The Department of Labor issued new overtime rules, on May 17th 2016, for all employers with one or more paid employees. The changes increase the salary threshold for employees who can be classified as “exempt”, and are therefore not eligible for overtime, from $455 per week ($23,660 annually) to $913 per week ($47,476 annually) for big and small businesses alike. I would guess that the continued pressure to increase the minimum wage has a lot to do with this change, As a result, affected employers must either increase employee salaries to avoid having to calculate and pay overtime, or reclassify them as “hourly” and pay them for any overtime they earn. If you are an employer you could have a major decision to make by December 1st when the new overtime rules go into effect.
While the current threshold has not been fully adjusted for inflation since 1975, it’s still safe to assume that a worker making what works out to be $11.35 per hour is not a critical manager.
Following the steps outlined below will help make better choices about how to respond to the new overtimes rules. This is especially important for small businesses, where employees tend to drive a larger part of the value and where a change to compensation can cause a significant ripple throughout the business.
- Review current pay and classifications. One of the first steps for employers is to make sure they truly understand their employees’ compensation structure, classification and the rules around FLSA exempt vs. non-exempt status. Employees that earn more than the new threshold of $46,467 can be classified as exempt from overtime if their work consists mostly of executive, administrative or professional duties. This is where having a solid understanding of their actual work duties is critical. Employees who earn less than that new threshold are probably classified as non-exempt, meaning they can earn overtime.
- Track employee hours worked per week. Just as important as their classification and pay, it’s critical that employers assess the hours that their employees work, since that is at the core of overtime pay, if an employee ends up being non-exempt. Businesses may consider using a time and attendance system that tracks worker hours and can alert them (and their supervisor) when they near or exceed a 40-hour workweek. Make sure to take into consideration any seasonality that might skew your results.
- Model what alternatives would look like from a financial and staffing perspective. As mentioned previously, it may make fiscal sense in some cases to change a non-exempt employee/s from salary to hourly, and then pay them overtime as necessary. This can be most useful when an employee does not consistently work 40 hours per week, but it requires more attention be paid to managing their work schedule.
- Limit the impact on pay equity. In order to ensure that employees are being paid fairly and based on their job, do not make changes on a per-employee basis, but instead based on their roles. This is especially important for businesses with low turnover, where an employee may have been in their same role for many years.
- Proactively control costs. If responsibilities in the business require employee activity outside of normal working hours and that leads to overtime for non-exempt staff, the business has a duty to pay them overtime. However, this is a good time to reexamine those responsibilities. Is it in the best interest of the business for its staff to be working after hours? If it isn’t critical to business function, is it worth what the added expense? If not, then establish workplace policies that diminish the amount of work that non-exempt workers perform outside of traditional working hours. This can also be positioned as an effort to increase morale.
The new overtime regulations will have a significant impact on some businesses and fortunately as of the date of this writing, the change is still nearly 5 months. So in the meantime, businesses can use the next several months to analyze their business labor and productivity, and get a better understanding of what they will need to change to minimize the effects of the new rules.
The Shared Finance Center provides outsourced accounting, bookkeeping and fractional CFO support to small business owners and in doing so we heavily focus on maximizing cash flow. We are headquartered in Roswell, Georgia and work with clients across the United States. If you think that this post would be helpful to anyone you know, please pass it along. Also please follow our blog for regular tips to grow your business.