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How the New Federal Overtime Rules May Impact Your Small Business
Posted by Sylvia Lagerquist, CPA
The U.S. Department of Labor (DOL) has announced a revision to the standards for overtime pay under the Fair Labor Standards Act (FLSA), and the update has the potential to dramatically impact small businesses.
As of December 1, 2016, the threshold for applicable salaried workers to be exempt from overtime pay will rise from $455 per week to $913 per week. Currently, salaried workers in certain job categories were not entitled to overtime if they made more than $23,660 per year. With the new rule, that standard rises to $47,476. The last time the rule was adjusted was in 2004, when the threshold increased from $250 per week to the current standard of $55 per week.
In short, if you have salaried employees working in your small business who make less than that amount, you will be required to pay them time-and-a-half for any hours worked over 40 per week, as of December 1, 2016.
Although the original regulation was intended to see the threshold rise over time with inflation, that did not take place. As a result, the Obama administration elected to institute a one-time shift that nearly doubles the standard overnight.
The federal government estimates that this change will bring overtime pay to an additional 4.2 million workers nationwide, although other sources suggest that the increase will impact as many as 12.5 million workers.
One reason for the discrepancy is that employers commonly assume that overtime is never required for salaried positions that pay at a rate higher than the threshold, and in fact that is not true.
The official DOL standard for overtime determination is based upon a combination of the level of pay the employee receives, and the nature of the work being performed. Specifically, exemption from overtime pay is only applicable to certain classes of salaried employees (executives, professionals, administrative personnel, consultants and a few other groups).
This is why some highly skilled blue collar positions pay a very high wage and are still eligible for overtime. And yet, thousands of small business owners have incorrectly classified their current employees as exempt when in fact they may not be, on the mistaken assumption that how they pay an employee (hourly vs. salaried) is sufficient to dictate whether or not the employee is eligible for overtime (non-exempt) or not eligible for overtime (exempt).
According to an article on the Department of Labor blog, the agency recommends that employers take one of the following approaches to respond to the new overtime rule. They may:
1. Pay time-and-a-half for overtime work for the applicable employees.
2. Raise applicable workers’ salaries above the new threshold.
3. Limit applicable workers’ hours to 40 hours per week.
4. Some combination of the above.
Source: Plenty of Options with New Overtime Rule (DOL Blog)
Retail and small business advocacy groups have expressed consternation not only with the dramatic speed and size of the threshold increase, but also with the timing of the change (coming right in the middle of the holiday shopping season).
Regardless, the change is going to take place and every small business owner should plan accordingly now. As a first step, contact your accountant and your human resources consultant to discuss both the financial impacts of the change and the process of ensuring that your current employee classifications are accurate. In addition, you will want to develop policies and strategies for determining how to adjust to the shift and put a plan in place well before December arrives.
- Here’s how the new overtime law will affect you (Fast Company)
- How will new overtime rules affect your business? (Fox Business)
Image Credit: Alan Cleaver (Flickr @ Creative Commons)
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