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A Guide to Small Business Overtime Laws

Donna Fuscaldo
Donna Fuscaldo
Senior Finance Writer
business.com Staff
Updated Jun 29, 2022

Find out who qualifies, how much you must pay them, and what it will cost you if you don't.

Do you know which of your employees are exempt from overtime protections and which aren’t? With new rules governing overtime pay recently instituted by the U.S. Department of Labor (DOL), it is important for small business owners to be aware of how they apply. This marks the first time in 15 years the federal government has made changes to the overtime rules, expanding the number of workers eligible for overtime pay to 1.3 million.

With that in mind, here’s a look at the current lay of the land, what compliance looks like, and what risks you’re taking if you fail to abide by the rules.

Did you know?Did you know? The changes made to the overtime laws went into effect in January 2020, but will have more of an impact in the coming years as businesses hire again after pandemic reductions.

 

Editor’s note: Looking for a time and attendance system for your business? We can help you choose the one that’s right for you. Use the questionnaire to receive information from a variety of vendors for free:

 

Federal overtime rules

The current rules governing overtime are administered by the DOL, which sets out the conditions that determine when overtime is paid, the rate at which workers earn overtime pay, and which classifications of employees are exempt from overtime protections under the law. [Interested in time and attendance software to make sure you’re being compliant with the law? Check out our choices for the best time and attendance systems.] 

Overtime and regular rates

The current rules on overtime pay state that unless an employee falls into an exempt category, they must receive overtime pay for any hours worked beyond 40 in one workweek. That overtime pay must be no less than time-and-a-half their regular rate of pay. There is no limit to overtime hours an employee can work so long as they are compensated properly.

A workweek is defined under the law as any fixed and regularly recurring period of 168 hours, which equates to seven consecutive 24-hour days. Any time worked by a nonexempt employee in that period must be paid at the regular rate of time-and-a-half pay.

The new rules raise the standard salary level to $684 per week from $455 a week and increase the compensation level for highly compensated employees to $107,432 per year from $100,000.

Did you know?Did you know? Employers are allowed to use bonuses and incentive payments that are paid each year to account for 10% of the standard salary level.

Exemptions

Those rules are clear enough, but what exactly is a nonexempt employee? The DOL currently considers several classifications of employees exempt from overtime protections, meaning they can work beyond 40 hours in a workweek without being entitled to that time-and-a-half pay bump.

  • Executive: Executive employees are those compensated on a salary basis at a rate of no less than $684 per week. Their primary duty must be managing the company or a recognized department or subdivision of the company. They must also regularly direct the work of at least two other full-time employees. Finally, they must have the authority to hire or fire other employees, or at least influence over the hiring and firing process.

  • Administrative: Administrative employees are those compensated on a salary or fee basis at a rate of no less than $684 per week. Their primary duty must be the performance of office or non-manual work related to the management of general business operations of the employer or clients. Finally, the employee’s primary duty must include the exercise of discretion and independent judgment in significant matters.

  • Professional: Professional employees are those compensated on a salary or fee basis at a rate of no less than $684 per week. Their primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and requires the consistent exercise of discretion and judgment.

  • Computer-related: Computer employees are those compensated either on a salary or fee basis at a rate of no less than $684 per week or, if compensated on an hourly basis, no less than $27.63 an hour. They must be employed as a computer systems analyst, programmer, software engineer or similarly skilled worker. Their primary duties must include the application of systems analysis techniques and procedures or the design and development of computer systems or programs.

  • Outside sales: An employee meets the outside sales exemption if their primary duty is making sales or obtaining orders or contracts for services. They must regularly be engaged in their work away from the employer’s place of business. Salary requirements do not apply to the outside sales exemption.

State rules

The overtime rules listed above are the federal minimums. That means they are the absolute floor of what must be paid. States can and do implement more stringent overtime protection laws, so depending on which state you operate in, you might be required to pay more overtime more often. Failure to do so could result in penalties assessed by the state government. Some states – including Alaska, California and Nevada – have daily overtime laws for those who work over eight hours in one day. Other states have overtime laws for working more than 10 or 12 hours in a day.

TipTip: To prevent your business from running afoul of overtime rules, check with your state. Some have stricter rules in addition to the federal ones.

Penalties for noncompliance

Penalties and lawsuits are among the risks small business owners face if they do not comply with overtime rules. Employee lawsuits are among one of the bigger risks. After all, for FLSA violations, employers could be required to provide back pay to the impacted employees, as well as pay a penalty called liquidated damages, which is equal to the amount of back pay owed. Those numbers add up fast, making the cost of noncompliance twice as expensive as simply complying in the first place.

“The problem comes when an employer does it wrong for a long time, or for multiple employees,” said Rhamy Alejeal, CEO of Poplar Financial. “If you are making a mistake, and you do it for a while, the cost to correct that by paying the employee up, plus interest and penalties, becomes quite large very quickly.”

Fines and fees

Enforcement doesn’t just come in the form of lawsuits. The DOL could also uncover violations through its Wage and Hour Division. Willful violations of the FLSA carry fines of up to $10,000 and the possibility of imprisonment for repeated willful violations.

How accounting software can help you manage overtime

The new changes to the federal overtime rules mean more of your employees may be entitled to overtime wages. If you have top accounting software, it’s easier to determine which ones are nonexempt. That will enable you to better assess the impact these changes are having on labor costs and identify ways to save.

In addition to identifying which employees are eligible for overtime, accounting software offers features that allow you to automate your timekeeping to reduce errors and save time and money. Once you understand the impact on your labor costs, you can make changes to the schedules to reduce overtime.

You may also want to raise salaries or hire more part-time staff instead. Without accounting software, it takes a lot more time to make an informed decision. All of those timesaving features are tied together to give you robust reporting and analytics that you can’t get from a pen and paper or a spreadsheet.

Adam Uzialko contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

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Donna Fuscaldo
Donna Fuscaldo
business.com Staff
Donna Fuscaldo is a senior finance writer at business.com and has more than two decades of experience writing about business borrowing, funding, and investing for publications including the Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, and Foxbusiness.com. Most recently she was a senior contributor at Forbes covering the intersection of money and technology before joining business.com. Donna has carved out a name for herself in the finance and small business markets, writing hundreds of business articles offering advice, insightful analysis, and groundbreaking coverage. Her areas of focus at business.com include business loans, accounting, and retirement benefits.