July 22, 2012
Among other things, the Fair Labor Standards Act (FLSA) requires employers to pay non-exempt employees (commonly referred to as “hourly” employees) an overtime premium if they work more than 40 hours in a workweek. The overtime premium must be at least 1.5 times the employee’s regular rate of pay.
Certain misconceptions have developed about when overtime is due and how it is calculated. Below are some of the most common overtime myths along with an overview of the FLSA’s overtime requirements:
Myth: Small employers aren’t covered by the FLSA’s overtime requirements.
Fact: Virtually all employers are covered by the FLSA and its overtime requirements. There are two types of coverage under the FLSA: Enterprise and Individual. If either applies, non-exempt employees are entitled to overtime for hours worked in excess of 40 in a workweek.
Enterprise Coverage: Employees who work for certain businesses or organizations (“enterprises”) are covered by the FLSA if the enterprise has at least two employees and: (1) has an annual dollar volume of sales or business done of at least $500,000; or (2) is a hospital, business providing medical or nursing care for residents, school, or a government agency.
Individual Coverage: Even when there is no enterprise coverage, employees are protected by the FLSA if their work regularly involves “interstate commerce”, which is defined very broadly. Examples of employees who are involved in interstate commerce include those who: produce goods (such as a worker assembling components in a factory or a secretary typing letters in an office) that will be sent out of state; regularly make telephone calls to persons located in other states; handle records of interstate transactions; or travel to other states.
Myth: If an employer pays an employee a salary, the employee is automatically exempt from overtime.
Fact: There is often confusion about the differences between a salaried and an exempt employee because the terms are sometimes used interchangeably. Simply because an employee is paid on a salary basis does not mean the employee is exempt from overtime; the employee must meet very specific criteria in order to be considered exempt. These exemptions are very narrowly defined and are based on an established set of salary and duties criteria.
Myth: “Unauthorized” overtime need not be paid.
Fact: If an employee has worked overtime, he or she must be paid overtime, regardless of whether the overtime was authorized. The fact that an employer has a policy that no overtime work is permitted unless authorized in advance doesn’t relieve them of this requirement. The employer may subject the employee to disciplinary measures for working unauthorized overtime, but in no case may the employer withhold overtime pay.
Myth: Employees may waive their right to overtime as long as it is in writing.
Fact: Regardless of the circumstances, overtime pay may not be waived. Non-exempt employees may not voluntarily agree to decline overtime even by way of a written agreement between the employer and employee.
Myth: An employer may offer employees “comp time” in lieu of overtime pay.
Compensatory time off (“comp time”) is paid time off that is offered instead of cash payment for working overtime hours. However, private sector employers cannot meet the FLSA’s overtime pay requirement through the use of compensatory time off.
Myth: An employee’s hours may be averaged over two workweeks when determining whether overtime is due.
Fact: The FLSA requires a single workweek to be used when determining if an employee is due overtime, irrespective of the employer’s pay cycle. For instance, if you have a bi-weekly pay schedule and an employee works a total of 80 hours over the two workweeks, he or she would be entitled to overtime pay if more than 40 hours were worked in either workweek (e.g., 50 hours in one workweek and 30 hours the next).
Myth: When calculating overtime, an employee’s regular rate of pay includes only his or her hourly wage.
Fact: Accurately determining an employee’s regular rate of pay is one of the critical components to making proper overtime calculations. As previously covered, under federal law, overtime is due at a rate of 1.5 times an employee’s “regular rate of pay.”
An employee’s regular rate of pay is calculated by dividing the total pay for employment (except the statutory exclusions described below) in any workweek by the total number of hours actually worked. For example, if a non-exempt employee who earns $10 per hour worked 50 hours in one workweek and also received $300 in commissions, their regular rate of pay would be $16 per hour ($10 x 50 hours + $300 in commissions divided by 50 hours). In this example, the employee’s overtime premium would be $24 (1.5 times their regular rate). Note: The regular rate of pay must always be equal to or greater than the minimum wage.
In determining an employee’s regular rate of pay, the following must be included:
Certain payments made to employees are excluded from the regular rate calculation. These “statutory exclusions” include, but are not limited to:
Myth: Paid time off for holiday, vacation, or illness must be included in determining whether an employee is eligible for overtime.
Fact: If you allow an employee to take time off for a holiday, a vacation, or because he or she is sick, the time off, even if the employee is paid for the time, is not hours worked and need not be included when determining the total hours worked for overtime purposes.
Myth: An employer may exclude rest periods when determining whether the employee has worked more than 40 hours in a workweek.
Fact: Rest breaks are considered hours worked and therefore must be paid and included when determining overtime. The Department of Labor (DOL) defines a rest break as any period lasting 20 minutes or less that the employee is allowed to spend away from work. Bona fide meal periods, on the other hand, aren’t considered hours worked and need not be included when determining whether an employee is due overtime as long as the meal period is at least 30 minutes and the employee is fully relieved of all duties for the purpose of eating a regular meal.
Myth: Employers may deduct cash shortages, uniforms, and lost equipment from overtime pay.
Fact: Employers are prohibited from making any deduction that would reduce an employee’s overtime pay. In certain circumstances, deductions are permitted to be made to non-exempt employee’s regular wages to the extent that the employee still receives at least the minimum wage for all hours worked–but in no case may such deductions cut into overtime pay.
Myth: An employer may pay overtime as a fixed sum for varying amounts of overtime.
Fact: A lump sum paid for work performed during overtime hours without regard to the number of overtime hours worked fails to qualify as an overtime premium even if the amount of money paid is equal to or greater than the sum owed on a per-hour basis.
Employers should carefully review the FLSA to understand their overtime requirements and verify that their policies and practices are in compliance. It is also critical to check state law, which may have additional requirements or restrictions. For example, California also requires daily overtime when a non-exempt employee works more than 8 hours in a workday.