In 2014, President Obama signed a Presidential Memorandum directing the Secretary of Department of Labor (“DOL”) to update the Fair Labor Standards Act’s minimum wage and overtime standards that had not been updated since 2004.
The new rule is becoming effective next month, on December 1, 2016 and it will affect not only employees but business owners. Those who will negatively be impacted are small business owners who have fewer than 10 employees and make up 68% of U.S. businesses with an annual revenue of less than $250,000.
First, it is important to understand how overtime works. Under the Fair Labor Standards Act, a non-exempt employee, an employee who qualifies for over time, must receive time-and-a-half pay for any hours worked beyond 40 hours in a week. The new law will not affect businesses that have all non-exempt employees. An exempt employee on the other hand, one who is normally ineligible for overtime may now become eligible to receive overtime pay under this new rule. To be exempt, an employee must receive a salary and have executive, administrative or professional duties. These two qualifications do not change with the new rule.
What changes is the addition of a third qualifying factor: the exempt employee must be paid more than the salary threshold which is set by the DOL in this new rule.
Pursuant to DOL, the salary threshold is now $47,476 per year or $913 per week. This threshold is more than double the previous salary threshold of $23,660 per year or $445 per week.
But, that’s not all. The salary threshold isn’t the only thing that is complicating small business payroll budgets. The minimum salary threshold will automatically increase every three years based on wage growth. The first automatic increase will happen on Jan. 1, 2020. That means more employees will become exempt as the threshold rises.
Moreover, the new rule also updates the salary level for highly compensated employees. Employees must receive at least $134,004 per year to be highly compensated.
So what does this all mean?
Employers will need to either pay employees higher salaries or pay overtime wages. Small business owners have some options available to make sure they are in compliance with the new law:
1.Increase employee salaries above the salary threshold. Paying employees salaries over $47,476 per year would effectively make employees exempt from overtime pay. This may be cost-effective for companies that already pay salaries close to the new threshold or those that pay a lot of over time to non-exempt employees. Therefore, employers must conduct a cost-benefit analysis by comparing the cost of overtime pay against the cost of increase salaries.
2. Pay employees less than the salary threshold, and pay overtime wages: if an employee is paid below the new salary threshold, they are no longer exempt regardless of their administrative, executive and professional duties and the fact that they receive a salary. Under the new law, they are deemed non-exempt employees and must paid at least one and a half times their regular pay for any overtime work.
3. Keep employees current pay and no longer allow any overtime work: small business may also consider paying employees at their current rate, below the threshold but prevent paying overtime costs to these “newly nonexempt employees” by capping the number of hours employees can work. This means that once an employee hit their 40 hours, their workweek is officially over. Instead extra work may be distributed to the other employees or more people might be hired to even out the work load. With that said however, employers once again must weigh the costs and benefits of paying below-threshold salaries because employees who may not work more than 40 hours a week, may search for other income-earning opportunities because of their extra free time.
4. Change employees’ salary to hourly, with the option for overtime hours: If one is not exempt from receiving overtime pay, then the employer would be well within its rights, given the new salary cutoff, to change that employee to be paid hourly. The employer would maintain the pay of the employee by ensuring that the hourly rate times 40 hours would be close to what the employee is being paid now [in salary] and then just be prepared to pay overtime for work in excess of 40 hours.
Transitioning to the new overtime rules.
Small business owners might have to make some tough decisions in the next four weeks. For managing changes to the law, employers can consult with an employment law attorney and at Thakur Law Firm, our dedicated attorneys are ready and willing to assist with your important business decisions.