In May, the U.S. Department of Labor (DOL) finalized a new rule that will change the way employers determine which white-collar employees are entitled to additional pay for overtime hours worked. Once the rule takes effect on December 1, 2016, an estimated 4.2 million additional salaried workers — generally executive, administrative and professional employees — could become eligible for overtime pay.

An overdue update

The current rules for determining overtime eligibility have been in place since 2004. In an effort to boost the wages of low- and middle-income employees, the DOL issued a proposed rule last July that was designed to increase the number of white-collar employees who would be eligible to receive time-and-a-half wages for each hour they work beyond 40 hours per week.

The final rule primarily affects one of the three tests that’s used to determine whether or not an employee is considered exempt for overtime wage purposes: the salary level test. Currently, any employee who is paid at least $455 per week (or $23,660 per year) is exempt.

Under the new rule, this salary threshold will be increased to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region, which is currently the South. This translates to $913 per week, or $47,476 per year — more than double the current exemption amount.

The other two tests for determining whether an employee is exempt remain largely unaffected by the new rule. First, employees must still be salaried — in other words, they are paid a fixed wage that can’t be reduced due to variations in the quality or quantity of work performed.

And second, employees must largely perform executive, administrative or professional job duties (that is, pass the duties test). Fitting under this umbrella are responsibilities and tasks such as supervising other employees and exercising discretion and independent judgment in the performance of their jobs.

In addition, the new rule increases the salary threshold for a “relaxed duties” test that is used to determine whether certain highly compensated employees (HCEs) are exempt. This threshold will rise from $100,000 to the 90th percentile of full-time salaried workers nationwide, which translates to $134,004 annually.

HCEs must continue to receive the full standard salary amount of $913 per week on a salary or fee basis without regard to nondiscretionary bonus or incentive payments. But these payments will count toward the total annual compensation requirement. Both the standard salary and HCE annual salary thresholds will be automatically updated every three years (starting in January of 2020) so that they are maintained at the 40th and 90th percentiles, respectively.

Minimizing the impact

So what are some strategies you can implement as an employer to help minimize the impact of the new overtime rule on your company’s operations and finances? Here are a few suggestions:

Convert salaried employees who’re newly eligible for overtime to hourly pay. If you keep these employees on salary, you’ll have to track the number of hours they work so you can pay overtime for every hour worked beyond 40 hours per week. Converting salaried workers to an hourly pay system should simplify the process.

Raise affected employees’ salaries. If employees currently earn near the new annual salary threshold of $47,476 — or if they meet the duties test and consistently work more than 40 hours per week — you could raise their salary to this threshold so they remain exempt.

Bar affected employees from working overtime. In this scenario, you might have to shift workloads so employees who aren’t as busy take on the work of employees who currently work overtime consistently. Or perhaps you could hire part-time or temporary employees to handle the extra work.

Pay the overtime wages above salary. You could, for example, pay a salary for the first 40 hours worked in a week plus time-and-a-half for each hour worked beyond 40. Or you could pay a fixed salary for a workweek of more than 40 hours that includes overtime compensation under certain conditions.

Start preparing now

The new overtime rules will have a significant impact on many small businesses, from both an operational and a financial standpoint. The effective date is right around the corner, so start making preparations now. If you have any questions, give us a call, we’re here to help!

 

Sidebar: What makes a collar blue?

The exemptions for paying overtime to certain employees are provided by the Fair Labor Standards Act (FLSA). They apply specifically to “white collar” employees, not “blue collar” employees.

The FLSA defines blue-collar employees as “manual laborers who perform work involving repetitive operations with their hands, physical skill and energy.” They include nonmanagement employees in production, maintenance, construction and similar occupations, including carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers.