Federal and state laws require most employers to pay overtime. The overtime premium is 50% of the employee's usual hourly wage. This means an employee who works overtime must be paid "time and a half"—the employee's usual hourly wage plus the 50% overtime premium—for every overtime hour worked.
These laws contain many exceptions, so not all employees are entitled to overtime. Employees who are eligible for overtime are called "nonexempt" employees, and those who are not eligible for overtime are called "exempt" employees.
Federal and most state laws impose a weekly overtime standard, which means that nonexempt employees are entitled to overtime for every hour beyond 40 that they work in a workweek, regardless of how many hours they work in a day. For example, Alex is a nonexempt employee who works 12 hours on Monday and six hours on Tuesday (and doesn't work any additional hours in the week). Because his total hours for the week do not exceed 40, he is not entitled to overtime under the weekly standard.
California and a handful of other states have a daily overtime standard, as well. This means that nonexempt employees are entitled to overtime for every hour beyond eight that they work in a day. Let's take Alex from the example above. In a daily overtime state, he would be entitled to overtime pay for the four extra hours he worked on Monday, even though he didn't come close to working more than 40 hours in the week.
Although the vast majority of employers must pay overtime, not all are required to. To figure out whether your company must pay overtime, first determine whether you are covered by the federal Fair Labor Standards Act (FLSA), the federal wage and hour law that sets out the overtime rules. Generally, your business is covered by the FLSA if you have $500,000 or more in annual sales. Even if your business is smaller, however, you must pay overtime if your employees work in what Congress calls "interstate commerce"—that is, they conduct business between states. This includes more than you might think, including making phone calls to or from another state, sending mail out of state, or handling goods that have come from, or will go to, another state.
Even if your business is so small or local that it isn't covered by the FLSA (and this will be a pretty rare occurrence), you might be covered by your state's overtime law. Contact your state labor department for details.
For a detailed guide to your legal rights and responsibilities as an employer, see The Manager’s Legal Handbook.
If your business is covered by either the FLSA or your state's overtime law, then all of your employees are entitled to overtime unless they fit into an exception. The following workers are "exempt" from the federal overtime law (meaning that they fit into an exception and are therefore not entitled to overtime):
Probably the most common—and confusing—exceptions to the overtime laws are for so-called "white collar" workers. Employees whom the law defines as "administrative, executive, or professional" need not be paid overtime.
To be considered exempt under the FLSA, administrative, executive, or professional employees must be paid on a salary basis and must spend most of their time performing job duties that require the use of discretion and independent judgment. Some states have created additional requirements that make it more difficult to fall within these exemptions, though, so you should also check with your state's law before classifying an employee as exempt.
An employee who is paid on a salary basis must earn at least $455 per week. The Department of Labor has proposed a rule to increase the minimum weekly salary from $455 to $970; if the rule passes as expected, it will likely go into effect the summer of 2016.
The employee must also receive the same salary every week, regardless of how many hours the employee works or the quantity or quality of the work the employee does. Generally, if an employer docks an employee's pay (for leaving work early to attend a doctor's appointment or not meeting a sales target, for example), then the employee is not paid on a salary basis and is entitled to overtime. However, there are a few circumstances in which an employer may pay an exempt worker less than his or her full salary for a week without compromising the employee's exempt status. This includes docking an employee's pay for full-day absences according to the employer's paid sick or vacation leave policy, or during the employee's first or last week of work. For more information on how pay docking affects an employer's obligation to pay overtime, see Nolo's article Legal Limits on Pay Docking and Unpaid Suspensions.
In addition to the above salary requirements, the employee must also be performing certain types of work—generally, work that is directly related to the company's business operations, requires an advanced degree, or is managerial or supervisory in nature. In all cases, the employee must be authorized to make relatively high-level business decisions. Here are the basic requirements for the administrative, executive, and professional exemptions:
To learn more about these exemptions, visit the Department of Labor's website at www.dol.gov.