For employers, overtime pay has long been a tricky issue. On the one hand, needing employees to put in extra hours may indicate a productive organization providing in-demand products or services. On the other hand, soaring amounts of overtime pay can make payroll harder to manage and be a major drag on cash flow. Let’s review some basics of how to keep your oversight strong.
Current rules
Under the Fair Labor Standards Act, nonexempt, hourly employees generally must earn overtime pay for the hours they work that exceed 40 hours within a workweek. A workweek doesn’t need to be a calendar week — it could be, for instance, from Wednesday to Tuesday.
As of this writing, to be exempt from overtime and minimum wage pay regulations, most employees need to be paid at least $684 per week or $35,568 annually. Contrary to popular belief, overtime eligibility isn’t determined by job title — even some salaried employees can qualify.
Currently, staff members paid a salary (or fee) of $107,432 or more annually are generally exempt from overtime if they receive at least $684 per week and perform at least one duty of an executive, administrative or professional employee as defined by the U.S. Department of Labor (DOL). However, workers paid a salary below that “highly compensated employee threshold” are generally eligible for overtime pay.
Calculation complications
Overtime wages need to be at least 1.5 times an employee’s regular rate of pay. Employers may apply nondiscretionary bonuses and incentive payments, such as those tied to sales metrics, to satisfy up to 10% of the standard salary threshold for exempt employees. These types of payments must be made at least quarterly.
Watch out for state regulations. When both federal and state rules are in play, employees are entitled to overtime compensation at whichever standard will compensate them at the highest pay rate.
Management strategies
Most organizations want to manage overtime for budgetary reasons. However, another important factor to consider is that employees who’ve been on the job for too many hours may be more error-prone and more likely to jeopardize their safety or that of others. In addition, though some employees appreciate the extra income from overtime work, others may prefer a better work-life balance. The latter group might eventually decide to quit if they’re pushed into overtime too often.
The good news is there are various overtime management strategies available. First, examine the factors driving overtime. Are employees stretched too thinly? If so, it may be time to consider adding staff. Similarly, if production or project timelines are overly optimistic, you may need to adjust fulfillment schedules.
Also, cross-train workers to the extent possible. Overtime is often necessary when only one employee knows how to do certain things. Instructing others on critical functions can mitigate the need to rely on key employees.
Leverage technology, too. Carefully chosen and implemented software can allow you to track overtime hours and pay by location or department to identify areas where such payroll costs appear outside the norm.
In addition, automating processes can cut down on manual or repetitive tasks, giving employees more time to perform their jobs during regular hours. Moreover, the right tech can support efficient scheduling and production processes, ensuring staff are on the job only when needed.
Changes always possible
As you may recall, the rules for overtime pay briefly changed last year under the Biden administration. However, a federal court vacated those rules in November.
Technically, the 2024 proposed rules are still under appeal by the DOL, but it’s unlikely they’ll be revived under the second Trump administration. That doesn’t mean the overtime rules can’t change in some other way, though. In fact, President Trump has proposed eliminating tax on overtime, which may be part of upcoming legislation. Contact us for help managing all your payroll costs, including overtime pay.
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