Overtime is work done by hourly employees beyond the regular work hours per week. Any work over forty hours per week for an hourly worker is considered overtime. Overtime and overtime compensation are provided under the federal Fair Labor Standards Act of 1938. It is required under the FLSA that employers pay employees working more that forty hours per week time-and-a-half, or 150 percent of the worker's salary for those hours exceeding the weekly average.
EXEMPT AND NON-EXEMPT EMPLOYEES
U.S. labor law distinguishes between "exempt" and "non-exempt" employees regarding overtime. Exempt employees do not have to be paid overtime if they work more than 40 hours a week. According to the FLSA, members of this class of employee include workers "employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools) or in the capacity of outside [salesperson]." Any worker employed in the above categories who meets Department of Labor salary and duty tests is exempt from receiving overtime pay regardless of the number of hours they work.
In some businesses, employees attend to a wide variety of tasks that may include a blend of "exempt" and "non-exempt" duties. In these instances, their overtime status is dictated by their "primary duty" to their employer. Time spent on each task is an important but not decisive factor in determining exemption status. Instead, federal regulations dictate that the most relevant factor is "the relative importance of the [exempt] duties as compared with other types of duties …and the relationship between [the employee's] salary and the wages paid other employees for the kind of nonexempt work performed." For instance, the Code of Federal Regulations notes that "in some departments, or subdivisions of an establishment, an employee has broad responsibilities similar to those of the owner or manager of the establishment, but generally spends more than 50 percent of his time in production or sales work. While engaged in such work he supervises other employees, directs the work of warehouse and deliverymen, approves advertising, orders merchandise, handles customer complaints, authorizes payment of bills, or performs other management duties as the day-to-day operations require. He will be considered to have management as his primary duty." The Code of Federal Regulations also includes tests that can be used to determine the primary duties of other "white-collar" workers, including executives, professionals, computer programmers, and administrative personnel.
Employers should regularly review their staff classifications to make certain that all workers in their employ are properly classified. "As part of that process," wrote Jeffrey Pollack in CPA Journal, "employers should develop written job descriptions that delineate the duties of each position; the employee's actual duties—not the job description—will be the controlling factor."
DECIDING TO USE OVERTIME
Businesses with seasonal peaks, with quotas and deadlines, or with the possibility of rush orders, will at some point probably not be able to meet staffing needs with the regular hours worked by employees. It is at these crisis points that overtime becomes an invaluable tool for the employer.
Most business experts, however, counsel owners and managers to use overtime sparingly if possible. The ideal use of overtime is when employees are willing to work longer hours for increased pay, and the employer needs qualified, trained individuals who will not need excessive supervision while tackling an increased work load. An employer should not, however, rely on employees working many more hours per week to routinely make up for work not accomplished during the regular work week. If this is the case—if overtime becomes essential to the performance of a business, even during regular operating scenarios—there may be other factors, such as poor compensation, morale, or inadequate staffing levels, to be considered.
One serious consideration often cited in the routine use of overtime is the effect it can have on employees' regular production. Increased work hours during one period may lead to increased absenteeism during others, due to family commitments that were put off during "crunch" periods or to illness exacerbated by stress. Indeed, Cornell University's School of Industrial and Labor Relations conducted a late 1990s study that found that employees who work at least 11 and up to 20 hours over overtime weekly showed a much greater incidence of severe conflicts in the work-family realm. These conflicts manifested themselves in higher levels of stress, alcohol and drug use, and absenteeism. In addition, some analysts believe that employee productivity during regular business hours often undergoes a major downturn after periods of extensive overtime.
All overtime should be authorized by a manager or supervisor, preferably in writing. Consideration should be given to tracking the work accomplished during overtime hours; this ensures that employees are continuing to be productive at the increased pay rate, even with the stress of longer hours and increased sales or other pressures. Tracking what work is done on overtime will also aid the owner or manager of a business to better plan for staffing needs in the future.
ALTERNATIVES TO OVERTIME PAY
Because overtime can become very expensive, and can sometimes be draining for regular employees, some businesses have embraced alternate plans of human resource management.
Expanding workforce size. The first determination to be made is whether the amount of overtime used throughout the year is enough to justify the hiring of additional staff. This step should be very carefully considered, however, because while overtime is expensive, so are the costs (salary, payroll taxes, social security, benefits) associated with hiring additional employees.
Temps. Another alternative to overtime is to utilize temporary workers. This can be done independently by the owner or manager, or through a temporary employment agency. Depending on the task (and how much training and supervision is required), the temporary employee can save businesses significant overtime expenses. This alternative can be particularly attractive if increased staffing needs are seasonal and predictable, so that temporary employees can be hired in advance.
Stock options. Many employers have begun offering their workers stock options as compensation in lieu of actual overtime pay. In fact, studies show that as many as 10 million hourly workers in the United States had acquired stock options by the late 1990s. In 1999 employer rights to offer such stock options were codified into law with the passage and signing of the Worker Economic Opportunity Act. This act amends the Fair Labor Standards Act to exclude profits from stock options or purchase plans from the calculation of non-exempt employee's overtime if various requirements are met (such as full disclosure of terms and voluntary participation). Supporters of this new law contend that it will allow employers to offer stock options as incentives to hourly workers while safeguarding employees against businesses that might try to disseminate risky stock options in place of overtime pay.
EMPLOYEE REACTIONS TO OVERTIME
Many employees welcome the opportunity to augment their regular salaries with overtime pay. Some businesses can effectively use overtime as a kind of voluntary bonus: if the employees are willing to put in the added hours, they will be rewarded with increased pay. Because of the strong positive feelings many employees have about the opportunity to earn overtime pay, employers should carefully weigh the pros and cons of hiring temporary help; regular employees will recognize the loss of overtime, and morale may suffer, particularly if overtime has become an integral part of the business cycle.
But the prevailing feeling among many business owners and executives is that employees are placing ever greater value on leisure/family time, and that they are willing to make some sacrifices in the realm of compensation in order to enjoy personal interests. In addition, analysts point out that families that have both parents in the work force may not value overtime as much as employees of the past. Employers should remain sensitive to employees' needs and responsibilities outside of the workplace, and should recognize that employees may not always be willing to volunteer for overtime.