When Is Overtime OK?

Is overtime a problem for your business? The new overtime legislation could make it an even bigger problem come December. The minimum salary threshold for overtime exemption will more than double on December 1, 2016, making some salaried employees newly eligible for time-and-a-half overtime pay. Now is a great time to conduct an overtime audit to find out what your business can handle.

Not all overtime is bad.

The first thing you’ll want to consider is when overtime can actually be good for business. Though your payroll may go up in December, there are cases where overtime can be cost-effective.

• If you have a sudden demand for increased productivity, especially a seasonal one, overtime can be less expensive than hiring new employees. When demand ebbs, new employees will still need regular, stable work, and you might experience staffing overages.
• What about temporary help? Along these same lines, overtime can be a more immediate solution for sudden demand, since any new help, even temporary, usually requires lead time for training.

You’ll want to do some rough estimates of how much you expect to pay in overtime and compare that to how much you would pay for alternative staffing, hiring, or training.

What kind of overtime is it?

For certain roles, some overtime is expected and natural. But you’ll want to make sure it’s not being overused. Take a look at your employees. Which category of overtime do they fall into?

• Occasional overtime. Some employees rarely, if ever, have overtime. They have predictable schedules, and deadlines only occasionally cause them to work late. These employees typically don’t strain your labor budget. In most cases, it will be most effective to continue to pay overtime when it comes up.
• Expected overtime. Other employees expect or rely on overtime as part of their regular compensation. This could happen seasonally (retail before Christmas), monthly (end-of-the-month or end-of-the-year accounting), or weekly (influx of processing on Mondays). For these employees, consider setting an expected overtime budget, and let employees manage when and how they use it.
• Heavy overtime. Some employees regularly work more than 40 hours a week—and significantly more than 40 hours a week at that. This is a case where you should strongly consider raising salaries to meet or exceed the minimum threshold to avoid overtime pay—or higher additional employees.
  • If you do decide to raise the salaries of employees who are just under the threshold, you may also want to consider the salaries of employees who are just above the threshold. This may seem unintuitive, but these workers may see their pay grades suddenly decrease in relation to their position, as lower positions get raises. Consider this in your calculations.

Often you’ll need to apply these strategies differently across departments and teams to create the most effective overtime plan.

How to calculate overtime for salaried workers.

If you’re going to pay overtime costs to non-exempt salaried workers, you’ll want to make sure you do it correctly. First, some basics:

• The Fair Labor Standards Act (FLSA) defines overtime as time worked beyond 40 hours per workweek. However, the FLSA gives you the flexibility to define when an employee’s workweek begins and ends. You don’t have to pay overtime for hours worked on Saturdays, Sundays, or holidays, as long as the hours fall within an employee’s regular 40-hour workweek.
• An employee working overtime is compensated at a higher hourly rate of pay, which must be at least 1.5 times the employee’s weighted average hourly rate. If you are paying overtime to a salaried worker, you’ll need to calculate what their hourly rate would be if they were paid hourly. Then take that number times 1.5 to get their overtime rate.
• When you calculate their weighted average hourly rate, pay attention to minimum wage. Unless the job is exempt from wage requirements, an employee’s hourly rate cannot be less than minimum wage. [$7.25 nationally, but check your state regulations.]
• You’ll want to make sure you are calculating your overtime pay rates correctly. If you are overpaying employees, you could exceed your payroll budget. On the other hand, if employees are underpaid, you’ll be in violation of federal law—and arming your employees with grounds for an overtime lawsuit. It’s worth seeking a professional opinion here.

Finally, FLSA states that overtime compensation must be paid at the same time as regular pay for the pay period in which overtime wages were earned. Failure to pay at the proper time can affect your compliance.

Watch out for these overtime issues.

If managed improperly, overtime costs can open your business to overtime lawsuits and settlements, or negate any financial gains. You’ll want to watch out for these potential issues:

• Don’t forget to monitor overtime. When overtime occurs frequently, it can become a part of the workplace culture. Once you’ve set up an overtime plan, set up alerts through your time and attendance software that can notify you if overtime spikes.
• Don’t condone off-the-clock hours. Legally, employees must be compensated for all hours worked. The FLSA forbids “comp time” or any agreement that gives the employee unofficial time off in lieu of recording overtime hours. This practice would leave your business open to potential lawsuits and costly back-pay settlements. Make sure everyone at your company knows this practice is unacceptable.
• Prepare your employees for new tracking procedures. You may need to deal with time-tracking stigmas from salaried workers who now need to start tracking their work hours—something many associate with hourly pay grades. Be prepared to have these conversations, so that employees know it is federally mandated—not a change in how you view their work.

If you don’t already have a time tracking system that lets you monitor and report overtime, now is the time to consider it. It is essential for helping your company maintain compliance should you be audited, and accurate records can help you avoid lawsuit claims. If you need updates to your time and attendance system before December, get in touch.