Our clients are often surprised to learn that they may have to pay additional wages to certain employees who work in excess of 40 hours per workweek. In the US, federal statutory overtime laws require “non-exempt” employees to be paid at 1.5 times their normal hourly rate for hours worked over 40 hours in a week. In addition, some US states have supplemental laws that: (1) require overtime pay for workers working more than a certain number of hours in a single day; (2) adopt overtime requirements for specific industries; or (3) require compensation as high as 2 times the normal hourly rate if hours worked exceed certain thresholds.
These laws apply regardless of the terms of the employee’s contract of employment. Thus, any attempt to waive these statutory protections will have no legal effect. Similarly, the law of the state where the employee is physically working will apply, regardless of any choice of law clause in your contract of employment.
Understanding whether the overtime laws apply usually requires determining whether an individual employee is “exempt” or “non-exempt.” Generally, under federal law (known as the FLSA) employees are exempt – and therefore not entitled to overtime pay – if: (1) they are paid on a salaried basis, in an amount in excess of certain monetary thresholds; and (2) based on their actual job duties, they are properly categorized as engaged in executive, administrative, professional, computer-related, or outside sales activities.
Most states follow the federal definitions for exempt and non-exempt employees. As a result, if an employee is exempt under federal law then the employee will usually be exempt from state level overtime laws. However, this is not always the case; some states impose stricter or more lenient requirements for exemption.
If an employee is non-exempt, then a host of additional issues can emerge:
- Over what period are the hours to be calculated? Generally the employer can choose any 7-day workweek for purposes of determining whether the 40-hour threshold has been surpassed. Different workweeks may be used for different classes of employees, subject to certain limitations. However, the workweek may not be changed retroactively, and any prospective change must be supported by a legitimate business reason.
- What hours are included in the calculation? In addition to hours actually worked, short breaks and required training are included in the calculation. Time spent “on-call” is included if the employee is required to be immediately available. Travel time may or may not be included, depending on whether the travel occurs during regular working hours or if the employee is required to perform duties while traveling. The travel time rules are complex and require detailed analysis.
- To what wage base does the overtime apply? Under FLSA, overtime pay is 1.5 times the “regular rate of pay.” This includes nondiscretionary bonuses and commissions.
Employers who fail to comply with overtime rules can face substantial consequences, including back pay awards, liquidated damages (often double the amount owed), and attorneys’ fees. Ensuring proper classification of employees and accurate tracking of hours worked is essential to avoid costly legal disputes and penalties.