What You Need to Know About the Federal Overtime Rules

What is the Fair Labor Standards Act?

The Fair Labor Standards Act (FLSA) is a federal law that establishes, among other provisions, when and how employers must pay their employees for overtime. As the rules stand today, any employee who is not considered exempt under the law must be paid overtime at a rate of 1.5 times their regular pay for every hour they work beyond 40 hours in one workweek.

The United States Department of Labor (DOL) defines a workweek as any “fixed and regularly recurring period of 168 hours,” meaning seven full, consecutive days. Often, this workweek will be Monday through Sunday, as on a standard calendar. However, the FLSA does not explicitly require employers to adhere to the standard workweek calendar. A Wednesday-through-Tuesday workweek is as valid as a Monday-through-Sunday workweek.

There is no limit to how many overtime hours an employee aged 16 or older can work so long as they are compensated appropriately. Any time a nonexempt employee works beyond that 40-hour maximum, they must be paid at the overtime rate of 1.5 times their standard rate. If not, the employer violates FLSA.

The FLSA does not count hours worked on Saturdays, Sundays and holidays as overtime. This means that if your employee works eight hours daily Tuesday through Saturday, their Saturday hours are not overtime. However, if the employee works a 41st hour on Saturday, that hour counts as overtime.

Current overtime regulations

The DOL is responsible for interpreting the law and setting precise business rules. These rules establish when employers must pay overtime to employees, the rate at which workers earn overtime pay and which types of employees are exempt from overtime protections. [Are you interested in a solution that helps ensure you’re compliant with the law? Check out our reviews of the best time and attendance system.]

“Employers with employees earning less than the overtime threshold need to keep accurate time and attendance records,” said Sally Baraka, chief administrative officer of Agile Growth Corp. “This is especially important for employers with remote employees who work from home. Other employers may choose to increase the compensation of their employees who are earning salaries close to the threshold. While there is some time before the rule takes effect, it’s important that employers get ahead of this issue and review their employee classifications and wages to determine impact.”

There are two major consequences for employers that violate overtime laws. The first is potential employee lawsuits, which can quickly become expensive and generate negative publicity. For FLSA violations, employers are generally required to provide back pay to affected employees and liquidated damages equal to back pay owed. That immediately doubles the cost of compliance upfront, without considering any legal fees employers would have to cover.

The government could also act against noncompliant employers. The DOL’s Wage and Hour Division can levy fines of up to $10,000 for willful FLSA violations that the agency uncovers. If it finds employers repeatedly and violated the law willfully, penalties could involve imprisonment. In other words, it pays to comply with overtime laws the first time.

Federal overtime laws and the FLSA

There are two important sets of rules to keep in mind regarding the FLSA.

Exempt vs. nonexempt employees

There are employee exemptions to the FLSA. According to federal overtime laws, an employee is exempt when they fall into one of the below classifications, meaning employers are not required to extend overtime pay to them:

• Executive: Executive employees are defined as those who make a salary of no less than $684 per week and whose primary duties include managing the company or a recognized department or subdivision of the company. Executive employees regularly direct the work of at least two full-time employees and maintain the authority to hire or fire other employees or at least influence the process. 
• Administrative: Administrative employees are defined as those compensated on a salary or fee basis of $684 per week or more. Their primary duties must be the performance of office or nonmanual work related to the management of general business operations of the employer or clients. They must also exercise discretion and independent judgment in significant matters.  
• Professional: Professional employees are defined as those compensated on a salary or fee basis at a rate of no less than $684 per week and primarily focused on the performance of work requiring advanced knowledge, intellectual in character and requiring the consistent exercise of discretion and judgment.  
• Computer-related: Computer employees are those compensated either on a salary or fee basis at a rate no less than $684 per week or, if compensated on an hourly basis, no less than $27.63 an hour. Their primary duties must include the application of systems analysis techniques and procedures or the design and development of computer systems or programs.  
• Outside sales: An employee meets the outside sales exemption if their primary duty is making sales or obtaining orders or contracts for services. They must work outside the employer’s primary workplace regularly. 

Maximum employee income for overtime

According to a new rule that the DOL started enforcing in 2020, all employees who make less than $35,568 a year must be paid overtime. This rule applies to both exempt and nonexempt employees. Coupled with this rule is a provision that employers can use nondiscretionary bonuses and incentive payments such as commissions to meet up to 10% of the standard salary level outlined in the FLSA. These bonuses and incentives must be paid at least annually.

State overtime laws

In addition to federal laws, employers should be aware of how state laws affect their policies. The federal overtime protection rules are just a minimum and some states go beyond them. It’s as critical to acquaint yourself with state law as with federal law and failure to do so could result in penalties at the state level even if you’re compliant with federal law.

The following states have overtime laws that supersede the FLSA:

• Alaska
• California
• Colorado
• Kansas
• Maryland (certain industries)
• Michigan
• Minnesota
• Nevada
• New York
• Pennsylvania
• Vermont
• Washington
• West Virginia

In all other states, employers must follow the FLSA.

Federal overtime law changes

Federal overtime laws have changed in a few ways since 2016, with each presidential administration handling them in different ways.

How the Obama administration approached overtime rules

Complicating the overtime picture further is a series of proposed rule changes that were raised, scrapped and then raised again. In 2016, the rules governing overtime protections seemed to be about to change, but the rule change was scrapped at the last minute.

In 2016, the President Barack Obama administration’s DOL appeared ready to change the rules for employee exemptions. These changes would have tightened the definitions of each classification and raised the pay threshold to $913 per week or a salary of $47,476. That change was expected to extend overtime protections to 4.2 million additional workers compared with the current regulations. Many businesses adjusted their policies in preparation for the change, which included shifting salaried employees to an hourly wage, but the rule change was ultimately scrapped after the Donald Trump administration took office.

How the Trump administration approached overtime rules

In 2019, the Donald Trump administration proposed an overtime rule change that would have set the income cutoff at $679 per week starting in 2020. This rule would have extended overtime protections to about 1 million more workers, leaving the status of workers making more than $679 per week unchanged.

However, one report found that this rule would exclude 8 million employees from overtime pay whom the Obama-era rules would have included. The proposed rule change would not extend to first responders, nurses or construction workers.

Ultimately, the Trump administration’s proposed changes were implemented with slightly different numbers. In September 2019, the DOL formally raised the maximum salary at which all workers must receive overtime to $684 per week ($35,568 per year) from its prior $455 a week. This change went into effect in 2020 and purportedly did, as expected, make 1 million more employees eligible for overtime pay

How the Biden administration has approached overtime rules

Labor Secretary Marty Walsh told Congress that the current overtime eligibility of the $35,568 figure is too low. In 2021, a group of four Congressmen urged Walsh to propose a standard that matches the income level of the 55th percentile of American full-time salaried workers, which translates to $82,732 every year by 2026. Similarly, worker advocacy groups called on the President Joe Biden administration to increase the threshold significantly higher than the one proposed during the Obama stint.

The Wage and Hour Division of the DOL is drafting the proposal to change the salary threshold for overtime eligibility. It would determine whether bona fide administrative, executive and professional employees are exempted under FLSA’s minimum wage and overtime requirements., which could potentially result in millions of workers becoming eligible for overtime pay.

The proposal might also cover updates, such as:

• Changes to the exempt duties tests
• Automatic and periodical increases to salary threshold according to market data
• Additional rate hikes for highly-salaried employees

The proposal was initially scheduled for April 2022 but was extended to May 2023.

Understanding overtime requirements is a necessity

As an employer, now is the perfect time to review your employee compensation policies to identify which individuals may be impacted by the imminent changes in overtime pay. Once the new rate takes effect, you need to decide whether to increase the salaries of impacted employees or change their status from exempt to nonexempt. 

Gem Siocon also contributed to this article. Some source interviews were conducted for a previous version of this article.