Employee Overtime: Handle With Care
October 27, 2016
Caleb Pilling, CPA, CFE
For many manufacturers and distributors, employee overtime has become a complicated issue for two reasons:
- Your firm may be paying too much in overtime.
- Or, you could be misclassifying employees as exempt from overtime when they are actually entitled to it under the law.
Either way, it can be an expensive mistake. Let’s begin with the first instance where employee overtime becomes the rule rather than the exception. In effect, these companies are operating on permanent overtime. When this happens, some employees tend to regard overtime pay as a “fringe benefit” they are entitled to, whether the company needs extra work or not. Indeed, they come to depend on that extra income and sometimes become creative at finding ways to make sure it continues.
Although state overtime rules vary, the national standard is clear. Unless your employees are exempt from the Federal Fair Labor Standards Act because they hold managerial, professional or administrative positions (or are outside salespeople or certain computer employees), you must generally pay them time-and-a-half for any hours worked in excess of a 40-hour week.
At 150 percent of an employee’s normal hourly wage, overtime pay scales can put you in the poorhouse. Before that happens, impose a company-wide moratorium on overtime pay. At a minimum, require written authorization from a key management official before any non-exempt employee works more than 40 hours a week. This policy eliminates misunderstandings, as well as unnecessary payroll costs.
Before you can solve your overtime problem, you have to search for the root causes. If work can’t be done during the normal hours, analyze why. Do you need to reshuffle job responsibilities or hire part-timers to catch-up? Consider paying a bonus for coming up with ideas to eliminate overtime by finishing the work on time.
But while you want to cut back on unnecessary overtime, be careful that you don’t go too far. There have been numerous class action suits filed by employees who claimed they were misclassified as being exempt from receiving overtime pay when they were entitled to it. For instance, Rite Aid, Taco Bell and U-Haul all settled multi-million dollar overtime lawsuits in recent years, although they admitted no wrongdoing.
If a company incorrectly categorizes employees as exempt, it could be liable for back pay, overtime and punitive damages for the past two or three years. If an employee files a complaint, your business could be subject to an investigation by the Labor Department.