Update: November 23, 2016 – Federal Court puts Overtime Rules on Hold
A Federal Court judge in Texas has given business owners one more thing to be thankful for this Thanksgiving. The new overtime regulations regarding the increase of the salary level required for exempt employees has been temporarily barred from going into effect as planned on December 1, 2016. On November 22, 2016, a judge hearing a number of consolidated cases contesting the new rule granted a motion for preliminary injunction, which stopped these regulations from being implemented.
While this is good news for employers who would have beenadversely impacted by the increase in salary requirement for exempt employees, employers should note that this action is not a final decision by the court. A full hearing and final decision (and possible appeals) will come later from the court, and if this is delayed until the administration changes in January changes could also be proposed by the Department of Labor or Congress. Business owners are still advised to review all employee classifications to ensure that employees are classified correctly under the current rules.
Original Post From August 9, 2016:
In May, the Department of Labor (DOL) has announced the final rules regarding new salary requirements for overtime exemptions. Under the new rules, effective December 1, 2016, for an employee to be considered exempt from overtime, the employee must make a minimum annual salary of $47,476 ($913 per week). This will affect all “white collar” exemptions – executive, administrative and professional. If an employee does not meet all exemption requirements they must be paid overtime (time and one-half) for all hours worked over 40 in a week.
What does this mean for business owners?
If you currently have employees “on salary”, and do not provide them overtime if they work over 40 hours in a week, the new rules may affect your business. If a salaried employee is making less than $47,476 annually, they will no longer qualify for the overtime exemption. If they do make this amount, then you still must make sure they qualify for the exemption under the “duties test” – do they perform the duties required under the DOL’s definitions of executive, administrative or professional exemptions.
What will this cost my business?
Oh, that’s a math question. Let’s use the following example: A general manager at a retail store makes $42,900 per year, and regularly works 50 hours per week. Under the new rules, the manager would be entitled to overtime for the 10 “extra” hours per week.
- Option A: Pay the employee overtime for the 10 hours/week. At $20.62 per hour ($42,900 divided by 2,080 hours), this would mean 10 hours of overtime ($30.93) per week, resulting in a total annual pay of $58,987. Additional cost to the business: $15,987.
- Option B: Increase the employee’s salary to $47,476, keeping the hours the same. Additional cost to the business: $4,576.
- Option C: Recalculate the employee’s hourly rate to absorb the anticipated overtime. If the employee were paid $15/hour, the overtime rate would be $22.50/hour. 40 hours at $15, plus 10 hours at $22.50 results in an annual pay of $42,900.
- Option D: Reduce the manager’s hours down to 40. Additional cost to the business: It is likely that another employee would have to pick up at least some of the 10 hours of work, simply shifting the labor cost. The employer could also reduce the manager’s pay commensurate to the reduction in hours (20% or $8,580).
What should I do now?
The regulations don’t go into effect until December 1, 2016. This gives businesses months to prepare for any changes in classification.
1) The first step is to determine if this change will affect your business. Do this by having all salaried employees making under $47,476 immediately start recording and reporting their actual hours worked. Having at least 2-3 months of data on actual hours will paint a fairly accurate picture of their average weekly hours (seasonal businesses may vary). Don’t forget about “off duty” hours, such as responding to emails or doing other work from home – this time counts for hourly employees. Then, do the math – and determine which scenario makes the most sense.
2) Don’t just think about dollars. Employee morale and retention is also important. Turnover is costly, and saving a few dollars may not be worth losing a good employee. Be open with employees during this process, and seek employee input on how to find the right solution.
3) Make sure your salaried employees are truly exempt under the FLSA rules (even if they make over $47,476). Small businesses often think that just putting someone “on salary” makes them an exempt employee. This is wrong, and the employees must meet specific duties test to be in compliance with the FLSA.
The DOL announcement link is below:
The DOL also updated their Small Business Guide:
If you have any questions regarding FLSA exemption or the new regulations, please contact Jennifer Corso. firstname.lastname@example.org, 216-381-3400.