Beginning in December, 2016, about 4.2 million more Americans will qualify for overtime pay under new rules from the US Department of Labor. If you own a small business and have full-time employees, there’s a good chance these rules apply to you.
Currently, hourly workers, lower-wage earners, and non-managerial workers must be paid 1.5 times their hourly wage when they work more than 40 hours in a week.
However, under the new rules, you’ll now have to pay overtime to many workers, especially those on salary.
In a nutshell, here’s what the new rules do:
- Increases the minimum salary threshold at which a full-time salaried worker can be “exempt” from overtime rules from $23,660 to $47,476 annually, or from $455 to $913 weekly.
- This level will be adjusted every three years.
- Employers can include non-discretionary bonuses and commissions to comprise up to 10% of the salary level.
In the 1930’s, in the midst of the Depression, workers were often badly mistreated. To help protect workers, the Fair Labor and Standards Act (FLSA) was enacted.
The FLSA of 1938:
- Established a maximum number of hours for the regular work week (44 hours in 1938 – 40 hours today)
- Set an eight-hour work day
- Established a national minimum wage (25 cents in 1938 – $7.25 today)
- Required time-and-a-half pay for overtime
- Limited child labor
*** “Exempt” versus “Non-exempt” employees:
The purpose of the FLSA is to protect workers from being exploited, but business needs flexibility, so FLSA “exempts” bona fide salaried executive, administrative and professional (EAP) employees and outside sales and many technology employees from overtime pay requirements. After all, it would be silly to require employers to pay overtime to a top corporate executive making hundreds of thousands of dollars a year.
Once a business has an employee, it’s critically important to know whether they’re “exempt” or “non-exempt:”
- Non-exempt employees: covered by FLSA and, by extension, most state and city labor laws. You must pay them at least federal and state minimum wage, and they receive overtime pay of 1.5 times their regular rate when they work more than 40 hours in a week.
- Exempt employees: Are not entitled to overtime pay, but must meet certain criteria for pay and job responsibilities.
*** Considerations Driving the Change:
In 1975, FLSA overtime provisions protected 62% of all full-time workers; today, overtime provisions protect only 8% of full-time workers.
The minimum exempt salary threshold was last changed in 2004. At the same time, the rules regarding executive and managerial jobs were loosened, resulting in many more employees being legally considered “exempt.” Some businesses took advantage of these new rules, resulting in some “supervisors,” especially in fast food and retail regularly working more than 40 hours a week without additional compensation.
On the other hand, many may question the new minimum threshold. After all, a white collar supervisorial or administrative job paying $20 an hour, or about $41,600, may be considered a very good job in many parts of the country. Often, employers and employees alike would view having employees working some overtime to complete tasks or to respond to email as fair, not requiring overtime pay.
*** Responding to the new rule:
If you employ salaried, full-time workers who are paid less than $913 per week, you’ll need to decide how to respond to these new rules. Some options:
- Keep salaries the same, eliminate or reduce overtime. Be sure to monitor activity and hours to limit overtime.
- Raise salaries to the new minimum, enabling you to require unpaid overtime of qualified employees.
- Keep salaries the same, pay overtime. This is financially beneficial if overtime is limited or irregular and current pay is at the low end of the present minimum. For instance, if you currently pay the equivalent of $12 an hour, and employees put in five hours of overtime in a week at $18 an hour, you’d still come out ahead. Be careful tracking employees’ hours.
- Lower wages, pay overtime. This results in your expenses staying the same, but will certainly create disgruntled employees and high turnover.
- Hire more employees. If you regularly need a lot of overtime from current employees, you may want to consider hiring additional hourly workers to pick up the extra hours.
Copyright, Rhonda Abrams, 2016
This article originally ran in USA Today on May 27, 2016