Maintaining consistent overtime regulation has remained one of the most difficult compliance items for hourly workforce employers. In fact, misclassifying employees or failing to pay overtime hours correctly often results in steep financial fines, damaged employee morale, and even legal action if you aren’t careful.
While several new overtime changes have been announced for 2021, having a solid overtime policy can help protect your business and soothe employees’ confusion as the Department of Labor (DOL) continues to expand OT rules. Without a proper policy, your employees won’t know whether working overtime is mandatory, optional, limited, or prohibited.
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Step 1: Classifying Employees (Exempt vs. Nonexempt)
The first step of creating an overtime policy is determining employees’ exempt or nonexempt status. Exempt employees generally hold a salaried position and aren’t subject to OT hours or time tracking. To qualify as exempt, employees must pass the FLSA tests (salary and duties assessments) used for determining overtime status. Check out this FLSA Exemption Questionnaire for an industry-based analysis tool.
When it comes to your policy, consider addressing the difference between exempt and nonexempt employees, the DOL’s criteria for classification, and what each status implies for your workers’ pay within the policy itself.
Example: Nonexempt employees will receive overtime wages for hours over 40 worked while exempt employees will not.
Note: Make sure your employees are aware of their status when you hire them. For more information, check out our blog, “Best Practices for Classifying Employees Correctly.”
Step 2: Mandatory, Optional or Prohibited Overtime
Depending on your industry or the size of your business, your next step will be to decide whether or not to make overtime mandatory, optional, or off-limits.
To avoid high costs, you may choose to ban employees from working overtime. On the other hand, if don’t necessarily need employees to work overtime but don’t want to limit your operation by prohibiting it, you can choose to include optional overtime within your policy.
Since hourly workforces do tend to allow some form of overtime, particularly if you’re in an industry with seasonal work or busy periods, it may benefit you to add which weeks will have mandatory overtime periods throughout the year within your policy. If you go this route, note how many hours of overtime each employee will be required to work.
Step 3: Overtime Limitations
If you are allowing overtime work, your third step will be to define all parameters, rate changes, and related rules that apply. Restricting the number of overtime hours your employees can work will be critical for maintaining a solid bottom line, fair operating system, and even operational compliance. If you decide to limit overtime, add all relevant details to your policy. This might include how many hours can be worked, when or where OT can occur, or the timeframe for which OT needs to be reported.
Example: Employees can work a maximum of 6 overtime hours each work week (per employee).
Step 4: Standard Operating Procedures (SOP) for Overtime
Your overtime policy should cover the specific actions employees need to take in order to receive overtime. Explain how to request overtime hours, your overtime rotation rules, and any pre-approval processes expected to occur. Create specific steps for employees to follow if they forget to mark OT hours or a manager fails to offer the appropriate amount of OT hours.
Moreover, don’t forget to explain how overtime hours will be tracked. Do you have a time and attendance system that automatically tracks it? Or do they need to clock-in using a time clock and mark their hours manually? All are necessary details to have solidified within your policy.
Step 5: How Overtime is Paid Out
Your overtime policy should make it easy for your workforce to understand the breakdown of overtime pay— basic or blended overtime rates, backpay (for when you forget to pay overtime wages), etc. If you are a multi-state employer, you will need to ensure your overtime rates are updated and take the appropriate state or city-based minimum wage rates into consideration.
Example: Employees will be paid overtime pay for any hours worked over 40 in a workweek. Overtime wages are 1.5 times the employee’s regular hourly rate.
In addition, explain any relevant processes about how employees will receive their pay. If back pay is owed, include whether employees can expect a separate payment for their OT wages or whether they will be included in their next paycheck.
Finally, it may be beneficial to offer employees a direct resource to contact or actions they can take if they believe there is a problem with their overtime. Whether it is miscalculated overtime or an overdue payment, make sure they know how to resolve any oversights with your company directly.
Want More Help with Managing Your Overtime Cost and Compliance?
Creating an overtime policy is just the first step to overtime compliance, because most overtime mishaps happen while tracking and calculating overtime. To avoid costly mistakes and overtime headaches its important to have a powerful workforce management solution in place to help you manage your overtime.
EPAY's workforce management solution easily conforms to any labor environment to help improve your ROI and maintain compliance. Plus when you partner with us, you gain access to premium HR-consulting services and compliance alerts year round.