The overtime FLSA rule: How to keep your business compliant

If you're running payroll in the US, overtime compliance isn’t optional: it’s the law. And understanding exactly what counts as overtime — and which of your employees qualifies for it — can be a tricky proposition.

This is why it’s important to understand the Fair Labor Standards Act (FLSA), which sets out the groundwork for how overtime works.

In this article, we’ll break down the FLSA overtime rule, go over some of the state-specific differences, and show you how to keep your business compliant without losing sleep. So let’s jump straight in.

What is considered overtime?

Overtime refers to any hours worked beyond the standard 40-hour workweek, as defined by the FLSA. That means if an eligible employee clocks in more than 40 hours in a seven-day period, they’re entitled to overtime pay.

However, there are some key points to bear in mind. For instance:

• FLSA overtime is not determined by the day. Under the FLSA, an employee who works 10 hours in one day but only 35 in the week is not due overtime; it must be more than 40 across the week. It’s important to note, though, that this isn’t the case in all states (see below).

• Only hours worked are counted. This means that breaks, PTO, and holidays typically don’t count toward hours worked when calculating overtime.

As a result, the answer to this question can vary depending on how your employees are classified, and where they’re located. Which is where the overtime FLSA rule comes in.

How does the overtime FLSA rule work?

To understand the overtime FLSA rule, it’s important to understand the difference between exempt and non-exempt employees.

Non-exempt employees are entitled to overtime, but exempt employees are not. So what’s the difference?

Non-exempt vs exempt employees

Non-exempt employees are generally (but not always) hourly workers, and often work in roles like customer support, administration, retail, manufacturing, and services.

Conversely, exempt employees (also known as salaried employees) are excluded based on legal criteria tied to their job duties.

To qualify as exempt under federal law, employees must:

• Be paid on a salary basis (i.e., annually, not hourly).

• Earn at least $684 per week.

• Perform specific job duties that fall under exempt categories like executive, administrative, or professional roles.

This classification process is where mistakes are most common. Employers often misclassify workers as exempt based on title alone — like “Manager” or “Coordinator” — but it’s the actual duties and compensation structure that matter. To help ensure you are classifying your people correctly, you can perform the duties test.

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What about state laws?

Now, here’s where things get tricky. While the FLSA sets a federal baseline, individual states can — and do — create stricter rules around overtime eligibility, calculation, and exemptions. And if a state law offers more protection or higher pay, it overrides the federal rule.

That means you must always comply with whichever standard benefits your employees more.

State overtime laws

Some states have slightly different overtime rules, as follows:

In addition:

• Minnesota has additional overtime rules for certain service and healthcare sectors.

• Illinois enforces one day of rest in seven for covered employees.

State exemption thresholds

As well as different overtime rules, some states also have different exemption thresholds, which are higher than the federal exemption threshold of $684 per week.

To see a full breakdown of the overtime laws and exemption thresholds in each state, check out our free US State Explorer tool:

How is overtime pay calculated?

The typical overtime rate is 1.5x the employee’s regular rate of pay for any hours beyond 40 in the workweek (known as time and a half).

However, calculating this “regular rate” isn’t always straightforward, as it includes:

• Hourly wages

• Commissions

• Non-discretionary bonuses

• Shift differentials

It does not include:

• Discretionary bonuses

• Reimbursements

• Gifts or holiday bonuses not tied to performance

This means if your employee earns a $500 performance bonus for a particular month, it affects their overtime rate for that pay period. If you don’t account for it, you may end up underpaying — and falling foul of the law.

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How do you stay compliant?

To stay compliant, always ensure that you:

• Correctly classify all your employees as exempt or non-exempt. Update these classifications if the salaries or job duties change, too.

• Track hours accurately, especially for remote or hybrid teams. 

• Factor in all earnings when calculating overtime pay.

• Monitor state-specific rules regularly (they change more often than federal ones).

• Document everything, from timecards to exemption decisions.

How can Remote help?

Adhering to the guidelines above can be difficult and resource-intensive — especially when you're wearing five business hats and payroll is just one of them.

That’s why it’s advisable to work with a payroll partner — like Remote — that does all this heavy lifting for you, allowing you to shift your focus and energies elsewhere.

Our centralized, automated platform ensures that:

• You and your team members can easily track and manage their hours through our self-serve platform.

• All wages are calculated accurately and automatically, meaning a much lower chance of underpayments or overpayments.

• You’re fully compliant and up-to-date with all local, state, and federal employment and payroll tax laws (as well as international laws if you have employees abroad).

• All your documentation is updated and available in real-time, meaning you’re always audit-ready.

On top of this, we handle all reporting and, in the US, even remit payroll tax payments on your behalf, saving you countless hours, dollars, and headaches.

To learn more about how we can streamline and transform your payroll experience, speak to one of our friendly experts today.

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