If he's paid a salary, and not hourly, do I have to pay overtime?

Business owners naturally want to reduce costs, and overtime costs can add up quickly. Many employers are tempted to pay an employee a salary, rather than hourly, and avoid the overtime charges. However, this strategy can be illegal and very costly.


California's labor laws start with the presumption that all workers are entitled to receive overtime wages if they work more than 8 hours per day. An employer cannot unilaterally ignore this rule and classify an employee as "exempt" from overtime. California allows five types of employees to be "exempt" from the overtime requirements, and a job title alone is not the determining factor:

1. executives
2. administrators
3. professionals (e.g., legal, accounting)
4. outside sales representatives
5. computer-related professionals

So, can your small business classify your employees as an "administrator" or "executive", and avoid the overtime requirements? Although the legal analysis is complex, and you should consult a lawyer for a specific situation, California uses what is known as the "stopwatch" test, meaning what percentage of the employee's time is spent on the exempt activity. For an executive, how much time does he or she spending "managing" the business, or supervising at least two employees? If it's less than 50% of his or her time, then she won't be classified as "exempt", and you are responsible for keeping track of, and paying, overtime.

And, what happens if you get it wrong? This question often arises after the employee is terminated. No longer loyal to the former employer, the former employee files a claim for back wages, interest, penalties, missed meal and rest breaks, etc., as well as attorney fees and costs. Suddenly, the employer is faced with significant risk and expense. Consult your lawyer and make sure you're complying with these rules.