What is overtime pay

Overtime pay is the additional compensation granted to employees who have worked beyond the standard full-time working hours as defined by an employer or labor laws.

The following content refers to US overtime laws. Overtime pay requirements and processes will vary depending on the jurisdiction you hire in.

What is the legal requirement for overtime pay?

Under the US Department of Labor (DOL) Fair Labor Standards Act (FLSA), overtime pay is required for hours worked over 40 in a workweek at a rate not less than one and one-half times an employee's regular pay rate. However, federal overtime laws vary globally, as each country has its own labor laws and regulations regarding overtime pay.

In this US, overtime state laws can differ depending on whether you’re hiring in California, New York, or beyond. Employers must comply with the legal standards for overtime pay in the jurisdictions where their employees are tax residents to avoid legal issues and ensure fair compensation.

How is overtime pay calculated?

Overtime pay is calculated by taking an employee's regular rate of pay and multiplying it by 1.5 (the typical overtime premium pay) for each hour worked beyond the standard 40-hour workweek. For example, if an employee's regular hourly wage is $20 USD, the overtime rate would be $30 per hour ($20 x 1.5). This is often referred to as “time and a half pay.” Some jurisdictions or contracts may stipulate a higher multiplier or different thresholds for when overtime pay kicks in.

What exemptions apply to overtime pay?

Generally, non-exempt employees are eligible for overtime pay. These are workers who are not exempt from the minimum wage and overtime requirements of the FLSA. Exempt employees—often executives, professional employees, administrative workers, and those who meet certain criteria regarding their job duties and compensation—are not entitled to overtime pay. It's crucial for HR professionals to correctly classify employees to ensure compliance with labor laws.

Overtime pay’s impact on teams and business needs

Overtime pay can positively and negatively impact a team and business. On the positive side, it can provide additional compensation to employees, boosting morale and potentially increasing productivity. However, excessive overtime can lead to employee burnout, decreased productivity, and increased labor costs. Balancing the need for overtime work with employee well-being and budget considerations is essential for maintaining a healthy work environment and ensuring business sustainability.

How to improve overtime management

Businesses can improve overtime management by implementing time-tracking systems to accurately record the number of overtime hours worked, hourly rates, and total hours of work during a specific pay period. You can also use time-tracking systems to forecast workloads and distribute extra hours more evenly among staff. Additionally, employers can hire temporary staff during peak periods or incentivize time off in lieu of overtime pay. Clear communication of overtime policies and monitoring of overtime hours can also help manage overtime effectively.

Measuring the impact of overtime on employees and business performance

The impact of overtime on employees and business performance can be measured through various metrics such as employee satisfaction surveys, turnover rates, productivity levels, and financial analysis of labor costs versus output. Regularly reviewing these metrics can help HR professionals assess whether current overtime practices are sustainable and beneficial to both the employees and the company.

Managing overtime pay on global, remote teams

Overtime pay can affect global hiring and the global workforce by influencing where companies choose to locate certain job functions based on the cost of labor and legal requirements for overtime in different countries. It can also impact the attractiveness of job offers to potential candidates who may prioritize compensation for extra work hours. Understanding local labor laws and competitive compensation practices is vital for companies operating in multiple countries.

With the rise of remote work, managing and compensating for overtime can be more challenging, as remote employees might work flexible hours or outside the traditional 9-to-5 workday. Employers must establish clear guidelines and tracking mechanisms for remote work to ensure accurate recording of work hours and appropriate compensation for overtime, while also respecting work-life balance.

Can overtime pay be substituted with compensatory time off?

In some cases and jurisdictions, employers can offer compensatory time off (comp time) in place of overtime pay, allowing employees to take paid time off at a future date. However, this practice is subject to labor laws and may not be permissible in all cases. Employers must adhere to the legal provisions governing the use of comp time and ensure employees are given a choice and agree to this arrangement.

Potential legal or compliance issues associated with overtime pay

Failure to correctly pay overtime or properly classify employees can lead to legal and compliance issues, including lawsuits, fines, and penalties. Employers must adhere to labor laws, maintain accurate records of hours worked, and ensure that all eligible employees receive their rightful overtime compensation. Regular audits and staying informed about changes in labor laws can help prevent compliance problems.

How does overtime pay impact different types of employment contracts?

Overtime pay provisions may vary depending on the type of employment contract. For instance, unionized workers often have specific overtime rules negotiated in their collective bargaining agreements, which can differ from standard legal requirements. Contract and part-time workers may also have distinct overtime terms compared to salaried employees. HR professionals must understand and manage the complexities of various employment contracts to ensure proper overtime compensation.

How to streamline overtime pay processes

Employers can use various tools and platforms to streamline overtime pay processes, such as automated time-tracking systems, payroll software, and scheduling tools that help manage employee hours and calculate overtime accurately. These technologies can reduce errors, save time, and ensure compliance with labor laws. Additionally, analytics tools can help HR professionals analyze overtime trends and make informed decisions about labor management.

By using Deel to manage their global team’s payroll, HR professionals can effectively manage their workforce, comply with legal requirements, and contribute to the overall success of the business. To learn more, book a 30-minute platform demo with a specialist.