How to Create an Overtime Policy for Your Business

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11 minutes read
Learn How to Craft a Clear and Compliant Overtime Policy for Your Business.

Highlights

  • A clear overtime policy ensures compliance with labor laws, protects employees from missed overtime pay, and minimizes the risk of lawsuits for employers.
  • Depending on your industry,overtime can be mandatory, optional, or off-limits.
  • EPAY’s Workforce Management Software simplifies time-tracking, overtime rules, and payroll for your business. Request a demo to learn how it can help your workforce!

Maintaining consistent overtime regulations for an hourly workforce can be challenging. From misclassification to missed overtime pay, even minor missteps can lead to hefty fines, disgruntled employees, and potential lawsuits. The good news? A clear, well-defined overtime policy can be your safety net.

With the Department of Labor (DOL) actively expanding overtime protections, having a policy in place not only shields your business but also eliminates confusion for your employees. Are they expected to work overtime? How much? How will it be compensated? A strong policy answers these questions and more.

Let’s dive into the key elements of crafting an effective overtime policy specifically designed for your distributed, hourly workforce.

The First Step of Creating an Overtime Policy Is Determining Employees’ Exempt or Nonexempt Status.

5 Steps to Create an Overtime Policy for Your Business

A strong overtime policy acts as a roadmap for both your company and your employees.

Here’s how to create one for your business:

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 overtime hours or time tracking. To qualify as exempt, employees must pass the FLSA tests (salary and duties assessments) used for determining overtime status.

Nonexempt employees, on the contrary, are typically paid by the hour and are entitled to overtime pay for any hours worked over 40 in a workweek. They are also generally required to track their hours worked for payroll purposes.

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 over 40 hours worked while exempt employees will not. 

2.    Mandatory, Optional, or Prohibited Overtime

Depending on your industry or business size, your next step will be to decide whether 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 you 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.

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, a 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 overtime can occur, or the timeframe for which it needs to be reported.

Example: Employees can work a maximum of 6 overtime hours each work week (per employee).

4.    Standard Operating Procedures (SOP) for Overtime

Your overtime policy should cover the specific actions employees need to take 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 overtime hours or a manager fails to offer the appropriate amount of overtime 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? Make sure to include all these details in your policy.

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 overtime 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.

Having a Time and Attendance Solution Can Help You Automatically Keep Track of Overtime Hours

Want More Help with Managing Your Overtime Cost and Compliance?

A well-crafted overtime policy is just the first step to overtime compliance. In fact, most errors occur during the time-consuming process of tracking and calculating overtime hours. A powerful workforce management solution can streamline this process, saving you money and headaches.

EPAY’s workforce management software adapts to your unique needs, regardless of your industry or company size. By simplifying overtime tracking and calculations, you can reduce errors, boost ROI, and keep your business compliant. Besides, you get year-round access to our premium HR consulting services and compliance alerts.

Discover how EPAY can help! Schedule your free demo today.


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