Overtime pay and federal overtime laws in 2023

As a business owner, you have a responsibility to your employees. This includes ensuring eligible workers receive the overtime pay they deserve. But how do you do that? First, it’s crucial that you have an understanding of federal overtime laws. Not only will this help your business remain compliant with the federal government, but it can also protect your organization in the event of litigation.

In this guide, we’ll discuss overtime pay and federal overtime laws to help you avoid overtime issues with your employees and the government. Keep reading to learn what overtime means for your business, or use the links below to navigate the post.

• What is overtime pay?
• Exempt vs. nonexempt employees
• Calculating an employee’s overtime pay
• Do employers have to pay overtime?
• Common overtime violations
• Final notes

What is overtime pay?

Overtime pay is an additional amount of money nonexempt employees receive for working over a 40-hour workweek. For example, if a nonexempt employee works 42 hours, then they’re entitled to overtime pay for the extra two hours worked. Failing to provide them with a paycheck that accurately reflects the extra time worked can result in hefty fines and even legal action.

Federal overtime requirements for business owners

The federal Fair Labor Standards Act, also known as FLSA, was passed in 1938 by the U.S. Department of Labor , or DOL. Since then, employees’ rights to overtime compensation have been protected. The law states that overtime pay is time and a half of an employee’s regular rate of pay. However, that’s the minimum. There’s no cap to how much you can pay your employees for overtime. If you choose, you can provide your employees with an overtime rate higher than the time and a half required by law.

Note that there are no overtime laws regarding employees working on weekends or holidays. But if they exceed their regular workday limit on those specific days, then you must pay overtime.

If you’re a small business owner, an HR professional, or someone who processes payroll, it’s imperative that you keep up with federal overtime provisions. You have to adhere to federal guidelines in addition to the employment laws in the state you’re conducting business in. State overtime laws vary by location. Whether you’re planning on starting a business out of state or expanding your business to locations across state lines, knowing overtime laws is a must. Check out our blog on overtime pay laws by state if you need assistance.

Exempt vs. nonexempt employees

To determine overtime eligibility, you must first find out if your employees are exempt or nonexempt. But what exactly is the difference between the two? We’ll go over exempt and nonexempt employees in detail below to prevent misclassifying workers and getting hit with overtime penalties as a result.

Exempt employees

Under the DOL, exempt employees are classified as workers who perform job duties in the following categories:

• Executive —An employee in an executive position must manage a fraction or the entirety of your business. They’ll also be in charge of two or more full-time employees, meaning they have hiring and firing responsibilities. Because of their standing, employees in this category have the power to change the employment status of workers.
• Professional —The professional exemption category is split into two sections: learned and creative. Learned professional employees must use their advanced knowledge in the field of science to do work at your company. On the other hand, creative professionals are required to use their artistic or creative skills to perform their job duties.
• Administrative—Administrative employees perform office work that has a direct impact on important business operations for you or your customers.
• Computer—For an employee to fall under this exemption, they must work as a computer systems analyst, computer programmer, or software engineer.
• Outside sales—The primary duty of outside sales exempt employees is to make sales. Their work is also based outside of your business location.

Exempt employees must also receive a salary of $684 or more per week. If an employee doesn’t meet this salary level, they would be classified as nonexempt. Exempt workers are also not subject to FLSA overtime regulations, meaning they’re not entitled to overtime pay.

Nonexempt employees

In contrast, nonexempt employees receive an hourly wage that follows either the federal minimum wage or a wage determined by the state. If your business resides in a state where they have their own minimum wage laws, you’re required to employ both at your organization. Nonexempt employees are also eligible for overtime compensation.

It’s important to recognize the differences between exempt and nonexempt, since classifying your employees incorrectly could result in inaccurate wages and unreported overtime. This could lead to costly wage disputes in court or fines by the government.

For a more in-depth look at these two types of worker classifications, check out our exempt vs. nonexempt post.

Calculating an employee’s overtime pay

Calculating overtime pay for hourly wages requires some simple arithmetic on your part. To calculate overtime pay, you’ll use the following formulas:

• Hourly rate x 1.5 = overtime rate
• Overtime rate x total overtime hours worked = overtime earnings
• Hourly rate x 40 hours = base rate
• Base rate + overtime earnings = total pay

Let’s take a look at the example below using the formulas above.

If an employee’s regular rate is $15 an hour, their overtime rate would be $22.50 an hour.

$15 x 1.5 = $22.50

So if they worked 45 hours one week, their total earnings would be $712.50.

($15 x 40 = $600) + ($22.50 x 5 = $112.50) = $712.50

Note that these calculations don’t include tax withdrawals, nondiscretionary bonuses, or multiple pay rates that may appear on employee paychecks. You can avoid complicated math and added work by using an automated payrollsystem that automatically calculates overtime pay.

Do employers have to pay overtime?

Under federal law, making sure nonexempt employees receive overtime pay is mandatory for employers. So yes, your company has to pay overtime. If your employee is nonexempt and they work more than 40 hours, it’s illegal to not pay them what they’re due. Failing to pay overtime wages could result in:

• Lawsuits from employees. Litigating overtime compensation in court can be very costly. Plus, a lawsuit may potentially damage the reputation of your business.
• An investigation conducted by the DOL.
• Having to find ways to pay back overtime wages owed.
• Fines up to $10,000.
• Prison time if violations continue to occur.

To avoid the consequences above, make sure you’re accurately classifying employees and keeping track of the number of hours worked. We recommend that you use time tracking tools to hinder errors and ensure no overtime wages fall through the cracks.

Common overtime violations

The first step in preventing overtime violations from happening is knowing what they are. We’ve outlined a few of the most common violations businesses make so that you can avoid them:

• Misclassifying employees: In order to avoid paying overtime, some businesses classify their employees as exempt when they’re really nonexempt. If an employee finds out they’ve been classified incorrectly, they may decide to take legal action and demand back pay for their lost overtime wages.
• Inaccurate time tracking: Having incorrect timekeeping records could result in employees receiving far less overtime compensation than they deserve. It’s crucial that employers keep an accurate record of their employees’ work on the clock. Not only will proper timekeeping ensure employees are getting paid for the hours they work, but it also prevents workers from making fraudulent claims against you.
• Not taking into account all hours worked: Employers could be “stealing time” if they don’t pay their employees for all of their hours worked. An example is not paying employees for work performed off the clock or as they travel from one work site to another.

Keep these violations in mind as you create the overtime policies at your business. You and your team should be on the same page when it comes to understanding overtime rules.

Final notes

Overtime can be tricky for businesses, but it doesn’t have to be. Good time tracking software can help you. QuickBooks Time enables you to accurately capture your team’s work times, so remaining compliant with the DOL is simpler. This innovative timesheet tracker automatically keeps track of clock ins and clock outs at your business. The system will also send notifications to you and your managers when employees don’t clock in or out as scheduled. With QuickBooks Time, it’s easy to stay in the know about the overtime at your business.

The QuickBooks Time Pay Rate Engine can also handle the complexities of overtime payments. Whether you live in a state with overly complicated regulations or need assistance with tracking overtime, the platform can quickly calculate overtime at your business. With the QuickBooks Time Pay Rate Engine, you can also:

• Customize overtime rates to your liking and create presets for holiday, overtime, and pay rates
• Eliminate costly overtime payroll errors by seamlessly integrating with your preferred payroll solution
• Save time by eliminating inefficient manual processes

No matter the size of your business, QuickBooks Time can help you keep track of your employees’ hours. Get started with QuickBooks Time to see how you can make tracking overtime hours and calculating wages easier.