What Is Overtime?
Overtime is the time worked by a non-exempt employee in excess of 40 hours in a workweek. Under the Fair Labor Standards Act (FLSA), overtime must be paid at a rate of at least one and one-half times the regular rate of pay. This is commonly called "time and a half."
For employers with hourly workers, shift employees, and non-exempt staff, understanding and properly managing overtime is critical for legal compliance and controlling labor costs.
Federal Overtime Requirements (FLSA)
The Fair Labor Standards Act establishes the baseline overtime requirements that apply to most private sector employers:
The 40-Hour Threshold
Overtime is calculated based on hours worked over 40 in a single workweek, not by day or pay period. A workweek is a fixed, recurring period of 168 hours (seven consecutive 24-hour periods).
Time-and-a-Half Pay
Non-exempt employees must be paid 1.5 times their regular rate of pay for overtime hours.
Example: If an employee's regular rate is $15/hour, their overtime rate is $22.50/hour.
No Maximum Overtime
Federal law doesn't limit how many hours an employee can work in a week, only requires overtime pay for hours over 40. (Some state laws do impose daily overtime or limits on consecutive hours.)
Who Is Entitled to Overtime?
Non-Exempt Employees
Most hourly workers are non-exempt and entitled to overtime pay when they work more than 40 hours per week.
Exempt Employees
Certain employees are exempt from overtime requirements if they meet specific criteria for salary level and job duties:
- Executive employees
- Administrative employees
- Professional employees
- Computer employees
- Outside sales employees
To be exempt, employees generally must:
- Be paid on a salary basis (not hourly)
- Earn at least $684 per week ($35,568 annually) as of 2020
- Perform exempt job duties as their primary function
Simply calling an employee "salaried" or "manager" doesn't make them exempt. They must meet all criteria. Know any overtime exemptions to avoid problems down the road.
State Overtime Laws
Many states have overtime rules that are more generous to employees than federal law:
Daily Overtime
Some states require overtime pay for hours worked over a certain number in a single day:
- California: Overtime for hours over 8 per day; double-time for hours over 12 per day and for the 7th consecutive day worked
- Alaska: Overtime for hours over 8 per day
- Colorado: Overtime for hours over 12 in a day
Different Thresholds
Some states have different weekly thresholds or salary requirements for exemption.
When State and Federal Law Differ
When state and federal overtime rules conflict, employers must apply whichever law is more favorable to the employee.
Calculating Overtime Pay
Regular Rate of Pay
The regular rate includes all compensation, not just the hourly rate:
- Hourly wages
- Salary (converted to hourly)
- Non-discretionary bonuses
- Shift differentials
- Commissions
- Certain other payments
Excluded from regular rate: discretionary bonuses, gifts, expense reimbursements, premium pay for holidays/weekends.
Standard Overtime Calculation
For an hourly employee:
- Calculate regular rate: $15/hour
- Calculate overtime rate: $15 × 1.5 = $22.50/hour
- Calculate total pay: (40 hours × $15) + (10 overtime hours × $22.50) = $600 + $225 = $825
Salaried Non-Exempt Employees
For salaried employees entitled to overtime:
- Divide weekly salary by hours it's intended to cover (typically 40): $600 ÷ 40 = $15/hour regular rate
- Calculate overtime rate: $15 × 1.5 = $22.50/hour
- Add overtime pay: $600 salary + (5 overtime hours × $22.50) = $712.50
Fluctuating Workweek Method
In some situations, employers may use alternative calculation methods, but these require specific conditions and written agreements.
Managing Overtime Effectively
Accurate Time Tracking
Use reliable systems to track all hours worked:
- Mobile time tracking for employees without fixed workstations
- Automatic overtime alerts when employees approach 40 hours
- Real-time visibility into hours worked across locations
- Audit trails for compliance
Overtime Policies
Establish clear policies on:
- Whether prior authorization is required for overtime
- Consequences for unauthorized overtime (note: it must still be paid)
- How overtime opportunities are distributed
- Blackout periods or overtime restrictions
Scheduling Strategies
Reduce unplanned overtime through better scheduling:
- Build schedules that stay within 40 hours per employee
- Cross-train employees for flexibility
- Monitor hours in real-time to prevent overages
- Plan for predictable busy periods
Alternative Arrangements
Consider strategies to minimize overtime:
- Hire additional part-time staff
- Use temporary workers during peak seasons
- Offer flexible schedules to spread hours
- Implement 4-day workweeks (4×10 hours) if daily overtime doesn't apply in your state
Overtime Record-Keeping Requirements
The FLSA requires employers to keep specific records for at least three years:
Required Records
- Employee's full name and social security number
- Address and zip code
- Birth date if under 19
- Sex and occupation
- Time and day workweek begins
- Hours worked each day and total hours each workweek
- Regular hourly pay rate
- Total overtime earnings for the workweek
- Additions to or deductions from wages
- Total wages paid each pay period
- Date of payment and pay period covered
Retention
Payroll records must be kept for three years; time cards and records on which wage computations are based should be kept for two years.
Penalties for Overtime Violations
Failing to pay required overtime can be expensive:
Back Wages
Employers must pay all unpaid overtime wages owed.
Liquidated Damages
Employees may be entitled to double their unpaid wages as liquidated damages under FLSA.
Attorney's Fees
Employers often must pay employees' legal fees in wage and hour cases.
Department of Labor Penalties
The DOL can assess civil penalties up to $2,074 per violation for repeated or willful violations.
Criminal Penalties
Willful violations can result in criminal prosecution, fines, and even imprisonment for repeat offenders.
Common Overtime Mistakes
Off-the-Clock Work
Allowing or requiring employees to work before clocking in, after clocking out, or during unpaid breaks violates overtime rules if it pushes them over 40 hours.
Averaging Hours Over Pay Periods
You can't average hours worked over two weeks. If an employee works 50 hours one week and 30 the next, you owe 10 hours of overtime, even though they averaged 40 hours over two weeks.
Comp Time in Private Sector
Private employers generally cannot give comp time (time off) instead of overtime pay to non-exempt employees. (Public sector employers have different rules.)
Paying Bonuses Without Recalculating Overtime
Non-discretionary bonuses must be included in the regular rate when calculating overtime for the period the bonus covers.
Improper Salary Deductions
Making deductions from exempt employees' salaries for partial-day absences can destroy the exemption and create overtime liability.
Technology Solutions for Overtime Management
Modern workforce management tools help businesses:
- Track hours in real-time across all locations
- Send automatic alerts when employees approach overtime thresholds
- Calculate overtime automatically, including state-specific rules
- Maintain compliance records
- Integrate with payroll systems
- Provide managers with labor cost visibility
For businesses with shift workers in multiple locations, like restaurants, retail stores, or service businesses, having real-time visibility into hours worked is essential for controlling overtime costs while ensuring compliance.
Overtime Best Practices
Classify Correctly
When in doubt about whether an employee is exempt, err on the side of caution and treat them as non-exempt. Consult with legal counsel when making exemption determinations.
Track All Time
Use automated systems that capture all time worked, including pre-shift prep, post-shift duties, and any off-the-clock work.
Train Managers
Ensure managers understand:
- Overtime rules and requirements
- How to identify all compensable time
- Importance of accurate time tracking
- That unauthorized overtime still must be paid
Review Regularly
Conduct periodic audits of:
- Exempt classifications
- Timekeeping practices
- Overtime trends
- Compliance with policies
Budget for Overtime
Plan for overtime in your labor budget, especially in industries with seasonal fluctuations or unpredictable schedules.
The Future of Overtime Regulation
Overtime rules continue to evolve:
- Periodic updates to salary thresholds for exemptions
- Increasing state-level regulations
- Greater enforcement focus on misclassification
- Technology making compliance easier to track and violations easier to detect
Staying compliant with overtime rules protects your business from costly violations while ensuring your employees are paid fairly. With clear policies, accurate time tracking, and proper employee classification, managing overtime becomes a routine part of workforce management rather than a compliance minefield.
