950?
The FLSA creates all sorts of illogical outcomes. For example, assume you hire someone who doesn’t qualify as an exempt employee to work 45 hours per week at a salary of $900/week. Under the FLSA, the employee’s regular rate of pay is $20/hour. However, because five of those hours exceed 40 hours per week, then those five hours must be compensated at 1.5x the regular rate of pay. This means that even though the employee agreed to work at the rate of $900/week, you actually owe that person $950 (40 hours @ $20/hour + 5 hours @ $30/hour).
In fact, if you wanted to actually pay him or her $900/week for 45 hours worth of work, you’d have to agree with the person that the regular rate of pay is $18.95/hour (40 hours @ $18.95 + 5 hours at $28.43 equals $900).
Experience has taught me that both U.S. Department of Labor and employees’ labor attorneys view it very differently and will demand you pay an extra $50 in overtime unless you have written documentation in advance that the rate of pay is $18.95/hour and not $900/week.
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Key Concepts
- All employee hours must be compensated. Overtime hours must be compensated at one and a half times the regular rate of pay.
- Overtime pay may still be due even if the employee is salaried. Proper classification of exempt versus non-exempt employees is crucial.
- The burden is on the employer to establish a record of the number of hours an employee worked if it is ever challenged.
More information is available at https://www.dol.gov/whd/overtime_pay.htm
Overtime problems can be easily avoided with a minimum amount of planning and accurate record keeping, but you have to do it ahead of time. Even if you think you have a problem, the sooner you address it, the sooner you can start the statute of limitations to run and limit your exposure.