Understanding the Differences with Salaried, Exempt, and Non-Exempt Employees
If an employee is salaried, does that automatically mean they are exempt from overtime? Or do they still need to track hours for overtime?
Discover how to calculate overtime pay accurately and fairly. Learn legal aspects, common errors, and special considerations in overtime calculations.
Nearly every employee and employer in today’s workforce is familiar with the concept of overtime. After all, overtime has been around since the Fair Labor Standards Act (FLSA) was enacted in 1938.
What you may not know is many employers under-calculate wages that should be included in overtime payments or neglect to track hours for qualifying employees, subjecting them to lawsuits and penalties.
If you are unsure about nonexempt vs exempt classifications, or you reward employees with bonuses or shift differentials, provide commissions or tips, compensate with day rate or piece rate productivity, or have salaried employees, you could be at risk for inaccurately calculating overtime wages.
What is overtime pay?
Overtime or premium pay is the common phrase people use when referencing time worked beyond their regular work schedule. In most states, a traditional full-time schedule is 8 hours a day, 5 days a week, totaling a maximum of 40 hours a week. Once an employee reaches their maximum 40 hours worked for the week, they begin working overtime.
While you could opt to pay more, the federal standard requires employers to pay at least 1.5 times the employee’s normal rate for each minute worked beyond 40 hours.
Paying overtime wages to qualifying workers is a federal requirement. Per the FLSA, employers must pay time-and-a-half (1.5 times) pay for work beyond 40 hours a week.
Some states, however, have different regulations and require employers to pay overtime hours based on a daily work time threshold. Whichever law is more favorable to employees is the one you should adhere to in your state.
Currently, the states of Alaska, California, Colorado, Nevada, and Oregon have daily overtime laws. Each state has varying hour thresholds, and several have specific positions or other criteria that must be met to trigger overtime wages. See the state overtime breakdown here (select the state and view the "Premium Pay After Designated Hours" section).
Any blue-collar employee is considered nonexempt and an automatic qualifier for overtime. However, many white-collar employees also qualify for overtime wages.
To simplify, you could make every employee track time and pay overtime wages for anyone who works beyond 40 hours a week. Or you could determine which workers qualify as exempt from overtime and only track hours and pay overtime to your nonexempt employees. It is crucial to correctly calculate total overtime hours worked for accurate compensation under federal and state laws.
Determining which white-collar employees are exempt from overtime is case-by-case, dependent on these key factors:
Regular rate of pay: For all but the Outside Sales Exemption, an exempt employee must earn at least $844/week ($43,888/year). As of January 1, 2025, the standard salary level for an exempt employee increases to $1,128/week, or $58,656/year.
Primary duties: No matter their job title, an exempt employee must perform regular job duties that fall under one of the exemption categories of Executive, Administrative, Professional, Creative Professional, Computer Employee, or Outside Sales to be exempt from overtime.
If an employee meets both the regular rate of pay (except for Outside Sales Exemption) and primary duties qualifications, they are exempt from overtime wages and not required track time worked.
Learn more about appropriately classifying employees in “Exempt or Nonexempt? Classifying Employees.”
There is no federal limit for how many overtime hours an employee age 16+ can work. Keep in mind that youth under 16 years old have hour limitations for school and summer days and are prohibited from working over 40 hours a week until they are at least 16 years old.
However, excessive overtime can lead to burnout, health problems, a reduction in employee engagement, poor quality of output, workplace accidents, absenteeism, high employee turnover, and so on.
While overtime pay has its place to help with staff fluctuations, many studies have found that productivity slows with high levels of overtime. Best practice is to reevaluate staffing and workloads when employees are consistently being scheduled for overtime to prevent problems.
In the event you have an employee that is unwilling to work overtime hours, you can make working overtime mandatory for employees age 16+, except in cases where there is an employment contract or union that limits how much an employee is required to work. Employees can be fired for refusing to work overtime.
While most situations for calculating overtime pay are cut and dry, you must be organized, systematic, and aware of irregular pay differentials to ensure you are paying employees within the law.
Because overtime is based on the number of hours an employee works in a week, you need to establish the day and time that your workweek begins. For example, Monday at 8:00am through the following Monday at 7:59am could be your seven-day workweek.
Once you define your workweek, it should not be altered unless the change is meant to be permanent. Fluctuating workweeks may appear as though you are evading overtime payments.
Next, you must add all the hours worked during the workweek to determine the total overtime hours and whether any employees surpassed the federal 40 hour maximum (or daily limits if your company is based in a state with varying overtime laws). All time worked up to the maximum should be paid at the employee’s regular pay, and any time worked beyond the maximum should be paid at 1.5 the regular rate.
Time on the job performing job duties is certainly compensable, but what about time before and after work?
Per the Portal-to-Portal Act of 1947 which amended the Fair Labor Standards Act, hourly employees can be compensated for time directly before and after their shift if it is “closely related and indispensable” to their work. This includes putting on or taking off protective gear for work but does not include changing clothes for convenience.
Commuting to and from work is not compensable work time.
There is no federal law that requires you to offer breaks to adult employees, but many states have regulations for paid or unpaid meal and break periods. The Department of Labor does say, however, that if your company offers short breaks of 20 minutes or less, they should be paid and included in the sum of hours worked.
For a nonexempt employee to have an unpaid break, they should be completely relieved of duties. This means no answering phones, responding to emails, being forced to sit at a machine, or any other work requirements unless the break is compensable.
Calculating overtime for employees who have compensation beyond an hourly rate is a bit more complicated. Because overtime is 1.5 times the employee’s regular rate, employees who are regularly paid bonuses, commissions, by piece rate, or that have shift differentials must first determine what their regular pay rate is for that workweek.
The first step to calculating overtime correctly for employees with different pay structures is establishing the day and time that your workweek begins. This will help you define boundaries of starting and stopping time.
Despite having different pay structures than employees paid strictly by hour, nonexempt employees who regularly earn bonuses, receive commissions and tips, or that are paid day rate or piece rate (or piecework) must still track all time worked and be paid overtime for work at 1.5 times the amount they earned that week.
A nondiscretionary bonus is a bonus that an employee knows how to earn and must be included in the regular pay rate. Samples of nondiscretionary bonuses include:
When an hourly employee earns a nondiscretionary bonus, the amount of bonus must be added to the pay rate to determine the employee’s regular rate of pay for the week. Calculating the regular rate of pay is necessary to determine overtime wages due.
To do this, add the total compensation earned for the week and then divide by the total hours worked in the week. For example, if an employee worked 48 hours one week at $20/hour and earned a nondiscretionary bonus of $100 for meeting productivity, his straight time compensation before calculating overtime wages is ((48 hours x $20/hr) + 100) = $1060. Divide $1060/48 hours and his regular rate for the week is $22.08/hour.
From here, multiply the regular rate of $22.08 by 0.5 ($11.04) and add it to the hourly rate to determine the overtime premium rate of $31.04. Multiply by the number of overtime hours worked ($31.04 x 8 hours of overtime = $248.33 overtime). Add this amount to the 40 hours worked at $20/hr plus the $100 bonus to determine the full amount of compensation owed for the week.
For our example, the employee earned ($800 + $100 + $248.33 = $1,148.33) for the week.
The same method for calculating overtime pay is required for employees who earn shift differentials, which are additional compensation given as incentives (but not legally required) to employees who work shifts outside their normal work hours. All shift differentials must be added to determine the regular rate of pay for the week, which is then used to calculate the employee’s overtime rate for the week when they work more than the maximum hours.
Nonexempt employees who regularly earn commissions and tips must track hours, regardless of whether they are also paid an hourly rate. This is a federal requirement to ensure minimum wage is earned and overtime is calculated and paid correctly.
Next, you must divide their total compensation by the number of hours worked to determine their regular hourly pay rate for the week. This amount is then multiplied by 0.5 to determine the premium pay for all overtime hours worked.
For example, a sales rep earns $1,000 in commissions for the week after working 45 hours. Their regular hourly rate of pay is ($1000/45) = $22.22, making their overtime premium pay ($22.22 x 0.5) = $11.11 for every hour of overtime worked. Because they worked 5 hours of overtime, they will earn an overtime premium amount of (5 overtime hours x $11.11) = $55.55, for a grand total of $1,055.55 for the week.
Employees who regularly receive more than $30 a month in tips are considered tipped employees and must have tips included as part of their wages. Follow the same process of adding tips to determine the regular hourly rate of pay to calculate the premium overtime rate for any hours worked beyond the weekly (or daily) maximum.
Nonexempt employees who are paid by day rate or piece rate must track hours worked each pay period, even if they are not paid any form of hourly rate. This amount should include both productive and nonproductive hours (like sitting and waiting for a truck to be unloaded) and is a federal requirement to ensure minimum wage is earned and overtime is calculated and paid correctly.
Next, you must divide the day rate or piece rate earnings by the total number of hours worked (productive and nonproductive) in the week to determine their regular hourly pay rate. From here, multiply 0.5 to determine the premium pay for all overtime hours.
For example, a laborer earns $8 for picking a half bushel of tomatoes. In one week, the laborer worked 42 hours and picked 100 half bushels of tomatoes. The regular hourly pay rate is (($8 x 100 units)/42) = $19.05 per hour. For the additional two hours of overtime worked, the employee earns a premium rate of 0.5 x $19.05, or $9.52 per hour of overtime. Total compensation for the week is ($800 + ($9.52 premium rate x 2 hours of overtime)) = $819.05 (rounded up).
Because employees paid by day rate or piece rate are paid based on productivity rather than time worked, best practice is to have a specific written agreement that informs workers that compensation covers all hours worked, regardless of productive or nonproductive work.
A salaried employee refers to someone who is paid the same amount for either a fixed workweek (set number of hours) or a fluctuating workweek (same amount, regardless of actual hours worked).
While exempt employees are typically salaried and not required to track time, federal overtime laws require all nonexempt employees to track time worked, even if they are paid by salary. This is required by the Fair Labor Standards Act to ensure minimum wage is earned and overtime is calculated and paid correctly.
Salaried employees on a fixed workweek are paid a set amount for a given number of hours. If the employee goes over that intended number of hours, they must be compensated in addition to their salary amount.
To calculate overtime for a salaried employee on a fixed workweek, you must first know how many fixed workweek hours the employee is required to work to be paid the salaried amount. For example, if an employee receives a weekly salary of $700 for working 30 hours, their regular hourly rate of pay is ($700/30) = $23.33.
If the employee works 45 hours one week, you must first multiply the additional 10 regular hours at $23.33 ($233.33) and then add the overtime premium of ($23.33 x 1.5 x 5 hours) = $175. For this example, the employee earned $700 (regular salary) + $233.33 (10 additional regular hours) + $175 (overtime premium) = $1,108.33.
Salaried employees on a fluctuating workweek are paid the same amount each week, regardless of hours worked. This means the amount they earn one week is the same amount they earn the following week, even if they worked less than 40 hours during one (or both) of those weeks.
To calculate overtime for a salaried employee on a fluctuating workweek, you must divide the salaried amount by the number of hours worked to determine the regular hourly pay rate. If an employee has a regular fixed salary of $900/week and works 45 hours one week, the regular pay rate is ($900/45 hours) = $20/hour.
From here, multiply 0.5 to the hourly rate to determine the premium pay for all overtime hours worked, which is ($20/hr x 0.5) = $10 premium pay in this example.
Because the employee worked an extra 5 hours of overtime, they receive (5 hours x $10 premium pay) = $50 in premium overtime pay to their weekly $900 salary, for a total of $950 for the week.
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