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.
What Counts as Overtime: Weekly vs. Daily Standard
Federal and most state laws impose a weekly overtime standard, which means that nonexempt employees are entitled to overtime for every hour more than 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 6 hours on Tuesday (and doesn't work any additional hours in the week). He is not entitled to receive overtime under the weekly overtime standard, even though he worked more than eight hours on Monday, because he didn't work more than 40 hours that week.
California and a handful of other states have a daily overtime standard, which means that nonexempt employees are entitled to overtime for every hour more than eight that they work in a day and every hour more than 40 that they work in a week. Let's take Alex from the paragraph 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.
Employers Who Must Pay Overtime
Although the vast majority of employers must pay overtime, not all are required to. To figure out whether you 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.
Which Employees Are Entitled to Overtime
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):
- executive, administrative, and professional employees who are paid on a salary basis (see below)
- independent contractors
- volunteer workers (this rarely applies to for-profit companies)
- outside salespeople (that is, employees who customarily and regularly work away from the employer's business, selling or taking orders to sell goods and services)
- certain computer specialists (such as systems analysts, programmers, and software engineers) who earn at least $27.63 per hour
- employees of seasonal amusement or recreational businesses, such as ski resorts or county fairs
- employees of organized camps or religious or nonprofit educational conference centers that operate for fewer than seven months a year
- employees of certain small newspapers
- newspaper deliverers
- workers engaged in fishing operations
- employees who work on small farms
- certain switchboard operators
- criminal investigators, and
- casual domestic babysitters and people who provide companionship to those who are unable to care for themselves (this exception does not apply to those who provide nursing care or to personal and home care aides who perform a variety of domestic services).
Administrative, Executive, and Professional Employees
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, and must 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. There are a few circumstances in which an employer may pay a salaried worker less than his or her full salary for a week -- for example, if the employee takes a couple of days of paid sick or vacation leave, or takes time off under the Family and Medical Leave Act. Generally, however, 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. 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.
Not every employee who earns $455 or more per week is exempt from overtime. 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.
- An administrative employee must perform office or other non-manual work that is directly related to the management or business operations of the employer or its customers, and must exercise discretion and independent judgment regarding significant issues.
- An executive employee's primary duty must be managing the employer's enterprise or a recognized division or department of that enterprise; the employee must regularly supervise at least two full-time employees (or the equivalent in part-time employees) and must have the authority to hire and fire or have significant input into hiring and firing decisions.
- A professional employee's primary duty must either be performing work that requires advanced knowledge in the field of science or learning, of a type that is usually attained through an advanced course of study; or performing work that requires invention, imagination, originality, or talent in a recognized creative or artistic field.
To learn more about these exemptions, visit the Department of Labor's website at www.dol.gov.