Navigating Overtime Pay: A Guide to the Fair Labor Standards Act (FLSA)

Introduction: The FLSA and Your Paycheck

The Fair Labor Standards Act (FLSA), established in 1938, is the cornerstone of federal wage and hour law in the United States. While it sets the federal minimum wage, its provisions on overtime pay often create the most confusion and, consequently, the most litigation. At its core, the FLSA mandates that covered, non-exempt employees receive overtime pay at a rate of "time and a half" for all hours worked beyond 40 in a single workweek. Yet, determining who is "covered" and who is "exempt" is where the complexity begins. In my years advising businesses, I've seen that misunderstandings here are not just common; they are expensive, leading to back-pay claims, penalties, and damaged employee relations. This guide aims to demystify the FLSA's overtime rules, translating legal jargon into actionable insights for both employers and employees.

Who is Covered by the FLSA? Enterprise vs. Individual Coverage

Before diving into overtime, you must first determine if the FLSA applies at all. Coverage operates under two primary tests: enterprise coverage and individual coverage.

Enterprise Coverage: The Business-Wide Test

An employee is covered if their employer is an "enterprise engaged in commerce." This typically means a business with at least two employees and annual gross sales or business done of at least $500,000. Importantly, it also includes hospitals, schools, and government agencies regardless of sales volume. If the enterprise is covered, generally all its employees are protected by the FLSA's minimum wage and overtime rules, unless a specific exemption applies.

Individual Coverage: The Employee-Specific Test

Even if the employer doesn't meet the enterprise threshold, an individual employee may still be covered. This occurs if the employee is personally engaged in interstate commerce. This is interpreted broadly. For example, an employee who regularly makes out-of-state phone calls, processes credit card transactions, handles goods that have come from or are going to another state, or travels across state lines is likely individually covered. I once consulted for a small local bakery that didn't hit the $500,000 sales mark, but because its sole delivery driver occasionally crossed state lines for a specialty ingredient wholesaler, that driver—and potentially others engaged in similar work—was covered under individual coverage.

The Heart of the Matter: Who is Exempt from Overtime?

This is the most critical—and most frequently misapplied—section of FLSA compliance. Simply giving an employee a "salaried" title does not make them exempt. The Department of Labor (DOL) sets specific tests. An employee must generally meet all three parts of a "salary basis test" and a "duties test" to be classified as exempt from overtime.

The Salary Level Test (Updated for 2025)

As of July 1, 2024, the standard salary level is $844 per week ($43,888 per year). On January 1, 2025, it increases to $1,128 per week ($58,656 per year). Highly Compensated Employees (HCEs) have a higher threshold: $132,964 per year in 2024, increasing to $151,164 in 2025. If an employee earns less than the applicable threshold, they are almost certainly non-exempt and entitled to overtime, regardless of their job duties.

The Salary Basis Test

The employee must receive a predetermined, fixed salary that is not subject to reduction based on the quality or quantity of work performed. With limited exceptions, you must pay the full salary for any week in which the employee performs any work. Docking pay for a partial-day absence for personal reasons typically violates the salary basis test and can destroy the exemption for that employee and potentially similarly situated employees.

The Standard Duties Tests

This is where nuance reigns. The primary exemptions are the "white-collar" exemptions: Executive, Administrative, Professional, Computer Employee, and Outside Sales.

• Executive Exemption: Primary duty is managing the enterprise or a recognized department/subdivision; customarily and regularly directs the work of at least two full-time employees; and has authority to hire/fire or whose suggestions on hiring/firing are given particular weight. A store manager who sets schedules, conducts performance reviews, and manages a team likely qualifies. An assistant manager who primarily performs the same tasks as cashiers but has a "key to the store" likely does not.
• Administrative Exemption: Primary duty is office or non-manual work directly related to the management or general business operations of the employer or its customers; and includes the exercise of discretion and independent judgment on significant matters. A genuine HR specialist crafting policy might qualify. A data entry clerk applying fixed rules to input invoices almost certainly does not.
• Professional Exemption: Primary duty requires advanced knowledge in a field of science or learning customarily acquired by prolonged, specialized instruction (Learned Professional) or involves invention, imagination, or talent in a recognized artistic field (Creative Professional). A licensed architect or a graphic designer creating original artwork may qualify. A technician performing routine lab tests under strict protocols does not.

Calculating Overtime Pay Correctly: It's Not Always Simple

The formula seems straightforward: 1.5 times the "regular rate of pay" for hours over 40 in a workweek. The complexity lies in determining the "regular rate." It is not simply the hourly wage for hourly employees or the salary converted to an hourly rate for non-exempt salaried employees.

What Constitutes the "Regular Rate"?

The regular rate includes all remuneration for employment, with specific statutory exceptions. This means you must include non-discretionary bonuses, shift differentials, commissions, and certain other payments. For example, a non-exempt retail employee earning $15/hour plus a monthly commission of $200 must have that commission factored into their regular rate for the weeks it was earned. If they worked 160 hours in that month, the $200 commission adds $1.25 to their regular rate for each of those hours. Their overtime for any week over 40 hours in that month must be paid at 1.5 times the new, higher regular rate.

The Fluctuating Workweek Method: A Special Case

For non-exempt employees on a fixed salary for fluctuating hours, the Fluctuating Workweek (FWW) method can be used, but it's riddled with specific conditions. The employee must have a clear understanding that their salary covers all hours worked each week, regardless of number. Overtime is then paid at a rate of 0.5 times the regular rate (since the salary already covers the "straight time" for all hours). The regular rate is the salary divided by hours worked that week. Crucially, the salary must be fixed and the employee's hours must genuinely fluctuate above and below 40. Misapplying the FWW is a common source of DOL investigations.

State Laws vs. Federal Law: Navigating the Overlap

The FLSA sets the federal floor, not the ceiling. Many states have their own wage and hour laws that are more protective of employees. Employers must comply with the law that provides the greater benefit to the employee.

More Generous Overtime Triggers

While the FLSA triggers overtime after 40 hours in a workweek, some states have daily overtime rules. For instance, in California, non-exempt employees are entitled to 1.5x pay for hours worked over 8 in a day and double time for hours over 12 in a day, and for hours over 40 in a week. An employee in California working four 10-hour days would be entitled to 8 hours of overtime pay (2 hours at 1.5x for each day) under state law, even though they worked only 40 hours in the week.

Higher Salary Thresholds for Exemptions

Several states have salary thresholds for exemptions that are higher than the federal level. In New York, for example, the salary threshold for executive and administrative employees in New York City is significantly higher than the federal standard. An employer in NYC must pay the higher state threshold to claim an exemption.

Record-Keeping: Your First Line of Defense

The FLSA requires employers to maintain accurate records for all non-exempt employees. In a dispute, the burden of proof regarding hours worked often falls on the employer. Incomplete or inaccurate records can be fatal to an employer's defense.

What Must Be Kept

Required records include: full name and social security number; address; birth date (if under 19); sex and occupation; time and day of week when workweek begins; hours worked each day and total hours each workweek; basis on which wages are paid; regular hourly pay rate; total daily or weekly straight-time earnings; total overtime earnings for the workweek; all additions to or deductions from wages; total wages paid each pay period; and date of payment and pay period covered.

Practical Record-Keeping Tips

I advise clients to use a reliable, automated timekeeping system that requires employee punches and supervisor approval. Prohibit "off-the-clock" work absolutely. Have a clear policy for correcting timecards and ensure managers are trained to enforce it. For remote employees, this is even more critical—implement a system that tracks hours digitally and train employees on their obligation to report all time worked.

Common Pitfalls and Costly Misconceptions

Through audits and litigation support, I've identified patterns of errors that consistently lead to liability.

The Misclassified Assistant Manager

As mentioned earlier, labeling someone a "manager" while they spend 90% of their time on the same production or customer service work as their team is a classic error. The DOL and courts look at the primary duty. If the primary duty is not management, the exemption fails.

Comp Time in the Private Sector

With rare exceptions, private-sector employers cannot offer "comp time" (hour-for-hour time off) in lieu of paying overtime wages. Offering a non-exempt employee an extra day off next week instead of paying time-and-a-half for overtime worked this week is an FLSA violation. This practice is generally permitted only for public sector employees.

Unauthorized Overtime is Still Overtime

If a non-exempt employee works more than 40 hours in a week, they must be paid overtime, even if the work was not authorized or was against company policy. The employer's remedy is to discipline the employee for violating the policy, but they cannot withhold the legally required overtime pay.

Enforcement and Employee Rights

Employees have powerful tools to enforce their rights under the FLSA.

How to File a Complaint

An employee can file a complaint with the Wage and Hour Division (WHD) of the DOL, which may investigate and pursue back wages on their behalf. The process is confidential, and the FLSA prohibits retaliation against an employee for filing a complaint.

Private Lawsuits and Collective Actions

Employees can also file a private lawsuit. These often take the form of a "collective action," similar to a class action, where one or more employees sue on behalf of themselves and other "similarly situated" employees. The potential liability here is substantial: back pay for up to two years (three if the violation is deemed willful), an equal amount as liquidated damages, and attorneys' fees.

Steps for Employers: Proactive Compliance Audit

The best defense is a good offense. A proactive audit can identify and correct problems before they become lawsuits.

Conduct a Classification Review

Annually, review all positions classified as exempt. For each, verify they meet the updated salary threshold and meticulously analyze their duties against the DOL's tests. Don't rely on job descriptions; interview managers and observe actual daily activities.

Audit Timekeeping and Payroll Practices

Ensure your timekeeping system captures all hours worked. Review how non-discretionary bonuses and other payments are factored into the regular rate. Train managers on their critical role in enforcing timekeeping policies and recognizing overtime triggers.

Create a Culture of Compliance

Develop clear, written policies on overtime authorization, timekeeping, and meal/rest breaks (as required by state law). Train all employees and managers on these policies annually. Foster an open-door policy where employees can ask pay-related questions without fear.

Conclusion: Knowledge is the Key to Compliance and Fairness

Navigating the FLSA's overtime rules requires diligence, but it is not an insurmountable challenge. For employers, the goal is to build a compliant payroll structure that values employee time correctly, thereby avoiding costly penalties and fostering trust. For employees, understanding these rules is essential to ensuring you are paid fairly for all the work you contribute. The landscape, with its interplay of federal and state rules, is dynamic. Staying informed, seeking expert advice when needed, and prioritizing accurate record-keeping are the best practices for all parties involved in the vital employer-employee relationship.