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Off The Clock

How to avoid costly mistakes in calculating and paying overtime

The basic concept of overtime sounds pretty simple: Employees who work more than a certain number of hours get paid at a higher rate for the extra hours put in. The actual practice is far more complex, however, with a lot of gray areas to consider. And making a mistake could hurt later in back pay and penalties if you get caught, says Steve Milner, a managing partner with Squar Milner, an accounting firm in Newport Beach, California.

Milner says the most common mistake employers make when it comes to overtime is in how they classify employees. Essentially, employees are either "exempt," which means overtime rules don't apply, or they're "unexempt," which means overtime rules do apply. Milner says administrative workers in smaller businesses are often misclassified as "exempt" when, because they lack supervisory duties, they should be "nonexempt."

Another problem occurs when an employee's responsibilities shift. "In the entrepreneurial environment, change happens quickly," Milner says. You might change someone's job description and not bother to adjust his or her pay structure--and find out after a complaint has been filed that the new job should have been classified differently. "Whenever you make a change in the way employees do their jobs, think about whether they're still classified correctly," Milner advises.

Another situation to be wary of is when employees take time off for personal reasons that they later make up; if makeup hours aren't worked until the next workweek, you may find yourself legally obligated to pay overtime rates for those hours.

Overtime rules vary by state, so check with your state's department of labor or local labor attorneys and accountants for details. For example, in most states, overtime must be paid after an employee works more than 40 hours in a week; in California, however, it must be paid when the employee exceeds eight hours in one day and/or 40 hours in one week.

Once you understand the rules, develop your internal policies and classify your employees. Then, before you take any final action, run your plan by a labor attorney or an accountant knowledgeable on this topic to confirm that it will stand up under a challenge. Milner says the small investment of an hour or two of professional fees can save you a tremendous amount of grief later on.


Jacquelyn Lynn left the corporate world more than 13 years ago and has been writing about business and management from her home office in Winter Park, Florida, ever since.

Contact Source

Squar Milner, (949) 222-2999

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This article was originally published in the February 2000 print edition of Entrepreneur with the headline: Off The Clock.

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