The New Overtime Law: What You Don’t Know Will Cost You

The New Overtime Law: What You Don’t Know Will Cost You

Have you heard about the changes the Department of Labor is making to the overtime provisions in the Fair Labor Standards Act? If not, it’s time to start paying attention because these changes take effect and will be enforced starting December 1, 2016. Under the current policy, the threshold in place that determines which white-collar, salaried employees are entitled to overtime pay is $455 per week (or $23,660 for a full-year worker). When the updated rule takes effect, this threshold will more than double to $913 per week (or $47,476 for a full-year worker). In addition, the Department of Labor will revisit and increase the threshold every three years to account for inflation and rising costs of living.

The new overtime law is a drastic change to the overtime rule, and it’s one that will impact an estimated 44 percent of small businesses nationwide, across all industries. The new overtime rules will directly touch millions of U.S. workers – an estimated 4.2 million according to a recent article in Workforce Magazine, so we certainly expect a lot of additional conversation on this topic. However, as of today there’s no indication that its enforcement will be delayed despite ongoing complaints from advocacy groups.

Here in Connecticut we expect that the new overtime rule will affect an estimated 46,000 salaried workers, so it’s more likely than not that your own business will have some serious decisions to make. The Department of Labor may be knocking on your door to conduct an audit in the near future, so there are a few things that you should do before December 1 to make sure you’re compliant with the updated law.

Employee Classification Matters More than Ever

The first thing you’ll need to do is identify which of your employees remain exempt from the new overtime rule. There are three criteria that your employees must pass to be considered exempt:
•Their primary job duty must involve the kind of work associated with executive, professional or administrative positions (this is also called the duties test)
•They must be paid on a salary basis
•Their salary must meet a minimum dollar amount (which has been updated under the new rule)

If you have any employees that meet the first two criteria, then you’ll need to look at their salary level to determine whether or not they’re exempt from overtime pay protection.

Do the Math – Weekly!

It’s important that you calculate how much these employees make on a weekly, not an annual basis. If you’re a seasonal employer, this is especially important. While it’s entirely possible that a seasonal employee may not earn $47,476 during the time they are employed, the new overtime law is based on a weekly structure, so make sure your salaried staff members are actually earning at least $913 per week throughout the period they are employed before you consider them exempt.

Take Action Now

Once you’ve established which currently exempt employees will be affected by this new overtime law, it’s time to come up with an action plan. Unfortunately, whichever avenue you choose will carry a price – either for the employee or you, the employer. Here are several options that you can consider as you work to ensure your business remains compliant with the law. But don’t procrastinate: December 1, 2016, will be here before you know it and your new compensation structure must be in place.

Raise salaries. The simplest solution, albeit one that can cost you a lot or a little, is a straight-forward salary increase approach. If you have only a handful of employees, or perhaps just one key individual shy of the new threshold, raising their weekly salary to the $913 threshold will retain their exempt status and all the accompanying benefits. If you opt for this solution, don’t forget that this rule applies to future hires as well. Any year-round, white collar, salaried positions you’re looking to fill will need to come with a $47,476-per-year offer to avoid paying overtime for any hours above 40 spent in the office or on the road conducting your business. Make sure you rebuild your compensation budget accordingly.

Transition to hourly pay. If you don’t have the resources to raise all of your salaried employees to the new threshold, then you might consider shifting the compensation of those currently under the threshold to an hourly wage. Obviously this is a tough step, depending on your current compensation and benefits package. Let’s face it, many employees feel that an exempt classification comes standard with a certain amount of status and, often, benefits not extended to hourly workers. If you convert a salaried employee to hourly pay, you’ll need to also spend time keeping precise records, so consider investing in timekeeping software, a time management portal or be prepared to institute other internal processes that track employee hours. When these employees reach the 40-hour mark, you’ll either have to send them home or pay time-and-a-half for any additional hours. There’s no required form or template for recording hours, but you must ensure the hours-worked information is accurate and verifiable.

Reorganize work flows. Addressing the new overtime rule may be just the excuse you need to reevaluate how your business gets the job done. Are there more efficient ways to accomplish tasks? You might find a way to trim down the hours your team has traditionally needed to complete work, allowing your employees with salaries below the new threshold to wrap things up within a 40-hour week. You may also identify opportunities to reorganize responsibilities and outsource specific tasks to contractors or freelancers. Who knows? Maybe you’ll find that all you need is a new, part-time employee to pitch in so your team can focus on getting their work done more efficiently.

This is by no means an exhaustive list since there’ll be many situations to consider. For example, if you’re open 8:30 am to 5:30 pm and your team routinely works right through lunch, you’ll be looking at five hours of overtime for anyone falling under the new salary threshold. And, if your clients expect your employees to be available to respond to emails or phone calls over the weekend, you’ll have to create a process to accommodate those needs. Whatever you decide to do, don’t forget to revisit your plan of action every three years to align with the Labor Department’s automatic pay threshold updates.

If you find that you need to reevaluate your cash flow to accommodate whatever changes you make, don’t hesitate to give our Solutions Team a call. The new overtime rule affects our business the same as yours, so we’ll be ready to help you every step of the way.

Written by Kasey Beckendorf
Compliance Officer, Union Savings Bank