Employers may not like to pay overtime, but not abiding by state and federal rules can land them in hot water. It takes just one or two disgruntled employees who realize they have not been paid properly to file a claim in court. An overtime violation that starts small can quickly grow into an expensive legal nightmare.

For example, a portable restroom company in New York will pay more than $7 million to almost 1,300 technicians to settle a suit over unpaid wages and overtime. The pump, flatbed and water truck drivers argued that they worked through lunch hours, although that time was deducted from their pay. They also contended that they were only paid their regular rate of pay instead of the overtime rate due to them. Additionally, they worked after their shifts’ ended without being paid.

Attorney Jodi Arndt Labs of the Law Firm of Conway, Olejniczak & Jerry, says employers need to be aware of the consequences of not following overtime rules.

“A small amount due and owed to each employee can add up significantly in a class action suit, especially when one can go back two to three years to collect unpaid wages. Then you add in the penalty that allows for the wages to be doubled, and attorneys’ fees,” she says.

Once a suit has been filed, state and federal investigators often start looking for other violations, says Michelle Higgins, associate editor at J. J. Keller. These violations may have nothing to do with the original infraction. Investigators may check a company’s labor law posters, child labor practices, meal/rest breaks for employees, etc.

“Once the wage and hour investigators start pulling a figurative piece of yarn, everything can unravel,” Higgins says. Besides paying back pay, other consequences may include mandated training for supervisors and years of agency follow-up. There’s also the negative publicity to consider.

Know the laws

Higgins encourages companies to do self-audits, review policies and employee handbooks, and watch for (and avoid) infractions experienced by other companies in their industry.

“Be as compliant as possible,” Higgins says.

A good starting point is to know the three fundamental rules of overtime:

Employers must pay overtime to employees who work more than 40 hours in a workweek.

Employers must pay an overtime rate of no less than time and a half of an employee’s regular rate of pay.

Employers do not need to pay overtime to exempt employees (more about that later).

Under federal law, an employer has a fair amount of freedom in deciding when employees (age 16 and older) will work. There’s no limit to the number of hours an employee works in a day or week or the number of days in a row. Working overtime can be a condition of employment, and employees can be fired for refusing to work overtime. In addition, employers aren’t required to give advance notice of overtime work and can call in employees on scheduled days off.

While employers have the freedom to require longer hours, they are smart to consider the impact of overtime hours on employee morale. Will the extra workload or last-minute requests cause employees to quit, bad-mouth the company or be less productive or safety-focused while on the job? The flip side is also true, when employees welcome the opportunity to work overtime.

“Often, employees are happy to earn extra money with overtime pay,” Higgins says. They count on it — or may even fight for the opportunity to work extra.

For less-enthused employees, incentives can help. Even small treats like coffee and donuts or pizza can contribute to management-employee camaraderie, strengthen morale and contribute to a positive company culture. Appreciation, empathy and good communication are also important.

If possible, employers should provide a time frame when overtime will be required. Employees who aren’t happy with their hours should talk with their supervisors, Higgins says.

“Their leader would really need to step in and say, ‘What are you unhappy about, and what can we do to figure out a solution?’”

Exempt employees

While all employees can be required to work overtime, not every employee is eligible for overtime compensation. It all depends on whether an employee is classified as exempt or nonexempt. Employers do not need to compensate exempt employees for overtime hours.

Exempt employees are certain individuals with executive, management or supervisory responsibilities, administrative duties that require independent decision-making, plus outside sales and computer employees.

“Some examples of employees who may be exempt from overtime would be a CEO, human resource director or vice president of sales,” Higgins says.

One of the biggest misconceptions about overtime is that companies can simply classify salaried employees as exempt when they’re not.

“What happens when employers don’t classify employees correctly? That’s when problems start,” Higgins says.

Arndt Labs says a well-written job description helps to classify employees accurately.

“I advise clients that they need to have a good job description that clearly outlines what the employee’s job duties and responsibilities are and that such job descriptions include the criteria needed to qualify as an exempt employee.”

Additionally, employers should talk with employees about what they do day to day to further categorize them correctly.

“We recommend employers have a policy that defines exempt versus nonexempt and clearly spells out the workweek,” Arndt Labs says. The policy also should set the compensation amount for overtime and state that vacation and holiday hours don’t count toward overtime compensation. 

“Employers may think they can avoid overtime obligations (for salaried workers). If the employee does not qualify as an exempt employee, then the employer will still need to pay overtime for those hours worked above and beyond 40 hours in a workweek.”

“Overtime pay due to an employee is based on the employee’s regular rate of pay and the number of hours worked in a workweek regardless of whether the employee is paid on a piece rate, day rate, commission or salary basis,” Higgins says.

Calculating overtime hours

Aside from compensating employees properly for overtime, employers must also track and report a nonexempt employee’s regular and overtime hours separately.

The Fair Labor Standards Act does not require a particular form for records, but it does require certain identifying information about the employee and data about the hours worked and wages earned. Companies can use various human resource systems to maintain these records. The U.S. Department of Labor wage fact sheet provides more information about recordkeeping: www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs21.pdf.

At the federal level, the U.S. Department of Labor administers the overtime policies as outlined in the FLSA. These are the minimum requirements; some states and municipalities have their own policies. Employers need to comply with all of these, applying the requirements that benefit the employee most, which can be tricky for companies with locations in multiple states. Higgins recommends starting with an overall employee policy and including addendums for what’s required in various municipalities and states where the company has workers.

When calculating overtime, employers need to factor in all of the hours worked, including travel time.

“Generally, all hours traveling from the company shop location to a customer site and all travel throughout the regular day are compensable as hours worked,” Arndt Labs says. Employers may establish various rates of pay for employees, like travel time versus an hourly wage. On-call time, nondiscretionary bonuses, shift premiums and other work arrangements also need to be considered when determining overtime pay.

Overtime laws can be confusing, complicated and costly if they’re violated. Arndt Labs advises clients to call her before problems arise.

“If a business owner is in doubt about what their obligations are to their employees, it is best to call an employment or labor attorney, as it will typically be more cost-effective than facing a wage audit or otherwise litigating a wage and hour claim,” she says.

Business consultants, human resource professionals/systems or online resources can also be helpful when it comes to knowing and abiding by the rules of overtime. 

“It is better to be proactive than reactive.”