Am I Doing Overtime Right? (Key Mistakes to Avoid for Business Owners)
- Abby Kotun-Thomas
- 1 day ago
- 6 min read
One of the most expensive wage-and-hour mistakes an employer can make is assuming that once an employee is paid a salary, they don’t have to worry about overtime.
In actuality, salary has little to do with whether you owe an employee overtime, and this misunderstanding can lead to costly lawsuits, government audits, and back-pay obligations.
At Johnsen Law, we can prevent major wage-and-hour lawsuits and investigations through a simple review of employee classification systems.
🚨 The Biggest Overtime Mistake: Paying Salary to Non-Exempt Employees
A common misconception is that paying a salary eliminates an employer’s obligation to provide overtime compensation to their staff. This is incorrect. Businesses that use payment methods as their sole basis for employee classification can end up with expensive wage-and-hour lawsuits.
Under the Fair Labor Standards Act (FLSA), the key distinction is not whether an employee is paid hourly or salary. The FLSA requires employers to focus on exempt versus non-exempt status. If an employee is Non-Exempt, they must receive at least 1.5 times their regular wage for all work hours exceeding 40 per week, regardless of whether they receive their pay as a salary or hourly. Employers that miss this key distinction can find themselves in years of overtime litigation and/or facing steep penalties.
Understanding the Exempt vs. Non-Exempt Rule
The FLSA requires employees to fulfill three specific conditions to qualify for Exempt status. If any employee does not meet any one of the three criteria, they are legally Non-Exempt and entitled to overtime.
💰 The Three-Part Test for Overtime Exemption
Salary Basis Test: The employee must receive a fixed salary that remains unchanged, regardless of their work performance quality or quantity. The Department of Labor establishes the minimum threshold for this requirement.
Salary Level Test: The employee must receive at least the minimum weekly salary amount determined by the Department of Labor. The current threshold is $684 per week, which equates to $35,568 per year. Earning above this threshold is necessary but not sufficient—employees must also meet the other two tests.
Duties Test: The employee must perform duties that match one of the three recognized executive, administrative, or professional categories, also known as white-collar exemptions. Courts evaluate what the employee actually does day-to-day, not what their job description claims they do.
❌ Key Classification Mistakes That Lead to Lawsuits
The main reason employers misclassify employees is failure to understand how to apply the Duties Test correctly. Your organization can protect itself from costly legal battles by identifying and fixing these typical classification errors.
👨💼 Mistake #1: Confusing Job Title with Job Duties
The IRS and courts do not recognize job titles as relevant evidence. The exemption status of a Manager or Director position depends on their actual work responsibilities, which must include actual executive, managerial, or professional duties. A person who holds the title of Assistant Manager but spends most of their time operating the cash register will remain non-exempt even if receiving a salary.
📊 Mistake #2: Misinterpreting the "Primary Duty" Requirement
The exemption applies only when an employee dedicates most of their work to performing exempt duties. The work performed by an employee that represents their main responsibility should be their primary duty. For example, an office worker who spends 70% of their time on non-discretionary tasks, like data entry or processing invoices, will remain non-exempt, even though they dedicate 30% of their time to executive assistance.
🚫 Mistake #3: Assuming All Highly-Paid Workers are Exempt
The FLSA includes a specific exemption for Highly Compensated Employees (HCE), but this exemption still requires employees to meet the duties requirements. The payment of a high salary above the HCE threshold (currently $107,432 per year) does not on its own qualify an employee for exemption, as they must perform at least some duties that meet the exemption criteria.
💡 Simple Steps to Review and Correct Your Overtime Process
Your business needs protection through an immediate internal assessment of employee classification systems.
📝 Step 1: Audit Your Classifications
Start by reviewing what each employee actually does. All salaried staff members who work more than 40 hours weekly need their actual work activities reviewed for this assessment. Look beyond job titles, job descriptions, and informal assumptions. The three-part test (Salary Basis, Salary Level, and Duties) should serve as your reference point for this. Robust documentation of this analysis is essential for defending your classification decisions, so be sure to document this process and your conclusions.
💸 Step 2: Recalculate and Correct Misclassifications
When reclassification is needed, document the change and adjust the employee’s status going forward. Key steps include:
Formally update the employee’s classification from Exempt to Non-Exempt and record the basis of the change.
Begin to track the employee’s hours using an accurate and reliable timekeeping method.
Pay the employee for all hours worked, including overtime for any time worked beyond 40 in a workweek.
🧑⚖️ Step 3: Consult Legal Counsel
Wage-and-hour classification is complex, technical, fact-specific, and easy to get wrong. Even small mistakes can lead to significant liability. If you’re unsure about an employee’s status or how to apply the exemption tests, consult with a labor and employment attorney. Getting clarity upfront is far less costly than defending a misclassification claim later.
Overtime and Exempt Status FAQs
Can I require Exempt employees to work more than 40 hours each week?
Yes. The FLSA allows you to assign Exempt staff members to work any necessary hours because their compensation depends on their job duties rather than their work duration.
What steps should I follow to determine the overtime compensation rate for my Non-Exempt salaried staff members?
To calculate overtime properly, first determine the employee’s regular rate of pay. For salaried Non-Exempt employees, the regular rate is based on the number of hours the salary is intended to cover—not automatically 40 hours. Once you have the regular rate, overtime should be paid at 1.5 times the employee's regular hourly compensation for all hours worked over 40 in a workweek.
Do I need to monitor the work hours of my salaried Exempt staff members?
The majority of businesses do not need to track Exempt employee work hours. Most companies monitor employee work hours because they need this information for internal management operations, client billing, or administration of FMLA/paid leave. Non-Exempt staff members, on the other hand, should be required to track their time worked by the hour regardless of their salary status.
What are the potential consequences of making an incorrect classification decision?
Incorrect classification decisions can trigger major financial exposure and business interruption. Employers may be responsible for up to three years of back wages, liquidated damages equal to the unpaid amounts, attorney’s fees, and civil penalties—often totaling far more than the original overtime owed.
📞 Verify Your Employee Classifications Right Away to Avoid Future Legal Issues
A single incorrect employee classification can result in substantial financial losses for your business through back wages and legal expenses. Here at Johnsen Law, we provide employment law compliance services to evaluate your employee classifications and confirm that your business meets all federal and state regulations.
Houston Business Lawyers offers wage-and-hour compliance reviews through a comprehensive assessment process, which can be initiated by contacting their office.
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