You have someone on salary who worked 47 hours last week. Do you owe them overtime?
If they're non-exempt, yes.
Getting overtime right with salaried non-exempt employees can be complicated. Being salaried makes them look exempt, but the salary alone isn’t enough.
Read on to find out five common overtime mistakes you could be making when it comes to salaried non-exempt workers, and how to avoid them.
Before we dive in, keep in mind that overtime protections come from the federal Fair Labor Standards Act (FLSA), the federal wage and hour law. It requires that you pay your non-exempt employees one and a half times their regular rate of pay for every hour over 40 in a workweek. Your state may require more, so check your state's labor laws alongside the federal rules below.
1. Assuming an employee is exempt because they’re paid a salary
Paying someone a salary is one requirement for an employee to be exempt, but that alone doesn't make them exempt. To qualify for an exemption, an employee has to meet all three of these FLSA white-collar exemption tests for executive, administrative, or professional work:
Salary basis test. They receive a predetermined, fixed amount each pay period that isn't reduced based on the quality or quantity of their work.
Salary level test. That salary is at least $684 per week, or $35,568 per year.
Duties test. Their actual job duties fit one of the exempt categories.
If the employee fails any one of the three, then the employee is non-exempt and eligible for overtime.
A few narrower exemptions with their own rules also exist, including ones for certain skilled workers in the computer field and outside sales employees.
The takeaway: Run every salaried employee on your payroll through all three tests, rather than making a decision on salary alone.
2. Assuming that salaried managers are always exempt
If an employee is a manager, you might assume they’re automatically exempt because of their executive or administrative duties. But remember, what matters for the FLSA duties test is the employee's primary duty, or their principal or most important duty based on the job as a whole.
You might assume you could review someone’s hours by task to determine their primary duty, but time worked is actually only one of four factors:
Time spent on exempt work
How important the exempt duties are relative to the rest of the job
How free the employee is from direct supervision
How their salary compares to what you pay others doing the same non-exempt work
The takeaway: Write down what each salaried manager actually does in a typical week, then test it against the factors above rather than against their title. If the honest answer is that they're mostly doing the same work as the people they oversee, they're likely non-exempt.
3. Miscalculating the regular rate of pay
Overtime is at least time and one-half the employee's regular rate of pay—but the trick is to correctly determine their actual regular rate. It can be higher than their base hourly wage.
Here’s how to calculate a salaried employee’s regular rate of pay correctly:
Identify how many hours the salary was meant to cover. Usually a salary covers 40 hours. If the salary was set to cover more, use that number instead. If you pay monthly or semi-monthly, convert the salary to a weekly figure first: multiply a monthly salary by 12 and divide by 52, or multiply a semi-monthly salary by 24 and divide by 52.
Divide the salary by those hours. A $1,000 weekly salary covering 40 hours gives a regular rate of $25 an hour. That rate doesn't change with hours actually worked. It stays $25 whether they work 41 hours or 48.
Apply the rate to the overtime hours. Multiply the overtime hours by 1.5 times the regular rate and pay it on top of the salary. In a 45-hour week, the five overtime hours are $37.50 each, so this employee is owed $187.50 on top of their $1,000 salary.
Account for any other pay that week. The regular rate includes nearly all compensation for the workweek, not just salary. If the employee also received any of the following, that week's regular rate goes up and so does the overtime you owe:
Non-discretionary bonuses (production, attendance, retention, anything promised in advance or tied to measurable criteria)
Commissions
Shift differentials
Hazard pay
If you pay out a production bonus in a 45-hour week, it raises that week's regular rate. Our guide to calculating overtime can help you navigate a situation like this, including bonuses earned over a quarter or a year rather than a single week.
Also, keep in mind that the regular rate can't be less than the applicable federal, state, or local minimum wage. If it is, the salary itself is too low for the hours it covers, and you may owe back pay on their regular pay, not just their overtime.
The takeaway: Before you run payroll for any week with overtime, check whether the employee received anything beyond salary that week. If they did, recalculate the regular rate for that week instead of reusing last week's number.
4. Not tracking hours for salaried non-exempt employees
Salaried employees don’t normally have to track their hours—except when they’re also non-exempt.
The FLSA's recordkeeping rules require you to keep, for every non-exempt employee, the hours worked each day and the total hours worked each workweek, along with their regular hourly rate, total straight-time earnings, and total overtime earnings for the week.
When there's a dispute over unpaid overtime, it comes down to your records against the employee's recollection. If you can't produce accurate timekeeping records, a reasonable estimate from the employee may be enough.
Rely on Gusto to make this easier for you. Gusto offers time tracking for salaried non-exempt employees, so hours flow into payroll without a separate step.
The takeaway: Put every salaried non-exempt employee on the same timekeeping system as your hourly staff, tracking daily hours rather than weekly totals. Keep payroll records for at least three years, and time cards and schedules for at least two.
5. Not paying salaried non-exempt workers for all time worked
For a salaried exempt employee, it doesn't matter if they come in early, stay late, or check email from home on a Sunday. The salary covers it.
For a salaried non-exempt employee, all of that is compensable time. Here's what counts as hours worked:
Work outside scheduled hours. Answering emails in the evening, taking a call at home, finishing something up after hours.
Work during a meal break. Someone eating at their desk while covering the phone is working, and that time has to be paid.
Short rest breaks. Breaks running from about 5 to 20 minutes count as hours worked no matter what happened during them. You can't deduct a 15-minute break.
Mandatory meetings and training. If you require attendance, it's paid time.
On-call time, sometimes. It depends on how restricted the employee is while on call.
Work you told them not to do, or work you didn’t request but permitted. You can address it as a performance issue, but you still have to pay for the time.
The takeaways:
Tell salaried non-exempt employees to record every minute they work, including off-hours and interrupted breaks, and make sure reporting it is easy and never discouraged.
Pay whatever gets reported, even if you didn't approve it. If someone is regularly working hours you don't want to pay for, fix the workload or the schedule going forward. Don’t decline to pay for hours they already worked.
What do I do if I have underpaid overtime for salaried non-exempt employees?
If you suspect you have errors with overtime for salaried non-exempt employees, start with an audit. Pull your list of salaried employees and check each one:
Do they clear all three exemption tests, including the duties test?
If they're non-exempt, are you tracking their daily hours?
Does their regular rate include every form of pay they received that week?
If you find someone who's been misclassified, you have two separate tasks to do:
Reclassify the employee. Put them on your timekeeping system, and start paying overtime.
Address unpaid overtime. Unpaid overtime can end up costing roughly double what you originally owed, and you could be responsible for the employee's legal fees if it goes to a claim. This is worth a conversation with an employment attorney in your state before you act. How far back to go and how to handle the payment are judgment calls, and doing it thoughtfully protects you in a way that a quick correction doesn't.
Get help going forward with Gusto
Salaried non-exempt employees are an easy group to misclassify, because the salary makes them look exempt. But the good news is that it's one of the most avoidable mistakes going forward. With Gusto, you can easily track hours and keep the records you need for compliance.
FAQs
What does the Department of Labor (DOL) exclude from the regular rate of pay?
You can exclude truly discretionary bonuses and holiday gifts, payouts for unused PTO or sick leave, reimbursed business expenses like cell phone plans and travel, and certain perks such as wellness programs, gym memberships, and tuition benefits.
Can I use the fluctuating workweek method for a salaried non-exempt employee?
Probably not. The method lets you pay overtime at half the regular rate instead of time and a half, but it requires hours that genuinely fluctuate week to week, a fixed salary that never varies with those hours, and a clear mutual understanding with the employee. Pennsylvania, California, Alaska, and New Mexico prohibit it.
Is there a limit to how many hours a salaried non-exempt employee can work?
No. The FLSA sets no cap on weekly hours for employees 16 and older, so you can schedule as many hours as your business needs as long as you pay time and a half for everything over 40 in a workweek. Some states limit daily hours or require daily overtime.
