Handling the New Overtime Rules in Your Small Business

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New 2016 overtime rules

What’s the deal?

Effective December 1, 2016, the new overtime rules are changing the exemptions that currently allow employers to avoid paying overtime to certain employees. Currently, employees making less than a certain salary threshold must be paid overtime (the salary threshold depends on the type of job). It is this threshold that is being increased, meaning employers will be required to pay overtime to a larger portion of their employees.

Give me some numbers…

  • Employers must pay overtime to any employee working more than 40 hours in a workweek unless the employee is exempt
  • The salary threshold that makes an employee exempt is going up
    • For administrative, professional and executive exemptions (for simplicity, let’s call them the “APE group”), the salary threshold is increasing from $23,660 to $47,476 per year ($455 to $913 per week)
    • For “Highly Compensated Employees” (a definition that affects tax items such as requirements for pension plans and other benefits), the total compensation threshold is increasing from $100,000 to $134,004 per year
  • For the first time, employers may use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10% of the minimum salary requirement for the APE group, as long as they are paid quarterly (this was already allowed for highly compensated employees)

So, what should I do?

  1. Make a list of employees who are currently exempt, but will no longer be exempt once the new salary threshold kicks in
  2. For each employee, decide between a few different options:
    1. Raise their salary to the new requirement and continue not paying them overtime (i.e. maintain their status as exempt)
    2. Don’t raise their salary to meet the new requirement, but pay them overtime when they work in excess of 40 hours in a week (i.e. change their status to non-exempt)
    3. Change their workload/schedule to minimize overtime
    4. Lower their base pay and pay overtime in an effort to maintain an unchanged total compensation (see the formula below)
  3. Be diligent in remaining compliant
    1. Monitor employee hours
    2. Periodically review employee classifications to determine who is exempt, especially after giving raises and/or promotions
    3. Beware pending lawsuits if you fall into noncompliance

Assuming I want to keep my employee’s compensation the same (option d), what should I do next?

  1. Rule out option a, because this requires that you raise the employee’s salary
    1. That said, you should consider how much of a raise an employee would need to get to bump them back into the new exempt range. Is it a raise they would have gotten soon anyway? Is it a raise they deserve now? Maybe it makes sense to give them that raise and avoid the uncertainties that may be associated with paying overtime
  2. Determine if option (b) makes sense
    1. Does the employee work more than 40 hours in a week? If not, then overtime is not a factor for them
  3. Consider option (c)
    1. Does this make sense for your business?
    2. Would changing schedules jeopardize your product/service or affect your customers?
    3. Would this upset employees?
  4. Evaluate option (d)
    1. Determine how many hours the employee works, on average, in a given workweek (remember, if the employee works less than 40 hours per week, overtime isn’t coming into play, so the new rules will have no effect)
    2. Divide their weekly salary by the number of hours worked to get their hourly rate
    3. Use the formula below to determine what hourly rate you need to pay the employee (including overtime) to maintain the same weekly salary
    4. So, if an employee currently makes $715 per week and works, on average, 50 hours per week, you can input this information into the formula to determine that, to maintain the same weekly salary, you should pay this employee $13/hour

Hourly Rate = Weekly Salary / (40 Hours + (Overtime Hours x 1.5))

And in conclusion…

If you have employees that work more than 40 hours per week with a salary between the old threshold and the new threshold, you should prepare your small business for the new law, as it will impact your payroll. It’s up to you to determine what makes the most sense for your business, and only you can decide whether you should be increasing salaries, changing schedules, paying more overtime, or taking some other tack, but if you have any questions or are looking for a sounding board to bounce ideas off of, we’re here to help, so give us a call!