How to create an employee overtime policy (plus free template)

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Want to create an employee overtime policy for your company?

Working overtime (beyond the contractual working hours) can adversely affect your employees’ health and well-being. However, sometimes, employees will have to put in overtime to meet weekly targets and client expectations.  

That’s why it’s essential to have an excellent overtime policy that covers every aspect of working overtime in your organization.  

In this article, you’ll learn the benefits of an overtime policy and what goes into creating one. We’ll also give a free overtime policy template to help you create your own policy easily.

Table of Contents

• What is an overtime policy? 
• 3 reasons why you need an overtime policy
• 4 main components of an overtime policy
• A free overtime policy template you can use

Let’s get started.

What is an overtime policy?

Note: The following sections are brief overviews of what an overtime policy is and why it’s important. If you want to skip to the overtime policy template section directly, click here. 

A company’s overtime policy is an official document that defines who can apply for overtime hours, along with how they can do it while specifying when they can do it.

This means that whenever an employee needs extra time to finish up a project, they can apply for overtime to complete it. 

However, it isn’t as simple as it sounds.

Why?

Although every employee can usually volunteer for overtime, not all of them get paid for it.

According to the Fair Labor Standards Act (FLSA) of the Department of Labor in the US, employees are categorized as being either an exempt employee or a non exempt employee.

While a non-exempt employee’s regular rate of pay increases by one-half times when they put in time beyond their 40-hour workweek, exempt employees don’t share the same privilege.

And this categorization of exempt and non-exempt employees isn’t just limited to the US. 

Countries in the European Union also have employee exemptions from overtime pay.   

That’s why no matter where you are, your overtime policy should cover both these categories of workers — especially if you employ both kinds in your company. 

But how can you differ between the two? Let’s find out.

Exempt employee vs. non-exempt employee

While exempt employees generally include white-collar professionals, non-exempt employees can be full time, half time or even temporary employees who earn a regular hourly rate or salary.   

However, to define the exact difference between an exempt and non-exempt employee, hours of work, salary levels, hours of overtime, job duties, etc. are considered. 

Here’s how both these employee types are classified in the US and in the European Union: 

A. In the united states

The FLSA or Fair Labor Standard Act has 3 basic tests that let you know if you have an eligible employee for exemption. 

1. Salary basis test

One has to be a salaried employee to qualify as an exempt employee. Here, an employer checks if their employees earn at an hourly rate or have a fixed salary. 

2. Salary level test 

For further clarity, the employee salary amount is reviewed to check whether they are within the remuneration range stated by the FLSA for a nonexempt employee.  

According to the new overtime rule rolled out by FLSA on January 1, 2020, employees with a salary of or over $684 per workweek are exempt from overtime pay.  

3. Duties test   

The FLSA does not take into account the job title but the responsibilities of each employee. 

FLSA categorizes exempt employees under 3 basic segments:  

• Administrative: comprises office or non-manual work related to management or general business operations.
• Executive: includes enterprise/department/subdivision management with the authority to hire, fire, promote or advance any employee.
• Professional is broken into 4 segments of:
  • Computer professionals: include computer system analysts, software engineers, and others in the technology field.
  • Learned or creative professionals: constitute application of advanced knowledge in science, learning or arts like law, nursing, music, writing, etc.
  • Outside sales: involves making sales outside the office, procurement of orders or contracts for services paid by customer/client. 

B. In the European Union

Unlike the state overtime law and tests under FLSA, the European Union (EU) has standard rules regarding working hours, compensatory leave and overtime hours. 

These rules are applicable to both the public and private sectors. 

However, countries within the EU can make alterations to this based on their national law or the collective bargaining agreement.    

1. Work hours and leaves

The standard average working hour in the EU, including overtime, is 48 hours per week.

Exempt or not, if your company is within the EU, you’ll have to consecutively provide every employee: 

• Minimum 11 hours for daily rest, and 
• 24 hours for weekly rest every 7 days.  

Providing 4 weeks of paid leave to your employees when asked is also mandatory. 

They can use them as sick leave, maternity leave or vacation. 

You can’t replace this mandated leave with any monetary compensation except if the leaves have not been used before the employment contract is fulfilled. 

2. Exempt employees

In the EU, an overtime eligible employee is identified based on professions without predefined working hours and sectors that require continued presence/service/production.

A few examples of such workers include:

• Family workers
• Off-shore workers
• Journalists
• Executives in management with discretionary authority.

The 48 hour work time limits can be extended and rests can be postponed if you employ for jobs that require continuity of presence/service/production, like in:

• Healthcare Centers 
• Agriculture
• Fire or civil protection services 
• Industries that demand uninterrupted production.

However, it has to be permitted by the national law. 

Upon producing an agreement between you and your employee to exceed 48 hours in a work week, your employee can refuse to consent or revoke it anytime. 

While you can extend the 48 hours workweek, the rest of the work time rules mentioned above stand for all employees.  

But if labour laws are so clearly defined, why would you still need an overtime policy?

3 reasons why you need an overtime policy

Here’s a quick look at why you need an overtime policy:

A. Transparency and non-discrimination

An overtime policy covers every aspect of working overtime – including the payment process for both employees and managers. 

This not only makes every employee aware of your company’s overtime provisions but automatically prevents any discrimination in compensation or overtime grants. 

B. Unexploited working hours

With an overtime policy, no manager can compel any fulltime/halftime/staff employees to work beyond their work schedule until they need overtime to complete their tasks. 

Employees also won’t be able to use overtime to get promotions or better compensation. 

This ensures that both your employees’ health and productivity are managed properly. 

C. Monitor employee work

An overtime policy not only clarifies the overtime reporting and monitoring process but also outlines the overtime approval procedure.

By mentioning the mode of tracking employee hours (through traditional timesheets or time tracking software), both managers and employees get clarity on the monitoring procedure.  

Apart from providing you with the number of hours for accurate pay calculation, this record keeping also makes you aware of their productivity during their regular working hours.

4 main components of an overtime policy

Here’s what you should include in your overtime policy:

A. Difference between an exempt and non-exempt employee

Clearly state the grounds of distinction between exempt and nonexempt employees. 

State how a non-exempt employee will be earning an hourly compensation after they exceed the standard working hours and why exempt employees’ won’t. 

Also clarify the category the new hire falls under according to the FLSA or EU exempt employee criteria.   

B. Overtime options

Overtime can be classified into mandatory, optional, prohibited and limited.

Add the type of overtime you’re offering your employees in your overtime policy.  

For overtime during special events, you can implement mandatory overtime in your policy stating the mandated overtime hours. However, if you’re in the US and require employees to work overtime during holidays/vacation, the FLSA overtime suggests prior approval for their premium pay.     

For a more flexible approach, make overtime optional for your employees – this can be especially helpful for work from home employees during COVID-19.

However, if you want to cut overtime costs, you can either ban it completely or restrict the overtime hours according to your needs. 

C. Overtime authorization process

An employee opting for voluntary overtime can tell you a lot about their commitment to the organization. 

However, you have to keep your costs in check too. 

That’s why you need to specify the process of authorizing overtime. 

Answer questions in your overtime policy like:

• Does an employee have to request prior overtime approval? If so, how?
• What is the duration of getting an overtime request approved?
• Is there an overtime rotation? How does it work?
• How can employees report their overtime hours?

D. Overtime payment process

Define how overtime pay is given for every non-exempt employee working in your company.

Mention who will calculate the overtime rate and how they will determine the pay amount.  

State the pay period and the rate of increase in overtime pay for non-exempt employees. 

In case of late payment, outline the procedure in detail — should there be a separate payroll or will it be included in the next paycheck?     

Remember, your employee overtime policy should answer all your employees’ questions regarding overtime hours and its pay.

A free overtime policy template you can use

Here’s a free and easily customizable overtime policy for you. 

Tip: If you’re managing a remote team, it’s best to set up a remote work policy along with your overtime policy. Click here to learn how.

Policy intent

Employees may be required to work overtime in case of specific or urgent projects completion. As per the existing overtime laws, our company will offer the deserved compensation for extra hours (overtime) worked.  

Our company overtime policy elucidates in detail how we’ll compensate our employees for their overtime hours.

We’ll:  

• Ensure employees are regularly and properly compensated for the time contributed towards their job responsibilities.   
• Reduce events of overtime abuse, productivity loss, health and safety risks and other issues.   

This policy follows all the legal guidelines and relevant legislation while assigning or compensating overtime hours. 

Scope

The overtime policy of our company applies to all our current employees.

Policy elements

In this policy, “standard working hours” refers to our employees’ regular working hours. Keeping in mind the legal minimum and maximum limits, the standard working hours are already mentioned in the employment contracts. 

‘Overtime” is defined as any amount of time contributed by an eligible non-exempt employee in addition to the standard working hours.  

Overtime policy – General rules

• Classification of employees as exempt or non-exempt will be done according to the state’s overtime pay laws. 
• Non-exempt employees who work beyond the standard working hours will qualify for overtime pay.
• Non-exempt employees will qualify for overtime pay irrespective of their work location.
• Employees working evening/night shifts will receive shift differential pay/paid time off.    

Who are exempt and non-exempt employees?

Exempt employees aren’t included in any overtime compensation for working beyond the standard working hours. 

Non-exempt employees may be weekly/hourly wage earners or temporary employees who, according to the state’s overtime law, are eligible for overtime wages with an enhanced pay rate.

All provisions mentioned in this company overtime policy is applicable to both exempt and non-exempt employees.    

Frequent overtime

Overtime may be required during urgent/heavy workload but our company overtime policy doesn’t encourage frequent overtime to safeguard employee health and well being. 

To ensure that there is no employee productivity or morale loss or work-related health hazards, we ensure: 

• Overtime hours are recorded accurately and consistently.
• To suggest overtime only when employees have to complete urgent tasks. 
• Provisions for all necessary facilities for employees to complete their work within the standard working hours. 
• To adopt overtime minimizing measures whenever a decline in employee performance is observed. 
• Weekly or daily overtime caps to prevent excessive overtime. However, employees exceeding this limit will be paid their due compensation. 

We won’t:

• Request employees to work beyond the legal maximum working hours per day/week. 
• Exercise any discrimination against any employee regarding who has to work overtime and their compensation. 

Shift-based system

If/when employees work on a shift-based system, we won’t:

• Request overtime of more than 2 hours to employees working night shifts.
• Permit to exceed two additional hours of overtime for employees who are on a 12 hours schedule. 
• Allow employees working for 8-10 hours to endure more than four hours of overtime. 
• Instruct double shifts for employees working more than eight hours.   

Abuse of overtime

To avoid any incidents of overtime abuse by our company/managers/employees that may result in legal confrontation, we don’t allow:

• Managers to request or encourage excessive overtime amongst team members.
• Employees to work overtime if/when not required. 

We ensure timely compensation of overtime pay at proper pay rates. Employees and managers should adhere to time tracking systems so that accurate employee overtime records are maintained.  

Overtime tracking procedure

To accurately compensate the non-exempt employees in our company and limit unauthorized overtime hours, we’ll keep a thorough record of all non-exempt employees overtime hours. 

We’ll follow the below suggested procedure:

• Team members and managers should agree on the required overtime hours.
• Any employee working overtime should not exceed the legal limits.
• Managers should be thoroughly aware of their team members being exempt or non-exempt employees.
• Our finance/HR team will calculate overtime pay. All overtime pay calculations will be according to legal pay rates. 
• All our current non-exempt employees should receive their overtime compensation on their next scheduled pay period.     

Any questions or queries regarding the policy should be directed towards the Human Resources (HR) department.

Disclaimer: This overtime policy is intended for general guidelines and references only. The contents of the template may not include relevant local, state or federal laws and can’t be deemed as a legal document. No legal liability (if it may arise from this policy) will be assumed by either the author or Time Doctor.    

Final thoughts 

Whether you’re only employing non-exempt employees or employing both kinds of workers, creating an overtime policy sorts out most of your troubles.

You’ll be able to clarify all employee concerns, ensure legal compliance and save on extra overtime expenses.

Use our template to amend your existing employee overtime policy or create a new one in no time. Because, remember, with the right policy, everything becomes far clearer and easier!