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In May of 2016, President Obama and the Department of Labor unveiled the details of the Final Rule updating overtime regulations in the United States. On December 1st, the Final Rule goes into effect, effectively doubling the threshold that white-collar employees—covered under the Fair Labor Standards Act—need to make annually before they’re exempt from overtime pay.
This, and other updates to the government’s overtime rules, will affect the way small business owners pay their employees in a big way. Here’s what you need to know.
There are 3 important parts to the new rule.
The standard annual salary level that separates exempt and nonexempt workers will rise from $23,660 to $47,476. This number is based on the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South).
In other words…
Anyone who qualifies as a white-collar employee under FLSA—so, for example, independent contractors are not covered—must receive time-and-a-half for any hour worked over 40 per week.
The total annual compensation requirement for “highly compensated employees” will increase to $134,004.
These compensation rules will be updated every three years in order to guarantee that they provide a useful test for exemption.
The reason for this change in overtime law?
To transfer income from employers to employees in the form of higher earnings—with additional overtime payments or in the form of a raise in order to keep employees exempt from receiving overtime. The Department of Labor foresees transfers of approximately $1.2 billion per year over the first 10 years after this change goes into effect.
And why is the government looking to make these changes?
The middle class is stagnating and shrinking due, in part, to businesses taking advantage of the low exemption threshold and current white collar classifications—those who perform managerial duties find themselves working extended hours each week with no overtime compensation and little legal recourse.
Indeed, the percent of salaried workers eligible for overtime has fallen from 62% in 1975 to a mere 7% today—and this change will increase that percentage to 35%. Whether this growth will come at the expense of the success of the businesses employing these workers is controversial and remains to be seen.
Regardless of how people feel politically, it’s undeniable that the changes are coming and that businesses—especially qualifying small businesses (those with more than $500,000 worth of business annually, including non-profits, as well as public agencies, hospitals, and schools)—will need to change the way they compensate their workers or face fines.
If small businesses can’t afford to pay for new overtime wages, they’ll just have to get creative with how they follow the law.
The Department of Labor suggests 4 different tactics to respond to the salary threshold update for businesses:
1. Increase the salary of an employee who meets the duties test of a white collar worker to the new salary level, keeping them as “exempt.”
2. Pay overtime to those who work overtime hours and are now eligible to receive it.
3. Reduce or eliminate overtime hours: don’t let employees to work more than 40 hours a week. The Obama administration has said they expect this to be an option for some business owners and that it’ll give workers “more leisure time.”
4. Reduce the base salary and instead spend that extra money on those overtime hours the employee works, keeping total weekly pay constant. This method requires a good relationship and understanding between employer and employee, since a reduction in pay without a demotion can be demoralizing.
Many small business owners ask:
Is there any legal recourse to fight these changes?
Senate and House Republicans have felt the same way, filing motions of disapproval and looking to block the bill from going into effect.
But according to legal experts, that effort will likely be in vain.
“I wouldn’t place a bet on the rule being blocked,” says Gary Young, a partner at Scarinci Hollenbeck law firm who provides employment law advice to private sector employees. “There’s a great deal of deference given to executive branch agencies in rulemaking, and these rules are more made up by the Department of Labor, going all the way back to after the passage of FLSA.”
In terms of how employers will be held accountable for these new legal changes, there are 2 main avenues for enforcement.
One is through audits: the government will audit activities by employers to make sure they’re following the law. This is usually prompted by disgruntled current or former employees.
Another way is through legal channels, and wage and hour lawsuits under FLSA have already skyrocketed in recent years. These complaints often result in collective actions, representing a sizable amount of money, and employment plaintiff lawyers are probably licking their lips as the new rules and a new set of circumstances for filing lawsuits approach.
In order to prepare for these changes and make sure you’ll be in line with the law, you might want to get in touch with professional legal services to help them navigate the new terrain.
“I would say to the client, let’s take a look at what you’re doing or not doing,” says Young, when asked how he would advise business owners. “Do you have your employment posters up and are they current? Do you have a handbook and what does it say? What are your actual pay practices? All of these things will have to be updated and be made clear to current and all future incoming employees.”
Young also has 3 basic tenets of wage and hour law that he advises all business owners—and employees—be aware of:
1. You have to measure all hours worked: “what’s the work week, is it Saturday night going into Sunday, Tuesday night into Wednesday?”
2. What is the rate of pay?
3. There should be proper accounting for all hours worked.
That last one is pretty tricky…
There’s a lot of nuance surrounding what work time is and what the employer’s obligations are.
Paying for call-in time when the employee is working remotely. Or “doffing and donning”—which is when an employee comes to the plant and has to put on special equipment or clothing in order to perform the tasks, but isn’t compensated for that time. Courts have found over and over that this should be considered work time, but often the employer fails to pay for that time. This can end up being a significant sum of money—15 minutes a day, but thousands over a career.
So what’s a good way to keep track of each employee’s working hours per week while protecting the company from FLSA lawsuits?
Business owners might want to consider an investment in automated time management systems—powered by punch cards, RFID, or even fingerprint-analyzing technology. These solutions offer companies irrefutable records of working hours, breaks, and overtime. This clarity can benefit employers and employees alike.
At the end of the day, the most important part of this legal overtime change won’t be a massive transfer of wealth—like we talked about, employers can re-configure how they pay their employees so that they aren’t receiving any more money after December 1st than before it. Instead, it’ll be the recognition that things have changed.
“Employers, especially smaller ones, are often oblivious to the law. Or they think they know the law, but they don’t,” says Young.
“Some employers are unwittingly making serious but costly mistakes—and when the law catches up to them, those mistakes can be so significant that they’ll get put out of business.”
Most good business owners would agree that a decent wage is important to their company—both because they want their employees to live on what they’re being paid and because they want to attract qualified workers to keep the company going.
But will this change drastically alter the cost of doing business?
The short answer:
Not necessarily. There are several workarounds that business owners can use to keep costs similar, if not exactly the same—options that the government expects and even encourages people to use, if necessary. Rank and file workers who form the backbone of many small businesses probably won’t see any big increases in pay unless the minimum wage is raised.
Until then, it’s important for business owners, managers, and employees alike to stay informed in order to avoid the much larger issue of legal battles that can doom a small business for good.