Fundamentals For Small Business Employers: Federal Overtime
Hiring employees is an endeavor full of pitfalls for small business owners. One issue that often causes confusion for even the savviest of business owners is whether to pay overtime compensation to employees.
I have spoken with many small business owners who think none of their employees need to be paid overtime. Their decision to not pay overtime is often based on explanations such as no one in their industry pays overtime to their employees or their employees get paid a fixed salary. However, whether an employee is legally entitled to receive overtime pay is not based on such simple and straightforward considerations. Read on for some guidance and review our checklist, which will help you determine whether to pay your employees overtime.
Are you or your employees covered by the federal law that requires payment of overtime wages?
The Fair Labor Standards Act (FLSA), which regulates federal overtime, applies to all employees of any organization that has at least two employees, and:
An annual dollar volume of sales or business done of at least $500,000; or
Is a hospital, business providing medical or nursing care for residents, school, preschool, and/or government agency.
When the FLSA applies to an entire organization, it is called Enterprise Coverage.
In addition to Enterprise Coverage, individual employees of an organization are protected by the FLSA if their work regularly involves interstate commerce (such as workers who produce goods that will be sent out of state, regularly make telephone calls to persons located in other states, handle records of interstate transactions, travel to other states on their jobs, and perform janitorial work in buildings where goods are produced for shipment outside the state); additionally, domestic service workers (such as housekeepers, full-time babysitters, and cooks) are normally covered by the FLSA.
A basic FLSA principle is that covered employees are entitled to overtime pay.
The FLSA was enacted in 1938 as part of a nationwide effort to protect workers. In accordance with this goal, a fundamental premise of the FLSA is that all covered employees are entitled to overtime pay unless they are exempt by the law. Thus, and contrary to the way many people initially frame the issue, you must either pay your covered employees overtime or determine that they qualify for exemption from overtime. Please note that various states and other municipalities have enacted their own overtime requirements, which are not reviewed in this article, but need to be considered by an employer in determining their obligation to pay overtime.
A primer on the exemptions to overtime.
Federal law recognizes the following key exemptions to overtime:
Executive
Professional (Learned/Creative)
Computer Professional
Highly Compensated Employee
Exemptions related to Outside Sales, Teachers, and the Practice of Law or Medicine
This downloadable federal exemption checklist, which is based on federal guidance, generally reviews each of these exemptions. It has been developed to provide business owners with a basic understanding of the exemptions to overtime as well as to help employers make initial determinations regarding whether to pay employees overtime compensation.
Federal overtime exemption laws have been extensively developed and many terms have substantial supplemental guidance that should be reviewed when determining whether an employee may be considered exempt from overtime. For example, when considering the exemption status of an employee, focus on the work actually performed by the employee (even if it differs from their job description or does not align with their job title). Likewise, when determining whether a position is exempt from overtime, the term primary duty means the principal, main, major, or most important duty that the employee performs (and determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole). Also, keep in mind that a job may qualify for more than one exemption.
This update is for informational purposes only and does not provide legal advice. Every legal situation is different and must be independently analyzed by an attorney. Please consult with an attorney for specific guidance.
About Luna Law, PLLC
Luna Law, PLLC, provides a wide array of legal services to small businesses, from the creation of corporate entities and contract negotiation to employment counseling, risk mitigation, and compliance with local, state, and federal regulations. Contact the firm for a consultation or visit RachelLunaLaw.com for more information.