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Overtime Pay: What Every Entrepreneur Should Know
September 04, 2019
Overtime-Pay

Overtime Pay: What Every Entrepreneur Should Know

Regardless of your business’s industry, employee wages will likely be among your largest expenses. Plus, if state or federal laws require you to pay your employees for overtime work, that expense can quickly balloon.

It’s crucial to be aware of laws relating to overtime shifts; failing to pay employees for overtime work when it’s required by law can result in fines of $1000 per violation. For these reasons, understanding the laws that might apply to your business and how to create policies that protect you and your employees is mandatory.

To help you do that, this post will review:

  1. When you’re required to pay overtime.
  2. What the typical overtime pay rate is.
  3. Considerations for certain states and industries.
  4. How to create a sensible overtime pay policy.

Everything You Need to Know About Overtime Pay:

When Are You Required to Pay for Overtime Work?

Overtime pay laws are governed by the Fair Labor Standards Act, or FLSA, a federal law which details many issues related to workers’ rights. Therefore, if your business is subject to FLSA, you’re required to pay overtime in certain scenarios. To be subject to FLSA, your business must bring in annual sales of $500,000 or more or be engaged in interstate commerce.

If you have a smaller business, you may believe you won’t have to pay for overtime, but legal interpretations of what constitutes “interstate commerce” can be broad.

For example, judges have ruled that companies that regularly sends and receive mail across state lines are engaged in “interstate commerce.” As you can see, even if you own a very small business, you’ll need to determine whether your company is subject to FLSA.

What Are Overtime Pay Rates?

As mentioned, overtime pay rates are governed on a federal level by the FLSA. However, some states such as California, Colorado, Alaska, and others, have state laws which also affect overtime pay rates. In those states, pay rates vary from 1.5 to 2 times whatever the employee’s normal pay rate is. In all other states, the pay rate is time and a half, or 1.5 times the normal pay rate.

Industry and State-Specific Considerations:

On both the state and federal level, the laws governing overtime pay are far from straightforward. Exemptions apply to certain types of workers in some states but not in others, and for workers in certain industries. Moreover, the nature of their work, their decision-making power in your company, and other factors can affect exempt employees’ statuses.

However, as complicated as the laws are, you can’t afford not to follow them. Failure to identify and apply these laws can result in strict financial penalties. You can learn more about specific exemptions on the U.S. Department of Labor website or consult a legal expert for help.

How to Establish an Effective Overtime Pay Policy:

Having an overtime pay policy is critical, not just for legal reasons but also because it affects your employees and payroll expenses. Confusion about overtime pay can cost you significantly in additional expenses while also causing tension amongst your employees. Obviously, both issues are bad for business.

As we previously mentioned, following legal overtime requirements is imperative, but that isn’t the only factor you need to consider when creating an effective overtime pay policy. Communication is just as important as knowing the laws.

As the leader of your business, you must communicate in terms of overtime rules and what you expect from your employees. First, you should establish whether you’ll allow employees to work overtime. You should also figure out which employees are exempt or non-exempt from overtime and communicate their status to them. Be clear and thorough when explaining when overtime is acceptable and how much overtime the company allows.

In addition, research state laws that are specific to your business location and industry. You can do this by consulting with a legal expert in your area to find out what laws your business is subject to.

Conclusion: Make Sure You’re Aware of The Expenses That Come with Overtime Shifts

Remember, if you recently started your business, the FLSA doesn’t apply to you unless you’ve hired a full-time employee. However, as your business grows, operating in compliance with overtime laws will be critical for your long-term success.

Fortunately, by reading this post, you’ve taken the first practical step towards compliance by understanding the basics of overtime wages. Next, you’ll need to hire a legal expert or research the laws that might apply to your business.

Based on the laws you’re subject to, you’ll have to establish an overtime policy. While we’ve already outlined an overview of what a good policy might look like, you’ll need to create one that fits the specific needs of your business. Finally, with your policy in place, the only thing left to do will be to make sure that you’re openly communicating your overtime policy to your employees.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].