New Overtime Rules Loom for Small Businesses

The U.S. Labor Department last year proposed a rule to increase the standard salary level for executive, administrative and professional exemptions and the minimum total annual compensation level for the “highly compensated employee” exemption under the Fair Labor Standards Act.

This would mean that, by Labor Department estimates, 5 million currently exempt workers would become eligible for overtime pay unless their salary is raised. This potentially huge modification of overtime compliance law could profoundly affect U.S. small businesses because employers would likely need to update their compensation plans to be in compliance.

The proposed rules look to increase the salary level for “white collar” exemptions from the current minimum of $455 per week, or $23,660 a year, to the 40th percentile of earnings for full-time salaried workers. The Labor Department anticipates that this would equate to $970 per week, or $50,440 annually.

In a similar fashion, the Labor Department seeks to increase the annual compensation level for employees who fall within the highly compensated employee exemption to the 90th percentile of annual wages of all full-time salaried workers. This would increase the current annual compensation level of $100,000 to $122,148. The Labor Department is also considering including mechanisms to update the salary levels on an annual basis and whether to permit nondiscretionary bonuses and incentive payments to count toward a portion of the standard salary level test.

When the Labor Department first announced the proposed changes, the agency received more than 250,000 comments. The majority of these responses came from employers who felt that any changes should be delayed until businesses had adequate time to prepare for possible regulation updates.

In response, the Labor Department decided to delay the public release of the final rule, which is now expected as early as July. Once the rule takes effect, employers will have some time to come into compliance; however, it’s imperative that employers begin preparing now. It’s widely accepted that the rule in some form will go into effect before the end of the year and the standard salary threshold will likely increase; other details as to what the final rule changes will entail remain uncertain.

As small-business owners continue updating operating plans for the year, they should consider labor costs and compliance efforts. It’s critical that they take time to assess any necessary changes they can make early in the year given the significant time it could take to become compliant with any new requirements.

Here are some tips to help small-business owners update employee compensation plans in a way that can help keep their business compliant while minimizing costs:

1.     Take Stock and Review Classifications. Employers should first ensure that they thoroughly understand their current employees’ compensation structure, classifications and the rules around FLSA exempt vs. nonexempt status. Any employee who earns greater than the threshold amount ($50,440 in the currently proposed rules) may be exempt from overtime pay if that person primarily performs executive, administrative or professional duties as described in the regulations. However, employees whose current salaries don’t meet this threshold are most likely to be deemed nonexempt and would be eligible for overtime if the final rules are passed as currently written. Depending on the business and size of its staff, this change could have a dramatic effect on operating costs.

2.     Closely Manage and Monitor Employee Hours. It’s important to remember that employers can work to reduce the proposed rule’s financial implications by properly managing and monitoring employee hours and using appropriate tools to help make educated staffing decisions. One effective method is to implement an automated time and attendance system that continuously tracks hours worked and sends an alert when an employee nears the 40-hour-per-week threshold. These notifications give business owners ample time to make staffing shifts before the week is up.

3.     Convert to Hourly Pay. For employees who aren’t always working 40 hours a week, it might make sense to convert them to nonexempt, hourly status and pay them for any overtime hours they incur. Keep in mind, however, that small businesses will need to proactively monitor each employee’s work hours to ensure accurate hourly pay and adhere to the FLSA’s minimum wage and overtime requirements. Also consider how this change might affect deductions, time off and other aspects of employment. Finally, communicate these changes in advance to employees and consider how such a change might be perceived.

4.     Pay More to Keep Costs Down. A less apparent strategy that can save small businesses money in the long term would have employers increase salaries to meet the overtime threshold for bona fide exempt employees who currently make less than $50,440 and consistently work more than 40 hours per week. To determine if this is prudent, businesses should first review applicable FLSA regulations and audit current job responsibilities to ensure employees qualify for the exemption. Then, calculate how that employee’s increased salary would compare to the estimated overtime costs that would otherwise apply.

Ultimately, the most important thing for small-business owners to remember is to take proactive steps to prepare for compliance once the final rule is released. Business owners should evaluate their organizations to better understand which employees may be affected, consider implementing time and labor tools that monitor their employees’ hours, and determine any changes they may need to make to ensure compliance.

While many updates can be made with no outside help, some businesses may also want to seek help from human resources and employment law experts as they navigate the complexity of the proposed changes.

Tara Wolckenhauer is division vice president, human resources, for ADP Small Business Services. To comment, email editors@workforce.com. Follow Workforce on Twitter at @workforcenews.