What is Overtime Pay and How to Prevent It

This post has been updated to include new U.S. laws that came into effect on January 1, 2020.

You check the monthly financial report, and something is off. Unexpected overtime pay is showing up, but the extra expenses were not budgeted for.

Your contractor has invoiced for that project, and the total hours are much higher than anticipated.

Does this sound familiar?

Wouldn’t life would be easier if overtime pay and contractor hours were more predictable?

The solution may be easier than you think.

Some quick facts on unplanned overtime pay

If you’re feeling the fallout of unexpected overtime pay for your staff and contractors, your business isn’t the only one.

The standard American work week is 40 hours. However, roughly 10 million Americans are working in excess of 60 hours per week every year. According to EU labor law, employees should not work more than 48 hours over a seven-day period.

According to the United States Department of Labor, there has been a 52% increase in the average number of overtime hours worked since 2009. And that’s in the manufacturing industry alone.

The Fair Labor Standards Act (FLSA) upholds that the failure to keep accurate overtime records can have dire effects on the overall health of your business.

In an unprecedented settlement, FedEx made history with its agreement to pay out $240 million in unpaid overtime as recently as 2016.

With FLSA back wages accounting for more than $1.7 billion, it is clear that ensuring your team’s overtime hours are accurately tracked is crucial for your organization’s bottom line.

What managers and business owners need to know about overtime in the U.S.

What are overtime laws?

America’s overtime laws are defined by the Fair Labor Standards Act (FLSA). Workers who are classified as non-exempt are required to be paid overtime of at least one and a half times their regular rate when 40 hours is exceeded per work week.

Overtime pay law stipulates that not paying overtime is illegal if your employees are non-exempt.

Non-exempt employees are usually paid an hourly rate. However, a number of factors are taken into consideration when determining eligibility, including the industry, earnings, position, tasks, and responsibilities of the worker.

Who is exempt from overtime pay?

In most cases, salaried professionals earning upwards of $455 per week ($23,660 annually) are considered “exempt” from overtime pay under the Fair Labor Standards Act (FLSA).

Exemptions can also be applied to industries such as agriculture, salespeople earning commissions, seasonal workers, and vehicle drivers. Due to the various considerations laid out in the FLSA, it is recommended to consult your local Wage and Hour Division office for further information.

Overtime rules differ by state

In addition to Federal law, hourly thresholds for daily and weekly overtime rates can differ depending on your state.

In cases where employees are covered by both federal and state overtime regulations, employers are required to process their pay according to the law that provides their workers with the highest earnings.

Overtime pay in California, for example, has precise regulations for calculating overtime in their state. Overtime pay of one and a half times the regular rate must be paid to non-exempt employees who have clocked in excess of 8 hours per workday and/or 40 hours in a workweek.

Additional considerations apply to the 7th consecutive day worked. The first 8 hours of the 7th consecutive day worked in a workweek must be paid at 1.5x the regular rate.

If you are looking to calculate overtime pay per hour specific to your state, we recommend getting in contact with your local Wage and Hour Division office for further information.

How overtime works for hourly vs. salaried employees

As we’ve discussed so far, workers can be classified into two categories: “exempt” and “non-exempt”.

To be non-exempt, that person could make an hourly or salaried wage. However, to be exempt, team members must be paid a salary.

Non-exempt employees

As of January 1, 2020, a new rule raised the threshold for a worker to be considered non-exempt from those earning less than $455 per week (approx. $23,600 per year) to anyone earning less than $684 per week (approx. $35,568 per year). An estimated 1.3 million additional U.S. workers will now be considered non-exempt and so must be paid federal minimum wage for overtime and are covered by existing FLSA regulations, regardless if they’re on an annual salary or paid an hourly wage.

For small business owners, this means they’ll need to be more diligent than ever to ensure they’re accurately tracking the time worked for the now larger group of non-exempt employees that will fall under overtime laws.

Overtime pay for hourly employees

In many cases, hourly workers employees fit into this criteria and are considered non-exempt, which is why it is vital to keep close track of their timesheets when calculating overtime pay for hourly workers.

Some common industries that are classified as “non-exempt” may include:

• Restaurants or retail
• Service businesses such as landscaping
• Cleaning companies with hourly staff

Overtime pay for salaried employees

Generally referred to as “salaried” workers, exempt employees are usually assigned regular hours per day and are paid a set salary.

It is agreed that the worker will complete their given tasks in line with their employer’s expectations regardless of how many hours they put in. Due to this, salaried employees are often not paid for working overtime.

There are several types of exempt classifications, but common exempt workers are:

• Executives and managers
• Professional in service industries (accountants, architects, designers)
• Administration-related jobs

Mandatory overtime for salaried employees

The FLSA does not define a maximum limit of the number of hours an employer can require an employee to work. So, salaried workers can be required to work mandatory overtime and can be terminated legally for refusing to do so. However, a condition of this rule is that working overtime must not present a safety risk to workers.

Keep reading, and you’ll see why more hours aren’t always better hours.

Salaried employees and overtime eligibility

Overtime laws for salaried employees can be confusing, as earnings and industry-related conditions allow typically exempt workers to qualify for overtime.

Salaried workers earning below $684 per week ($35,568 annually), for example, may be entitled to overtime, depending on their duties, responsibilities, tasks, and industry.

More hours aren’t always better

If you’re worried about how to make up for overtime pay, there’s good news.

Having employees work more hours isn’t the only method of achieving business goals or increasing productivity.

In fact, studies show that extending hours does not result in better productivity.

Stanford University’s research concluded that once a 50-hour work week is exceeded, a worker’s productivity takes a steep plunge.

The loss of productivity is so drastic that after 55 hours is clocked, the additional output did not compensate for the hours worked. In other words, working for 70 hours a week results in the same outcome as working 55.

The difference is how much you end up paying.

Overtime actually leads to an increase in absenteeism, which has a staggering 36.6% loss in productivity in the workplace.

How is this possible, you ask?

Overworking results in both mental and physical fatigue, which limits cognitive function and bodily resources. If an employee is not able to think clearly, or move as responsively, it takes longer to produce the same quality of work.

The data to back this up is compelling.

Overtime was related to an increase in workplace injuries by up to 61% due to mental fatigue.

Sleep deprivation, or being unable to sleep for more than 6 hours each night, has increased by 31% since 1985 due to longer working hours.

A Finnish study concluded that working for 11 hours a day doubled a patient’s chance of developing major depression as opposed to patients who worked only eight hours a day.

If this is the case, then, the question to be asked is:

How can you increase productivity in your business without the need for overtime?

How to prevent overtime: Strategies used by thousands of teams worldwide

Knowing how to better manage overtime and keep clear track of employee hours is no easy task. Keeping an eye on your team’s hours sounds good in theory, but how is it possible?

Without, of course, spending all of your time micromanaging your team.

Here are some strategies to better manage overtime in the workplace.

1. Use a time tracking software with automated weekly limits

Fortunately, tech companies have pioneered a time management software that allows for automated weekly limits to be tracked, and thus, overtime work to be reduced.

Used by over 8,000 companies worldwide, Hubstaff allows teams across a wide range of industries to keep on top of timesheets, track their team’s progress, monitor their staff’s productivity and run payroll. Outsourcing agency Affordable Staff attributes Hubstaff to streamlining their business processes, saving them $170,000 annually as a result.

– Cleaning, construction, and health care teams who are on the move use Hubstaff to maintain their timesheets. Clocking in and out for mobile-based shift work is a breeze, and more accurate.

– Accountants, attorneys, software developers, and digital agencies rely upon Hubstaff to keep precise time records, which are later invoiced to clients.

– Construction workers and landscaping teams utilize Hubstaff’s location-based mobile tracking with geofencing capabilities to record their exact whereabouts from shift-to-shift.

The more accurate and in-depth your time tracking is in real-time, the easier it is to spot potential overtime hours. You can open your Hubstaff dashboard at any time and see how many hours each person has worked, which projects and tasks they’re tracking time toward, and how much budget is left.

How to add limits to your staff’s hours using Hubstaff

The great thing about being able to set weekly limits for each team member is that they always know how much time is left in their work week.

If a task is due, for example, they will be certain of how much time they have remaining to complete it.

Hubstaff’s hours and budget limits feature lets you set constraints and see progress any time, so it’s easier for managers and owners to check in. Time tracking becomes restricted for users once their weekly limit is reached, so you’ll never go over budget again without knowing.

The weekly limits feature is flexible, too. It allows for customizable and recurring limits, with the ability to block tracking completely or override if necessary.

Maybe you know a project needs a few extra hours this week. No problem.

Employers and managers receive email alerts when limits are almost reached, allowing you to make necessary adjustments to projects, contact your client, or bring in others to help bring the project across the finish line.

This is also useful for managers who need to be prompted to communicate with staff to ensure deadlines are met.

Reviewing projects simply with the weekly limits report

The weekly limits report makes reviewing projects easy. Check your stats at a glance, and immediately determine the time remaining in a project’s budget.

Data is readily available to support the need for more staff, longer deadlines, or more accurate budget estimates in the future. All of the metrics you require are available to you with the weekly limits report.

Time-consuming tasks such as stopping your work to check in with team members and closely watching timesheets will become a thing of the past. When staff request to switch shifts, scrambling to calculate if they’ll hit overtime is no longer necessary— you’ll know their weekly hours in a snap.

With secure weekly limits in place, you will feel confident that projects will stay within budget.

2. Better communication

Implementing time limits in isolation may not be enough. Teams can only become truly efficient when business priorities are clearly communicated.

Can you say with certainty that every member of your team knows what needs to be worked on, what can wait and has a clear expectation of when those outcomes are due? If not, establishing clarity around these factors is absolutely essential. Not only for keeping within budget, but also for ensuring optimal productivity within your team.

Fostering excellent communication amongst your team prevents issues such as these from arising before they occur, so it is a good place to start when reviewing the level of communication within your team.

What problems can arise if there is a lack of team communication?

Studies have shown that up to 56% of budgets allocated to projects are at risk due to poor communication. Going over budget is not the only misfire waiting to happen, either.

In worse case scenarios, poor communication can lead to duplicate work, working off the clock, delivering incorrect outcomes to clients, producing solutions that do not meet the original objectives and an inability to hit promised deadlines. The last thing you want is to put key relationships at risk when these issues are so easily avoidable.

Teams suffering from poor communication tend to have higher levels of conflict in the workplace.

It is no secret that animosity between employees can result in low morale across the board. Poor communication can also isolate team members, who become disconnected from the purpose of the project, doubting their role and the value their contributions have.

Think back to a project that went over budget. If communication had been better amongst your team, could the outcome perhaps have been better, as well? If your answer is yes, perhaps it is time to rethink your team communication strategy.

Communicate your pay and overtime procedures and policies

Lawsuits can be avoided with proper communication channels in place. An organization’s overtime policies need to be ingrained into management training and impressed upon managers and employees alike.

Your organization should have a clear overtime policy documented in written format that can be referred to by your management and employees. Inform employees upfront of how to access it and ask for feedback on the document.

It should be mandatory for employees to review the employee handbook or policy manual containing overtime policies. A great way to ensure this is achieved is to request employees sign-off confirming they have understood, with regular reviews to maintain compliance.

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4. Implement a project management system

According to the Project Management Institute, 75% of organizations met their business goals, 65% finished on time and 67% stayed within budget when a project management system was implemented.

Implementing time limits and improving team communication are surefire ways to increase productivity, reduce overtime hours, and stay within budget. However, adding a third layer of resilience and utilizing a project management system will truly solidify your team’s output.

Project management software such as Hubstaff Tasks, which can be integrated with Hubstaff’s weekly limits feature, allows your team to focus on the core elements of a project and complete it faster, by keeping everyone on the same page and organized. This allows profits to increase, due to less time wastage and more streamlined communication.

How does using project management software help my team complete work faster?

Managers don’t have time to waste on administrative tasks. This is why systematic, semi-automated project management systems have gained popularity across different industries.

Visual workflows

Hubstaff Tasks tool allows teams to absorb the entire workflow of a project because it’s visualized in a clear format. Team members can quickly and easily see who is responsible for each task, and the flow of a project as it moves toward being completed.

This helps foster clearer communication, preventing misunderstandings from occurring. Cross communication between tasks becomes second nature, which contributes to tasks being completed more efficiently.

Setting due dates and deadlines

Due dates and deadlines are often the first questions asked in a kick-off meeting.

The act of assigning an estimated number of hours to a task, or marking urgent ones with priority, keeps everyone firmly on the same page. This serves as a reminder of the larger picture and acknowledges the deadlines your team has promised to your client.

Cross-collaboration

Team members are often required to access each other’s work to contribute their part of the project. Project management tools allow for organic collaboration via file sharing and cross-task continuity.

Communication channels

Built in messenger apps, or the ability to add comments or notes to tasks, facilitates better communication among your team. Rather than having many emails scattered across an inbox, having a central location makes communication clear and efficient.

Set milestones and checklists

The ability to set milestones for your projects and adding checklists within a task, allows managers to focus on the output rather than low-level administrative tasks. This renders progress meetings unnecessary as the status of a project is available at a glance.

If you’re using Hubstaff to set weekly limits, it offers many project management integrations. You can choose to use activeCollab, Asana, Basecamp, GitHub, Jira, Trello, or Zoho Projects. You can even use Hubstaff’s own project management tool built to work seamlessly with the weekly limits feature: Hubstaff Tasks.

Overtime wrap-up and summary

With the number of working hours increasing steadily for Americans every year, it is vital for the health of your organization to stay ahead of your team’s hours and the overtime regulations within your state.

Getting started by setting hourly limits for your team. This change will help not only to strengthen relationships with your clients by ensuring estimates are accurate, but it will save your budget and increase productivity within your team.

Implementing project management software results in better communication, happier employees, and better outcomes for your clients.

Knowing all this, Hubstaff’s weekly limit feature and up-to-date timesheets become even more compelling. With the added bonus of integrating with free PM software, Hubstaff Tasks, and a 14-day free trial, there’s no reason not to give Hubstaff a try.

At the end of next month, when you review that same monthly financial report and see no unexpected overtime costs, it’ll be worth it.

Learn more about travel time pay (we also have a guide to travel time pay policies) and holiday pay policies.

This post is intended to convey general information only and not to provide legal advice or opinions. Information is current as of the date published; overtime changes may have been made since this article was created.