Many business owners assume they’re paying overtime correctly—until a Department of Labor (DOL) audit proves otherwise. Miscalculating overtime is one of the most common and expensive payroll mistakes. Overtime violations are among the top reasons businesses get audited. Understanding overtime rules and avoiding hidden traps can save your business thousands in fines and back wages.
Some employers believe that as long as an employee’s total hours over a two-week period average out to 40 per week, they don’t owe overtime. This is incorrect.
Overtime is calculated per workweek, not per pay period.
For example, if an employee works 35 hours in week one and 50 hours in week two, you must pay for 10 overtime hours in week two, even if their average is 42.5 hours per week.
Employers who fail to calculate overtime correctly can face fines for every affected employee going back three years.
Employers who pay employees on the 1st and 15th of each month must be cautious—overtime must still be calculated on a weekly basis.
Workweeks often split across two pay periods, which can make tracking overtime more complex.
If an employee worked 45 hours one week, but the pay period ends mid-week, the employer still owes five overtime hours, even if it falls into the next pay period.
Payroll systems that do not automatically track overtime per workweek can cause serious compliance issues.
Many employers mistakenly assume that all salaried employees are exempt from overtime, which can lead to costly fines.
Exemption is determined by job duties, not just salary.
Employees must meet the DOL’s salary and duties test to be classified as exempt.
A common mistake is paying mechanics a salary and assuming they are not entitled to overtime. If they do not meet the exemption criteria, they must still be paid for overtime hours.
One auto shop owner learned this lesson the hard way when he was fined $478,000 after misclassifying his mechanics.
Track hours weekly to ensure overtime is calculated based on a seven-day workweek, regardless of pay frequency.
Use an automated time and attendance system to eliminate errors caused by manual calculations.
Audit employee classifications annually to confirm whether employees should be classified as exempt or non-exempt.
Review state-specific laws, as some states, such as California, require overtime pay after eight hours in a single day.
Overtime compliance is not just about paying employees correctly... it’s about protecting your business from unnecessary legal and financial risks. If you are unsure about your overtime calculations, now is the time to review your processes and implement a system that ensures accuracy.
Baron Payroll’s automated payroll system helps businesses stay compliant and avoid costly errors.
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