Top Overtime Traps for Business Owners As a business owner, you often look for ways to bootstrap or ask employees to go above and beyond. But overlooking overtime could land you in a heap of trouble.

By Susan Schreter

entrepreneur daily

This story originally appeared on Business on Main

Top Overtime Traps for Business Owners

This is the age of expensive equity and debt financing for startup entrepreneurs and small-business owners. The prudent way for business owners to weather this storm is to stretch their company's cash flow and operating assets in clever, cost-effective ways. Employee compensation is no exception.

The problem with bootstrapping compensation to employees is that it's easy for business owners to fall out of compliance with federal and state payroll regulations. One of the most common areas of oversight is the failure to pay overtime wages to certain types of employees.

Plan ahead to avoid payroll surprises
Federal regulations class employees as either "exempt" or "nonexempt" when it comes to receiving overtime pay for working above 40 hours in a single workweek. Nonexempt employees are generally non-salaried employees who have no direct managerial oversight of other employees or the discretion to make decisions on matters of significance to the organization. The minimum pay rate for overtime is 1.5 times regular pay.

Here's the gotcha that often catches business owners off guard. Even if an eager, extra-hardworking nonexempt employee wants to work longer hours without pay, a company is still liable for the cash obligation. Former employees who later leave a company on unfriendly terms can seek overtime back pay and cause a nightmare of audit activity from payroll tax authorities. Yikes!

To minimize payroll surprises, business owners should take care to classify their workers according to definitions of exempt and nonexempt employees under the Fair Labor Standards Act. The definitions are not always clear-cut. Some types of administrative, customer service, engineering, marketing and website workers may be entitled to overtime pay while others may not.

Closing overtime loopholes
Under the Fair Labor Standards Act, business owners can no longer simply give employees an impressive job title or put them "on salary" to avoid overtime pay obligations. Now, to qualify as an "exempt" employee, all of the Department of Labor's qualifications for a specific type of job must be met. Key classification descriptions are available for software, administrative, professional and other jobs at the Department of Labor's website.

I'm frequently asked by cash-poor startup entrepreneurs or business owners seeking to turn around struggling operations if they can use common stock or stock options to sidestep minimum wage or overtime pay obligations. They argue that the stock is a form of compensation that may, over time, be worth far more than current cash payments.

That's true, but if the Department of Labor or local payroll tax authorities find out about the non-cash payment, the business owner will still be held accountable for minimum wage and overtime payments to nonexempt employees. Further, officers and board members of companies can be personally liable for unpaid payroll tax obligations if a company is unable to meet its tax obligations.

Here's one last payroll documentation management tip. The Fair Labor Standards Act requires employers to keep payroll and other records for nonexempt employees for three years. The IRS requires employers to keep employment-related tax records for four years.

What do you think about this issue?
If a dedicated employee waives his or her right to overtime compensation in writing, should business owners still remain liable for payments? Chime in below.

Susan Schreter is a 20-year veteran of the venture finance community and a university educator in entrepreneurship. She is the founder of TakeCommand, a community service organization that offers the largest centralized database of venture capital funds, angel investment clubs, incubators and microfinance lenders in the U.S. Ask her your questions at susan@takecommand.org.

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