FLSA Overtime Guidelines You Need to Know

The federal Fair Labor Standards Act (FLSA) is a comprehensive employment law and much of it is fairly straightforward.

But the part that’s most complicated – and most misunderstood – is the section detailing the rules on how employers must categorize employees for the purpose of deciding who’s eligible for overtime pay – called “nonexempt” employees – and who isn’t – called “exempt” employees.

A survey of employers by one Washington, DC-based law firm revealed that a majority of employers were unknowingly in violation of some parts of the FLSA.

Of course, the real problem occurs when an employee believes that misclassification under FLSA is more than a “mistake” – that the employer is purposely skirting the law. Then you’re dealing with a lawsuit and a possible Department of Labor audit.

Of course you want to avoid all that, especially because:

• Violations are expensive. A pay error of a few hundred dollars could mushroom into thousands of dollars in legal fees and penalties – which could have been avoided with proper procedure in the first place.
• The law, and each employer, is under a microscope. When the FLSA was passed, labor groups charged that it was too business-friendly, so the government takes every opportunity to prove it goes tough on violators.

(While this report deals exclusively with the federal FLSA, the question of exempt versus nonexempt is further complicated by a confusing array of state laws governing who gets overtime and who doesn’t. The state laws, and how to follow them, is dealt with briefly on page 18.)

Included in this Executive Report:

• The basics of FLSA.
  • First and foremost, according to the law, the burden of proof on whether or not an employee is eligible for overtime pay falls on the employer. It’s not up to the employee to prove the case; it’s up to the employer. That means all employees are considered eligible for OT pay until the employer shows otherwise.
  • Employees who are eligible for OT pay don’t need authorization or permission to work overtime and get paid for it. Simply put, anytime an eligible employee works more than 40 hours in a week, that employee must receive 11/2 times his or her normal hourly pay. It’s not enough for an employer to say: “I never OK’d you to work overtime, so you’re not getting paid for it.”
• The “primary duties” test for employees who are exempt from overtime. FLSA lays out a set of tasks that determine whether an employee falls into the exempt category. The general, loose rule is that an employee is exempt if he or she spends more than 50% of the workweek on those tasks. But it’s not always that simple. Sometimes the scope or influence of a person’s job, or the potential responsibilities – such as standing in for a regular manager who’s absent – will carry more weight than the 50% rule.
• Categories of exemptions. The law recognizes what the primary duties and standards are for an exempt employee:
  • Pay. Exempt employees must make at least $455 a week, or $23,360 a year.
  • Executive. An employee meets the exempt standards when the primary duties consist of:
    • – Managing an enterprise or a department or subdivision
    • – Regularly directing the work of two or more employees
    • – Having the authority to hire and fire or to make recommendations about an employee’s work status
  • Administrative. An employee meets the exempt standards when the primary duties consist of:
    • – Nonmanual work directly related to management or general business
    • – Exercising discretion or independent judgment on significant matters, such as policy or finance
  • Professional. An employee meets the exempt standard by having:
    • – Advanced knowledge in a field of science or learning
    • – Knowledge acquired by a prolonged specialized instruction
  • Computer professional. An employee meets the exempt standards when the primary duties consist of working with computer systems for the purposes of:
    • – Analysis
    • – Design
    • – Creation and modification
    • – Development of documentation
  • Note: Not included in this category are:
    • – Repair specialists
    • – Help-desk personnel
    • – Web-page designers
  • Outside sales. An employee meets the exempt standards when the primary duties consist of:
    • – Working outside the employer’s normal place of business
    • – Making sales and obtaining orders
  • Highly compensated. An employee meets the exempt standards if:
    • – The employee’s total annual compensation is at least $100,000 annually, $23,660 of which is salary
    • – The employee performs some type of nonmanual work
    • – The employee performs at least one of the primary duties listed under the executive, administrative or professional exemptions
• Using the job description as the building block. Properly classifying employees and avoiding problems start with building the right job descriptions.
  • Have supervisors review the descriptions and match them against actual duties
  • Revise descriptions as needed, noting responsibilities and authorities that had been “understood” but not documented
  • Reclassify as needed, especially when there’s a broad reorganization and duties change
• Pay deductions. The law allows or bars certain types of pay deductions for exempt employees. For instance, you can’t make deductions based on the quality or quantity of an exempt’s work. However, you can make deductions for:
  • Full-day’s absence for personal reasons when the employee has no leave to cover the absence
  • Amounts equal to what the employee receives for jury duty, witness fees or military service
  • Full or partial days for major safety violations
  • Full-day’s absence for unpaid FMLA leave and partial days for unpaid intermittent FMLA leave
  • Full-day’s absence for personal reasons when the employee has no leave to cover the absence
  • Full days for conduct violations, such as sexual harassment or violence
• Calculating hours worked. FLSA sets rules on how hours must be calculated for employees who receive OT pay:
  • Nonexempt “on-call” employees who are free to carry on normal activities outside the workplace generally are not considered to be working while waiting to be called.
  • Nonexempt employees in training should be considered working when the training is mandated by the employer.
  • Nonexempt employees in travel status should be considered “on the clock” when:
    • – They’re actually doing work, no matter the time or place
    • – They’re traveling during normal business hours, even if they’re not performing work
    • – For all hours of travel when they’re doing same-day travel
• ‘Safe harbor’ provision. Employers who mistakenly deduct from an exempt employee’s pay can avoid some penalties by:
  • Communicating to employees the policy on deductions
  • Having a procedure for dealing with employee complaints
  • Promptly reimbursing employees for mistakes
  • Making good-faith efforts to comply with the law
• Recordkeeping. As with most areas of employment law, good documentation is always important for supporting your case when classifying an employee.
  • Keep accurate, comprehensive records regarding hours worked and pay issued.
  • Make sure the recordkeeping is current and ongoing. Courts look unfavorably on trying to do “make-up” or after-the-fact recordkeeping.

Some managers have asked why they need to have a solid understanding of the overtime guidelines of the Fair Labor Standards Act (FLSA). After all, they say, if some employees don’t get the OT pay they’re entitled to, the fix is easy: We’ll recompute after we discover the error and write them a check for the owed amount.

If only it were that easy. There are at least two reasons why it’s not:

1. It’s expensive. The fix isn’t always just to write a check for the difference. Often employees in that situation think they’ve been wronged. And then they do what people often do when they think they’ve been wronged – they hire a lawyer and sue.

Once you get into court with an FLSA violation, you’re looking at legal fees, damages and the OT amount owed. Plus, if the violation involves more than one employee, you could be looking at a class-action suit where the company has to pay the employees’ lawyers.

So a violation of a few hundred dollars in OT pay ends up costing in the neighborhood of $10,000 to $20,000 after all is said and done.

2. It’s under a microscope. When the FLSA was passed, some labor groups complained that it was too employer-friendly. To counter that, FLSA’s supporters in government vowed that violators wouldn’t get off easy.

As a result, the federal government aggressively pursues violations, and punishments are severe and costly to the company.

The rules of FLSA say you should start with considering that all your employees are eligible for OT pay. It’s up to the employer to show that the employee is exempt, and not eligible.

In other words, an employer cannot say to an employee, “Prove that you’re ‘nonexempt,’ that you meet the guidelines for receiving OT pay.” It is up to the employer to prove that the employee doesn’t meet the guidelines. If an employer can’t prove that, the employee must be paid OT after having worked the required hours.

Any nonexempt employee must receive 11/2 times the employee’s hourly rate of pay for all hours worked more than 40 in a workweek.

Suppose an employee works more than 40 hours in a week without authorization from the boss to do so. Can you deny OT pay? The answer is a clear, definite “no.” Authorization doesn’t matter. If the eligible employee puts in more than 40 hours, the company must pay that employee 11/2 times the employee’s hourly rate of pay for all hours worked over 40.

Suppose an employee works more than 40 hours in a week even after the boss forbids it. Can you deny OT pay? Again, the answer is “no.” Even if an employee ignores orders and works more than 40 hours, the company must pay that employee 11/2 times the employee’s hourly rate of pay for all hours worked over 40.

Of course, refusing to follow the supervisor’s orders can be dealt with as a performance issue, but not as a pay issue.

FLSA lists two major “tests” for determining whether an employee is exempt from eligibility for OT pay.

• Salary basis. An exempt employee must be paid the same amount – a true “salary” – every week, no matter how many hours he or she works. That amount must be at least $455 a week, or $23,660 a year. That part is fairly straightforward.
• Primary duties. The main tasks an employee is expected to perform must fall into the executive, professional or administrative categories listed in the FLSA. Let’s break down each of those categories to give a clearer picture of this part of the FLSA.

* For information on the overtime updates effective as of January 1st, 2020, see this three-part series detailing all of the latest changes, impacts, and best practices.

Employees who spend 50% or more of their time performing tasks that fall into the “exempt” category generally are not eligible for OT pay. FLSA points out, however, that the 50% rule isn’t the only standard for making the determination.

Employees could spend less than 50% of their time on exempt tasks and still be ineligible for OT pay. For instance, someone whose title is “assistant manager” might be called upon to stand in for the manager and make crucial decisions during that time.

In that instance, even though the person might not be in the manager’s position 50% of the time, the assistant manager could be classified as exempt from OT pay because of the weight of the responsibility.

Note: FLSA clearly states that you can’t classify someone as exempt just by putting “manager” in the person’s title. That person must actually fill some managerial, administrative or professional duties.

Let’s look at what those duties entail under FLSA.

Executive exemption

Anyone who meets the executive exemption standard of FLSA must first of all be paid at least $455 a week. That’s always the basic part.

After that, it gets a little more complicated. So let’s detail how the exemption works. To qualify for the executive exemption, an employee’s primary duties must include:

• Management of an enterprise or of a department or subdivision.
• Customarily and regularly directing the work of two or more employees, and
• The authority to hire and fire, or to make recommendation regarding hire/fire, promotions or other changes in an employee’s status, such as a job or location transfer

Administrative exemption

As you might expect, the administrative exemption also has the requirement of the $455-a-week minimum.

Let’s look at and describe the other requirements of this exemption.

• Nonmanual work directly related to management or general business. Typically, these are people who do nonmanual jobs that cover several parts of the organization.

Some examples: accountants and other finance people, human resources, marketing.

Those employees regularly deal with several parts of the organization.

• The exercise of discretion and independent judgment on significant matters. Generally, the best way to determine whether someone meets this requirement is to ask: Does this person make policy or just implement policy?

Someone who makes policy is exercising discretion and independent judgment on significant matters. Someone who just follows policy does not exercise that discretion or independent judgment.

Another way to put it: The exempt person formulates the procedures manual; the nonexempt person just follows the manual.

Another way to judge the significance of a person’s decisions is to consider the financial impact of those decisions. The greater the amount of money involved, the more likely it is that the decision-maker is exempt.

Note that the exempt’s decisions can be subject to review at a higher level. What matters is that the person has the power to make decisions of significance, not that someone else takes a look at those decisions.

Professional exemption

Again, the $455-a-week minimum is required for this exemption.

Outside of salary, here’s what you should be looking for when placing people in the “professional” category of exempts:

• Advanced knowledge in a field of science or learning. Examples of people who have such advanced knowledge are doctors, lawyers, engineers, architects and accountants. In many instances, such employees must have some professional certification or license to practice their profession – such as CPA.
• Knowledge acquired by a prolonged course of specialized intellectual instruction. FLSA doesn’t specify that people in the “professional” category must hold advanced degrees, but most do.

Computer professionals

A special category of exempt professional has evolved since the FLSA was mandated: computer professionals.

Because of the nature of the work in that field, some special rules apply:

Pay. The usual $455-a-week minimum applies to the computer-professional category, but this category is the only one that also sets an hourly minimum, too: $27.63.

Duties. The standards for duties for this category are narrowly defined and specific to the profession.

Computer professionals are expected to be involved in computer systems, software and machine-operating systems. And they must, as primary duties, perform analysis, design, develop, create or modify those systems, as well as build documentation.

Who doesn’t meet the ‘computer professional’ standard?

The Department of Labor has specifically designated some computer-related work as “not professional” and therefore not in the exempt category (see below).

Those that do not meet the standard are:

• Computer repair specialists
• Help-desk personnel, and
• Web-page designers

Companies that employ people in those positions generally cannot place them in the exempt category unless the jobs come with added duties and responsibilities over and above what we normally consider appropriate for those jobs.

Outside sales employee

FLSA recognizes many types of outside sales employees as exempt from OT pay.

One qualification that sets these positions apart from most of the other exempt types: salary, or the lack of it. The position requires no salary basis or minimum as a stipulation for being in the exempt category.

The standards for the outside-sales exemption are:

• The job must be regularly and customarily performed away from the employer’s place of business (see below), and
• The employee must make sales and obtain orders. So, for instance, a delivery driver who just fills a standing order for a product such as bread is not considered exempt, even if that driver gets a commission on the order.

Highly compensated employees

FLSA has an exempt category based partly on money earned, and employees who fall into that category are considered “highly compensated.”

Here’s how it works:

• The employee’s total annual compensation must be at least $100,000 – at least $23,660 of which must be salary. So the amount over $23,660 can consist of commissions or other incentive pay according to a set plan, but it can’t be one-time bonuses or awards
• The employee must perform some type of office or nonmanual work, and
• The employee must perform at least one of the duties described in the tests for executive, administrative or professional exemptions.

Note: The $100,000 figure is based on a full year’s employment. If an employee works less than a full year, the figure is prorated to the time worked. So, for example, an employee who works six months out of the year may be considered “highly compensated” if that employee earns $50,000, or half of the $100,000 figure.

For that reason and others, it’s a good idea to keep accurate records on the number days an employee – exempt or nonexempt – works each year. Without that data, you can’t support prorating the pay eligibility of a highly compensated employee. However you can’t use an employee’s time off under the Family and Medical Leave Act when prorating. That time is considered the same as time worked.

The job description is your basic document for correctly classifying employees as exempt or nonexempt. If the description is up-to-date and accurate, you’ll have most of what you need to make a classification decision that will stand up to scrutiny.

Here are three steps to help you ensure your job description make the grade:

1. Have supervisors review the descriptions against employees’ actual duties

2. Revise the descriptions as needed, and make sure to document any discretion or authority the employee has that’s been “understood” but not written down, and

3. Reclassify employees as needed, and pay special attention to reclassifying if there’s been a broad restructuring of duties in your organization.

One of the touchiest parts of administering FLSA rules comes when you review an employee’s duties and realize the employee has been classified incorrectly: An exempt should be nonexempt, or vice versa.

Consider that you may be dealing with one of two situations:

• An employee who’s been reclassified as exempt must be told he or she is no longer eligible for OT pay – after receiving it in the past, sometimes for years.
• An employee who’s been reclassified as nonexempt – and is now eligible for OT pay – realizes he or she has worked OT in the past and not been paid for it.

Either way, you’re dealing with someone who may be unhappy and seek revenge by filing a lawsuit or a complaint with the DOL.

What to do? With either employee, you’re probably looking at someone who feels the sting of losing money. If possible, look into adjusting salaries to make up for the loss.

Of course that’s not always possible, so you may have to defend your decision against some sort of legal complaint. If that’s the case, be ready with:

• An explanation of why and how things changed. Presumably the person’s job changed, and often the case is that the job evolved over time from one type of position to another. Document that the change took place in steps and that the steps, taken as a group, led to a change in classification.
• Notes of major changes – Keep notes of changes involving the organization as a whole or just the employee – that affected the classification. Did you do a reorganization? Did you change who the employee reported to or the level of the employee’s responsibility?

How you handle deductions from exempts’ salaries can be just as important as any other aspect of applying the law.

In summary, improper deductions can lead to a loss of an employee’s exempt status, violations of the law and requirement for paying overtime.

So the first and foremost “can’t” for deductions is:

• You can’t reduce exempts’ salary based on the quality or quantity of the employee’s work. The law assumes that exempts get the same weekly pay, without respect to how much they produce or the quality of what they produce.

Let’s look at some major “cans” of deductions for exempts.

Full-day deductions

FLSA allows some salary deductions that can be done only in full-day increments, and not hourly or partial-day deductions.

• You can deduct for a full day’s absence for personal reasons when the employee has no vacation time that can be used to cover the day. Keep in mind, again, that the deduction must be made in full-day increments to maintain the employee’s exempt status.
• You can deduct for a full day’s absence when the employee is sick but has no sick leave. Of course, if you have an official sick-leave plan, and the employee has built up days in the plan, those days can be used in lieu of salary deductions. Again the deductions can be only in full-day increments.
• You can deduct for amounts the employee receives for jury duty, witness fees and military pay. In other words, an exempt’s salary can be reduced by the same amount the employee gets for jury duty, serving as a witness or serving in the military. Some companies handle this by having a policy in which the employee signs over the check to the employer, rather than doing a salary reduction.
• You can deduct for major violations of safety rules. This is one of the few times FLSA allows non-time-based deductions – essentially, penalties – from exempts’ salaries. If you’re going to deduct for safety violations, it’s probably a good idea to document what those violations would be, so there’s no dispute about what’s “major.” For instance, “not wearing a hardhat” in a designated area might be considered a major violation.
• You can deduct for full days’ suspensions for violations of workplace-conduct rules, such as those governing sexual harassment or violence. Any suspension of this type should be detailed in a written policy that applies to all employees, exempts and nonexempts.
• You can deduct for full day’s absence for any unpaid leave the employee takes under the Family and Medical Leave Act.

Partial-day deductions

FLSA allows some narrow salary deductions that can be done in partial-day increments.

• You can deduct partial days for unpaid intermittent leave taken under the Family and Medical Leave Act. Most intermittent leave is taken on an hourly basis – as, for example, medical appointments – so the law allows employers to deduct such time off from exempts’ salaries on an hourly or partial-day basis.
• You can deduct partial days for major violations of safety rules. There’s overlap here, since violations of safety rules also can be penalized with full-day deductions, so it’s up to the employer to decide when the penalty is full day or partial day.

We’ve covered a lot of material on determining who’s exempt, who’s not and how to maintain the exempt status for an employee. Let’s look at things from another angle and go over the ways to calculate hours worked for employees who are nonexempt – and eligible for OT pay.

FLSA has some strict rules about how the calculations should be done, and failure to comply can carry harsh penalties.

So let’s look at some common but tricky situations that call for calculating nonexempts’ hours.

‘On-call’ time

“On-call” time typically involves the situation where an employee wears a “beeper” and must be available to take calls to go to work. The employee is free to leave the place of employment and carry on normal off-work activities – such as going to a movie – but must come in to work or carry out an assignment when called.

Are the on-call hours paid time? And must they be figured into overtime calculations? No. An on-call employee who’s off the employer’s premises and free to carry on normal activities doesn’t get paid for those on-call hours.

The employee isn’t “on the clock” until after receiving the come-in phone call and starting work activities.

Exception: On-call time can be considered normal working hours if the employee gets frequent calls. Let’s say, for instance, a computer-repair person is on call in case of a machine breakdown. That person gets a call to walk another employee, over the phone, through the repair of a machine. Then the person gets another call of the same type 30 minutes later, and another call after that, and so on. In that situation, the employee’s on-call time is considered working hours and must be used to calculate pay.

Training time

Many types of training scenarios call for the time to be considered paid working hours – such as when an employee is at work and being trained to do a job function.

For training time to be considered nonpaid time, all four of the following stipulations must exist:

1. Attendance is outside the employee’s regular working hours

2. Attendance is fully voluntary

3. The training is not directly related to the employee’s job, and

4. The employee does not perform productive work during training.

One typical scenario would involve a bookkeeper who wants to move up to an accounting job with the company.

That person decides to go to school at night to pursue an accounting degree. Such training is not “on the clock” because it’s outside normal working hours, voluntary, doesn’t relate to the job of bookkeeper (since the employee could perform that job without the training) and no work is done during the training.

When a nonexempt is “on the road,” you’ll have to pay close attention to the circumstances and timing of the travel to determine whether travel time is paid time.

So let’s look at the three “rules” for making a correct decision about whether a nonexempt gets paid while in travel status.

Rule 1: All working time is paid time. That is, if a nonexempt employee is doing substantive work in a hotel room, in a car, on a plane, etc., the employee must be paid for that time.

So, for instance, if a nonexempt employee sits next to a customer on a plane at 8 p.m. and explains how to use software purchased from your company, that employee must be paid for the time – and paid OT if the time causes the weekly hours to exceed 40.

Rule 2: All travel during the employee’s normal working hours is paid time, even if the travel takes place on a nonwork day.

To understand how this applies, take the example of the nonexempt employee who usually works 9 a.m. – 5 p.m., Monday through Friday.

Any time that employee travels between 9 a.m. and 5 p.m. must be paid and figured into overtime calculations if the person exceeds 40 hours in a week. And the time must be considered paid even if that 9-5 travel took place on a Saturday or Sunday.

So a nonexempt employee who’s dozing in his plane seat on the trip home must be considered on the clock if the travel takes place 9-5 any day of the week.

Rule 3: All same-day travel time is paid time, except for time that substitutes for the nonexempt employee’s normal commute.

Let’s use another example to explain how the law applies here.

We’ll use that same 9-5, nonexempt employee in Rule 2, and we’ll say he normally works at an office 30 minutes from home. That employee takes a train at 7 a.m. to travel to a nearby city for a work assignment. He does the job, gets back on the train the same day, gets to the originating train station at 7 p.m. the same day and drives home.

Here’s how the employee’s work time is figured:

• The time spent driving to the station isn’t paid time because it’s considered a substitute for the commuting time the employee has when going to the normal place of business.
• All travel time from 7 a.m. to 7 p.m. is considered paid time, even though the employee normally doesn’t start work until 9. That’s where the same-day rule differs from other travel rules.
• Once the employee leaves the train and starts the drive home, he’s no longer on paid time. As with the morning drive in, the evening drive is considered a substitute for normal commuting time.

You can see that keeping on top of who’s exempt, who’s nonexempt, who gets OT pay and under what conditions can be complicated.

The Labor Dept. recognizes that, too, and as part of FLSA, has instituted what’s called the “safe harbor” provision that you can lean on to avoid penalties if you’ve discovered that you made a mistake in deductions that results in a loss of exempt status for that employee.

The safe harbor provision notes that if you’ve made improper deductions, the exemption won’t be lost if you:

• Clearly communicate the policy on prohibiting improper deductions
• Have a procedure for dealing with employee complaints
• Promptly reimburse employees for mistakes, and
• Make a good-faith effort to comply with the rules in the future.