Thinking Through Your Overtime Policy

Being careless about overtime compliance is akin to licking a metal pole on a cold winter day: you will learn an unpleasant lesson the hard way. Employers can avoid an unwanted lesson on overtime violations by developing a good understanding of overtime requirements so they can effectively implement a compliant policy.

An effective overtime policy requires the following:

1. Identify what overtime is and when it is applicable: The threshold for overtime under the federal Fair Labor Standards Act (“FLSA”) is 40 hours in a work week. Minnesota state law sets the threshold at 48 hours. Most employers are likely to be governed by the lower federal threshold. A policy needs to make clear when overtime applies by defining employees’ standard working hours.

2. Make clear who is eligible to receive overtime pay: Employers need to ensure that employees know their classification. This should be specified on the Employee Notice provided at the start of employment, as required by Minnesota law. The U.S. Department of Labor recently revised its regulations implementing the FLSA, which narrowed the application of exempt classifications. This means more workers will be considered non-exempt employees and overtime requirements will now apply to those workers.
3. Explain how overtime is calculated: Avoid misunderstandings among employees by making clear that overtime is based on actual hours worked; holiday hours, vacation time and sick leave do not count towards hours worked. The workweek does not need to match the calendar week but does need to be a fixed period of seven consecutive 24-hour periods. Employers also need to determine whether there are any unique factors relevant to determining an employees’ regular rate of pay for calculating overtime compensation. Determining the “regular rate of pay” is generally straightforward for employees paid on an hourly basis; however, the calculation can become complicated if there are any variants in employee pay (ex: shift differentials).  The regular rate of pay also typically needs to factor in commissions, certain bonuses, and other incentive payments.

4. Identify the procedure for overtime requests: Address how overtime needs will be communicated to employees, including any minimum notice employees will be given of an overtime request, whether accepting overtime work be optional or mandatory, and what excuses will be sufficient to avoid mandatory overtime. Employers also need to ensure it is clear who within the company can make the decision to have employees work overtime and how that decision needs to be documented. Commonly, employers want to clearly communicate that working unauthorized overtime will result in disciplinary action. A clear process ensures that both management and employees have shared expectations.
5. Proper documentation: Make sure it is clear how employees need to document and report overtime work, and that everyone involved in payroll understands the proper process to ensure wages are paid correctly.

Like other wage laws, overtime requirements are not something to be casual about. Noncompliance could result in penalties and other costs, in addition to paying back wages to employees who were not compensated correctly. Just as with that frozen metal pole: don’t be the one who has to learn the lesson the hard way.

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