Payroll is one of the largest ongoing expenses for many businesses, making overtime management a key factor in controlling labor costs and maintaining compliance. Our payroll service providers outline what businesses need to know about overtime pay and offer practical strategies to help manage costs without compromising productivity or employee morale.
Understanding Overtime Eligibility
Under the Fair Labor Standards Act (FLSA), nonexempt, hourly employees generally must earn overtime pay for the hours they work that exceed 40 hours within a workweek. For FLSA purposes, a workweek isn’t defined as a calendar week — it could be, for instance, from Wednesday to Tuesday.
Calculating Overtime Rates
Overtime wages need to be at least 1.5 times an employee’s regular rate of pay. Employers can use nondiscretionary bonuses — say, those tied to a measure like sales — and/or incentive payments to meet up to 10% of employee pay requirements.
In addition to federal requirements, many states have their own overtime, salary threshold and wage-and-hour rules. When state and federal laws differ, employers generally must follow the standard that provides greater protection to employees.
Optimizing Overtime Management
Most organizations want to manage the amount of overtime for budgetary reasons. But another important factor to consider is that employees who’ve been on the job for too many hours may forget or rush through safety procedures, putting themselves and others in danger. In addition, while some employees appreciate the extra income from overtime work, others may prefer a better work-life balance and may leave if they’re required to regularly work extra hours.
Here are some strategies to help you manage employee overtime:
- Cross-train workers. At times, it’s necessary to extend one employee’s hours because they’re the only one who knows how to complete a certain function. Training other employees in this function can mitigate this need.
- Examine the factors driving overtime. Are employees stretched too thinly? If so, it may be time to consider adding staff. Similarly, if project timelines are overly optimistic, you may need to adjust schedules.
- Leverage technology. Automating processes can cut down on manual tasks, giving employees more time to handle their other responsibilities. Technology also can support your scheduling process, ensuring employees are on the job and productive when needed, rather than being scheduled for work, only to be underutilized. In addition, technological methods for tracking overtime hours and expense by location or department can help you identify areas where overtime expenses appear outside the norm.
Staying Current with Evolving Regulations
Overtime regulations continue to evolve. In 2024, the Department of Labor (DOL) finalized a rule that would have increased the salary threshold for many overtime-exempt employees, but a federal court later vacated the rule, leaving the prior threshold in place. In addition, some states impose overtime requirements that are more stringent than federal law. Employers should regularly review their workforce classifications and pay practices to ensure ongoing compliance.
Our Michigan-based payroll service providers and national accounting pros are here to help you navigate changing overtime regulations, manage payroll costs and implement strategies that support both compliance and operational efficiency.
