How New Federal Overtime Laws Can Affect Your Small Business

  •    A freelance reporter and writer based in Philadelphia, Pa., Dinah previously worked as a staff reporter for The Associated Press and Dow Jones Newswires.

In May, President Obama announced a Department of Labor update to federal overtime regulations, potentially extending overtime protections to millions of workers in the first year. Do these fresh rules, which go into effect on Dec. 1, make a difference to your small business?

If your business has revenue of at least $500,000 and salaried employees, they might. And if your business generates less than $500,000, some of your employees might be covered individually by the OT rules anyway, if involved in or producing products for interstate commerce.

The update raises the threshold pay levels at which white collar, salaried professional, executive and administrative employees would be exempt from overtime pay protections. Unless exempt, employees protected by the Fair Labor Standards Act must be paid at least time-and-a-half for working more than 40 hours a week.

"The current salary level is outdated and no longer does its job of helping to separate salaried white collar employees who should get overtime pay for working extra hours from those who should be exempt," the Department of Labor website says in a Q&A about the changes.

Under the new rules, a salaried employee must be paid at least $913 a week, or $47,476 a year, to be considered exempt from the overtime regulations; the previous levels, set in 2004, were $455 a week and $23,660 annually. With the update, employers now will be able to use certain bonuses and incentives, including commissions, to satisfy up to 10 percent of the salary requirement, if made at least quarterly.

To be considered exempt, employees also must pass a "salary basis test," which means they receive a fixed salary that doesn't fluctuate with work amount or quality. Employers must use an existing "duties test" to qualify employees whose pay exceeds the threshold as exempt.

"Too many salaried, white collar workers today are overworked, and their employers have no incentive to limit hours because they aren't required to provide additional pay when employees work more hours. Under this rule, employers will have a renewed monetary incentive to support work-life balance," the Department of Labor says in an overview.

Certain "highly compensated employees" whose total annual pay, including salary, commissions, and other non-discretionary incentives and deferred compensation, reach at least $134,004, and who pass a relaxed duties test, also are exempt, an increase from the previous level.

These salary and compensation thresholds will be updated automatically every three years, starting Jan. 1, 2020.

If employers make no changes, the update is expected to affect 4.2 million workers in the first year, according to the Department of Labor. There are currently some 8.9 million overtime-eligible salaried employees, including 5.7 million white collar workers and 3.2 million blue-collar employees, the department says. Some 732,000 white-collar employees already are overtime-eligible but aren't acknowledged as such by their employers, the DOL says.

The Economic Policy Institute estimates, however, estimates that 12.5 million workers will directly benefit from the higher salary threshold, with most newly eligible for overtime pay.

"It is critically important for employers to understand the FLSA overtime pay exemptions and its impact on their budget, as there can be serious financial consequences for employers who violate the FLSA overtime pay requirements," The Wagner Law Group said in an alert after the government released the updated rules.

Some business leaders warn that the new rules will hurt employees and small companies, effectively forcing employers to demote salaried managers to hourly status, but the government says that needn't be the case.

If you have salaried employees who are covered by the updated overtime rules, you do not need to convert them to hourly status or force them to punch a time clock, the DOL says. If they usually work a set schedule, you can note that schedule and then indicate any additional hours worked. If their schedules are flexible, the employees can record their total hours worked each day by the end of their pay period.

If you and your employees enjoy flexibility in work schedules, the government says the regulations won't change that ability. The Fair Labor Standards Act, which these rules update, doesn't mandate minimum or maximum shift hours, nor does it prevent split shifts or prohibit employees from working from home, according to the department.

If you find that this update does apply to your business, what can you do? The DOL offers these options:

  • Raise an affected employee's salary at least the new threshold so he or she remains exempt.
  • Pay the one-and-a-half-times-regular-rate premium for overtime worked.
  • Cut overtime hours.
  • To hold pay constant, trim the amount of compensation attributed to base salary, as long as the worker continues to receive at least the minimum wage, and add pay to cover overtime hours worked.

Author Rhonda Abrams, writing in USA Today, mentioned another option: hiring more hourly employees to reduce the need for salaries workers to put in overtime.

The National Federation of Independent Business estimated the change will affect 44 percent of small businesses. "The rule could force many business owners to reclassify salaried employees to hourly positions – resulting in a loss in flexibility, bonuses, and promotion opportunities," NFIB said on its website, noting that it's pushing for legislation to block enforcement.

Cicely Simpson, an executive with the National Restaurant Association, wrote in a column on The Hill that the regulations, by roughly doubling the exempt-salary threshold, could make it very hard for restaurateurs to maintain flexibility, teamwork and employee upward mobility — and effectively ensure that some salaried jobs will become hourly. This DOL page provides links to details on U.S. overtime regulations.Have questionsabout your employees' status? Check with your local DOL Wage and Hours Division office.

Note: Your state may have higher salary standards that aim to be more protective of employees than the FLSA. If so, the higher state standard would apply.