Overtime violations hit employers with $127 million in back wages last year alone. If you're managing people, you need to understand these rules inside and out. The regulations around exempt employee classification, wage compliance, and hour compliance aren't just HR paperwork - they're business-critical knowledge that can save your company serious money and legal headaches.
The landscape got messy in 2024 when a federal court struck down the Biden administration's attempt to raise salary thresholds for exempt employees. We're back to the 2019 rules, but state laws are still doing their own thing. Let's break down what you actually need to know.
The Current State of Overtime Rules
Right now, federal law says an exempt employee must earn at least $684 per week ($35,568 annually) to qualify for overtime exemptions. But here's where it gets tricky - states can and do set higher bars.
California effectively requires around $124,800 annually for large employers because their threshold is twice the state minimum wage. New York varies by region, with some areas requiring over $64,000. If you have employees in multiple states, you need to follow the strictest rules that apply.
The basic overtime rule hasn't changed: non-exempt employees get time-and-a-half for anything over 40 hours in a workweek. Some states add daily overtime requirements on top of that.
Exempt vs Non-Exempt: The Three-Part Test
This is where most managers mess up. Just because someone has "manager" in their title doesn't make them exempt. Every exempt employee must pass three separate tests, and failing any one of them means they're non-exempt and owe overtime.
The Salary Level Test is straightforward - they need to earn at least $684 per week federally, plus whatever your state requires.
The Salary Basis Test trips up a lot of employers. Exempt employees must get their full weekly salary for any week they do work, period. You can't dock their pay for leaving early, taking long lunches, or poor performance. The only legal deductions are for full-day personal absences, disciplinary suspensions for workplace misconduct, or unpaid FMLA leave.
The Duties Test is where things get subjective. The employee's actual job duties - not their title - must fit into executive, administrative, or professional categories.
For executive exemption, they need to manage two or more full-time employees and have real authority to hire, fire, or significantly influence employment decisions. An "assistant manager" who occasionally assigns tasks but can't actually fire anyone probably doesn't qualify.
Administrative exemption requires office work directly related to business operations plus exercising discretion on matters of significance. Think about the difference between a purchasing agent who negotiates contracts versus a clerk who processes routine orders following a manual.
Professional exemption applies to work requiring advanced knowledge from prolonged study (like lawyers or engineers) or creative work that's original and artistic.
The Mythical "4 Hour Rule for Exempt Employees"
Here's something that confuses a lot of managers: there's no federal "4 hour rule for exempt employees." This seems to be a mix-up with state laws or company policies. Federal law just requires that exempt employees get their full salary for any week they perform work - no minimum hours required.
Some states do have minimum work requirements or reporting pay rules, but these aren't part of the federal overtime exemptions. Don't assume a rule you heard about applies everywhere.
Wage Compliance and Hour Compliance Basics
Getting wage compliance right means understanding that overtime calculations include more than base pay. You have to factor in non-discretionary bonuses, shift differentials, commissions, and most other compensation when computing that time-and-a-half premium.
Hour compliance requires tracking all time worked, including pre-shift setup, post-shift cleanup, and required training. If you require it or allow it to happen, you probably have to pay for it. The "de minimis" exception only covers truly trivial amounts of time.
Keep detailed records for at least two years, but smart managers keep them longer since willful violations can be pursued for three years.
State Laws That Change Everything
California operates in its own universe with daily overtime after 8 hours and double-time after 12 hours in a day. They also have double-time for work beyond 8 hours on the seventh consecutive day of work.
Multi-state employers face a nightmare scenario where remote workers are subject to the laws where they work, not where you're headquartered. A remote worker in New York needs to meet New York's salary threshold even if your company is based in Texas.
The safest approach is often to adopt policies that meet the strictest requirements across all your locations.
Common Violations That Will Cost You
The Department of Labor loves going after employee misclassification, especially in service industries. Restaurant "managers" who mainly serve customers, retail "supervisors" who stock shelves, and healthcare "administrators" who provide direct patient care are frequent targets.
Automatic meal deductions create another violation hotspot. If an employee works through any part of their meal break, you have to pay for the whole period. You can't just automatically deduct 30 minutes and hope for the best.
Pre-shift and post-shift work violations are everywhere. That security briefing before the store opens? Compensable time. Shutting down equipment after closing? Also compensable. Changing into required uniforms? Usually compensable too.
Industry-Specific Gotchas
Healthcare employers can use the 8/80 rule for overtime calculations over 14-day periods, but this requires special agreements and careful record-keeping.
Restaurants face complex tip credit rules that don't apply to overtime calculations. Employees must receive full minimum wage rates when calculating overtime premiums, regardless of tip credits used for regular time.
Construction companies often struggle with travel time between job sites, which is generally compensable work time unless the employee goes straight home.
Retail operations commonly misclassify assistant managers who lack real supervisory authority but handle routine tasks like opening registers or counting inventory.
Enforcement Trends You Should Know
The DOL recovered nearly $127 million in overtime back wages in fiscal year 2024, and they're not slowing down. Current enforcement priorities focus heavily on misclassification in service industries where violations are most common.
Willful violations face enhanced penalties including three-year lookback periods and civil money penalties up to $1,000 per violation. They consider violations willful when employers show "plain indifference" to FLSA requirements.
State enforcement operates independently from federal actions. New York can seek up to six years of back wages, while California's Labor Commissioner actively pursues misclassification cases with additional state penalties.
Practical Steps for Staying Compliant
Start with honest job analysis. Look at what people actually do most of their time, not what their job description says they should do. Document your classification decisions and review them annually or when job duties change significantly.
Train your managers on what overtime violations look like. They need to recognize red flags like employees consistently working 39.9 hours, requests for "off-the-clock" work, or complaints about unpaid time.
Invest in payroll systems that can handle complex calculations including multiple rates, bonus integration, and state-specific requirements. Many violations happen because systems can't handle the complexity, not because of intentional non-compliance.
Create clear policies around time tracking, meal breaks, travel time, and overtime authorization. Make sure employees acknowledge these policies in writing.
The Bottom Line
Overtime law compliance isn't optional, and the penalties for getting it wrong keep going up. The regulatory landscape stays complicated with federal and state requirements often conflicting or overlapping.
Focus on accurate classification using the three-part test, proper time tracking for all compensable work, and regular audits of your practices. When in doubt, err on the side of treating someone as non-exempt - it's cheaper than the penalties for getting it wrong.
The investment in compliance systems and training always costs less than violation penalties, legal fees, and the damage to your reputation when the Department of Labor comes calling.
Frequently Asked Questions
1. Can exempt employees work different roles without losing their exemption status?
Yes, but it's risky. The DOL uses a "primary duty" test where exempt employees can perform non-exempt work as long as their primary duty remains exempt work. However, if an exempt employee regularly spends more than 50% of their time on non-exempt tasks, they risk losing their exemption. The key is documentation - you need to track what percentage of time is spent on exempt vs. non-exempt duties. Some courts have found that exempt employees who spend 60-70% of their time on non-exempt work should be reclassified. This is particularly common in retail where "managers" spend most of their time on the sales floor rather than managing.
2. How do fluctuating workweek agreements work for salaried non-exempt employees?
A fluctuating workweek (FWW) allows employers to pay overtime at half-time rates rather than time-and-a-half for salaried non-exempt employees whose hours vary. The employee must receive a fixed salary that covers all hours worked in a week (including overtime hours), and the arrangement must result in at least minimum wage for all hours. For example, if someone earns $600/week salary and works 50 hours, their regular rate is $12/hour, so they'd get an additional $6/hour for the 10 overtime hours. However, the agreement must be clear that the salary covers all hours worked, and many states don't recognize FWW agreements or have additional restrictions.
3. What happens when bonuses affect overtime calculations retroactively?
Non-discretionary bonuses must be included in overtime calculations for all workweeks the bonus covers, which can trigger additional overtime payments retroactively. For example, if an employee earns a quarterly production bonus, you must recalculate their regular rate for each week in that quarter and pay additional overtime if owed. This gets complex with annual bonuses covering 52 weeks. The calculation involves dividing the bonus by total hours worked during the bonus period to find the additional regular rate, then paying half of that amount for each overtime hour worked. Many employers miss this requirement entirely, creating significant liability for unpaid overtime premiums.
4. How do you handle overtime for employees working multiple positions at different pay rates?
When employees work multiple jobs at different rates, you must calculate a weighted average regular rate for overtime purposes. For instance, if someone works 30 hours at $15/hour as a cashier and 15 hours at $20/hour as a trainer in the same workweek, their regular rate is $16.67 (($450 + $300) ÷ 45 hours). Any overtime hours are paid at $25/hour (1.5 × $16.67). You can't just pay overtime at whichever rate they were earning during the overtime hours. This also applies when employees receive different shift differentials or have temporary rate increases. The calculation must include all compensation for the workweek, making payroll systems more complex but legally required.
5. Are there any circumstances where exempt employees can receive overtime pay?
Yes, exempt employees can receive overtime pay without losing their exempt status, but it's uncommon and must be handled carefully. The FLSA allows additional compensation beyond the salary as long as it doesn't undermine the salary basis. Some employers pay "overtime" to exempt employees as an incentive or recognition, but this is actually additional compensation, not legally required overtime. However, if the additional pay is tied to specific hours worked or becomes expected regular compensation, it could jeopardize exempt status. The safer approach is providing bonuses or additional compensation that isn't tied to hours worked. Also, some state laws require overtime for exempt employees in specific circumstances, so check your state requirements.
