Employee Overtime Policy: How To Create It [+Free Download]
Set clear guidelines for overtime pay and approvals. Download an editable overtime policy template to simplify your HR processes today.
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Demanding extra hours without a clear promise of fair compensation is one of the quickest ways to erode employee trust. When teams consistently work beyond their regular shift to hit your deadlines, the question of overtime pay cannot be left ambiguous.
For companies in India, ambiguity is a serious legal risk. Non-compliance with mandatory overtime rules can lead to significant financial penalties, including fines of up to ₹1 lakh or potential prosecution for executives. Putting off a policy now is simply exchanging a small administrative task for a huge legal liability later.
In this blog, we will clearly define an overtime policy, explain exactly what it must contain to ensure legal compliance, and provide a complimentary, editable template to help you formalise your rules today.
An overtime policy is your official document defining the precise rules for working beyond standard hours, primarily aimed at ensuring legal compliance and pay clarity.
The key benefits are mitigating legal risk (avoiding large fines), optimising labour spend, and building organisational trust by ensuring fair compensation and work limits.
A sound policy must define eligibility (non-managerial staff), the compensation rate (double the ordinary wage), and a mandatory prior written approval process.
You can access a ready-to-use, editable template that includes all necessary clauses covering limits, tracking, compensation, and disciplinary protocols.
Avoid critical mistakes like misclassifying exempt staff, ignoring state-specific laws, and failing to mandate a written approval trail for all extra hours worked.
An overtime policy is your company's official document defining the precise conditions under which an employee can work beyond their standard contract hours. It formally dictates whether extra hours are permitted, required, or strictly prohibited.
Its core purpose is to guarantee legal compliance by clearly setting out how those additional hours will be approved, tracked, and compensated. This protects your business from legal risks while ensuring total clarity for your payroll and operations teams.
Having understood what the policy does, let's now examine the specific risks it helps your business avoid.
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Uncontrolled overtime can quietly sabotage your company's finances and risk profile. When extra work goes unmanaged, it costs your business money, time, and compliance security. A formal policy acts as a vital control measure, setting mandatory limits and ensuring that every extra hour worked is both necessary and accounted for.
Here are the critical business reasons to formalise your overtime rules:
Mitigate Legal Risk: Directly ensures adherence to local Indian labour laws that mandate double the ordinary pay for excess hours, avoiding serious fines and potential litigation.
Optimise Labour Spend: Shifts overtime from an unpredictable expense to a controlled, manageable budget item, improving cost visibility for operations and finance.
Standardise Compliance: Dictates a uniform process for all departments to approve and log extra hours, guaranteeing consistent record-keeping for labour inspections and audits.
Safeguard Employee Health: By setting clear maximum hour limits, the policy protects staff from excessive work, directly supporting better productivity and long-term retention.
Build Organisational Trust: Eliminates confusion over who gets paid and when, ensuring that employees who put in the extra effort feel fairly compensated for their commitment.
With these essential benefits in mind, let's explore the key components your overtime policy must include for complete clarity and compliance.
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To be legally sound and genuinely useful, your policy must act as a precise instruction manual for both managers and payroll. It needs to address the 'who, what, when, and how' of extra working hours to eliminate assumptions.
Here are the essential components every overtime policy requires:
Standard Working Day/Week: Clearly define your official business hours (e.g., nine hours per day, forty-eight hours per week) so staff immediately know when overtime legally begins.
Eligibility Criteria: Specify which employee categories are entitled to overtime pay (non-managerial/non-supervisory staff) and which roles are legally excluded.
Compensation Rate: State the mandatory compensation, which, in India, is typically double the ordinary hourly wage for all authorised overtime hours worked.
Mandatory Approval Process: Establish the rule that prior written approval from the manager or a specific HR system is required before any overtime hours are worked.
Tracking and Reporting: Detail the system (e.g., time clocks, digital logs) and frequency by which managers must record and submit the extra hours worked for processing.
Limits and Boundaries: Set the maximum number of overtime hours permissible per day, week, or quarter to maintain legal compliance and prevent employee fatigue.
Consequences of Non-Compliance: Outline the actions taken for both unauthorised overtime worked by an employee and for any manager who fails to process or approve it correctly.
Now, let’s see how you can include these elements in a detailed policy template that you can adapt for your organisation.
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A template is the fastest way to achieve legal compliance and clarity. This structure provides the necessary clauses to protect your business from pay disputes and ensures every manager follows a uniform procedure.
Here’s a template you can use to align the policy with your business practices and create a fair work environment.
1.Policy Purpose and Scope
Start by clearly defining what the policy aims to achieve and precisely who is covered. This section eliminates ambiguity regarding eligibility and ensures the document serves a specific, legally compliant purpose.
Objective: The objective is to ensure all eligible staff are compensated for authorised overtime hours worked, strictly following Indian labour and employment laws.
Applicability: This policy applies to all full-time and part-time staff across all departments.
Covered Employees: The document explicitly covers non-exempt employees (typically non-managerial staff) who are legally entitled to overtime pay.
General Limit Rule: The policy's rules on maximum working hours apply to all employees, regardless of their pay eligibility.
2.Overtime Compensation and Eligibility
This section addresses the core financial aspect: defining when overtime begins and the specific rate of pay. Clarity here is vital for both payroll accuracy and legal adherence.
Standard Work Week: Employees are expected to work a standard limit, typically nine hours per day or forty-eight hours per week (as per the Factories Act and state-level Shops and Establishments Acts).
Overtime Threshold: Overtime pay is activated only when work exceeds the defined standard daily or weekly hours.
Compensation Rate: Eligible staff will be compensated at a rate of double their ordinary rate of wages for all approved overtime hours worked.
Work on Holidays/Days Off: Compensation for work performed on designated weekly off days or company holidays must be defined and compensated based on the same principle (double the ordinary rate).
Exempt Roles: Clearly list roles (e.g., senior management, supervisory positions) that are classified as exempt from overtime pay due to their salary and nature of work, in line with applicable law.
Also Read: Understanding the Meaning and Rules of Compensatory Off Leave
3.Approval, Tracking, and Limits
To maintain control over labour costs and prevent employee fatigue, managers must adhere to a strict process for approval and tracking. This prevents managers from unilaterally deciding on extra work.
Mandatory Pre-Approval: All overtime work must receive prior written approval from the immediate manager and, potentially, the department head, before the extra hours are worked.
Request Method: Specify the system used for requesting and approving (e.g., using the HR system like craze or a dedicated digital timekeeping application).
Overtime Limits: To safeguard employee well-being and comply with the law, employees must not exceed two hours of overtime per day or a defined maximum cap per week/quarter (e.g., 50 hours per quarter).
Record-Keeping: Managers are responsible for accurately tracking and submitting all approved overtime hours via the designated system for payroll processing.
4.Policy Violations and Manager Responsibility
The policy must address what happens when rules are broken, whether by staff working unapproved hours or by managers failing to manage the process. This maintains accountability across all levels.
Unauthorised Overtime: Employees who work extra hours without prior, documented approval will not be compensated for those hours, and repeated offences may result in disciplinary action.
Excessive Overtime: If a manager consistently relies on overtime, they are responsible for reviewing the workload, staffing levels, and scheduling practices to resolve the systemic issue.
Policy Revision: The company retains the right to amend or terminate this policy at any time, in accordance with applicable labour laws.
This detailed structure is ready for customisation. Next, you can access a free, editable template to put this policy into practice immediately.
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Drafting an overtime policy requires precision to prevent expensive misunderstandings down the line. The worst policies are those that leave managers room for interpretation or fail to address common grey areas.
Here are the key pitfalls to watch out for:
Failing to Define the 'Ordinary Wage': Do not assume the base pay is the only component. The policy must clearly specify which elements (e.g., basic salary plus Dearness Allowance) are included in the 'ordinary rate' used to calculate the mandatory double pay.
Ignoring State-Specific Laws: Relying solely on central acts like the Factories Act is risky. You must cross-reference and adhere to the Shops and Establishments Act applicable in your state, as maximum work hours and caps can vary regionally.
Misclassifying Exempt Employees: Do not automatically exempt senior staff. Ensure that any employee classified as non-eligible for overtime meets the specific criteria for managerial or supervisory roles and salary thresholds defined by law.
Permitting Verbal Approval: Allowing managers to approve overtime orally makes your records undefendable in an audit. Mandate a prior, written (digital) approval trail for all extra hours.
Lack of Consequence for Managers: A policy fails if only employees are penalised for non-compliance. Include clear disciplinary action for managers who fail to track, submit, or approve overtime correctly.
Vague Language for Compensation: Avoid subjective terms like 'fair pay' or 'reasonable hours.' Use precise, auditable numbers: "twice the ordinary rate" and "no more than 50 hours per quarter."
Avoiding these fundamental errors will ensure your policy serves as a watertight defence against compliance failures.
Also Read: Statutory Salary Deductions Explained for Employees
Final Thoughts
An overtime policy is not simply a burden of compliance; it's a foundation for responsible growth. When employees commit their extra time, they need to see a precise, documented commitment from you regarding fair pay and limits. This practice protects your business from the significant legal and financial backlash of uncontrolled work hours.
Taking the time to define your rules now is the best insurance against future audits and team friction. Implement a clear policy to manage costs effectively, safeguard your executives from compliance risks, and ensure that your dedication to fair labour practices reinforces employee trust.
Disclaimer
The downloadable template and the information provided in this article are intended for general guidance and educational purposes only. They do not constitute legal advice or a legally binding document. Craze does not accept any responsibility or liability for any decisions made or actions taken based on this content. We recommend reviewing your final policy with legal or HR professionals before implementation.
Download the Policy Template Here
