Are You Prepared for the New Overtime Rules?

Effective December 1, 2016 a new salary basis test for overtime eligibility goes into effect. This is the most significant change to labor law in this century. The Department of Labor estimates it will affect 4.2 million workers. The Economic Policy Institute puts the number at 12.5 million.  And unlike incremental increases in the minimum wage, the overtime rule change goes fully into effect on the implementation date. How will you deal with it? On the plus side, this is a great opportunity to review your classification system without raising a red flag to regulators; and unlike many changes, we have six months to prepare for this one.

There are two tests to determine if an employee is exempt from overtime payments: the salary basis and the duties test.

The Salary Basis

Currently for an employee to be exempt from overtime the base salary must be $23,660 annually ($455/week). On December 1st the floor is raised to $47,476 annually or $903/week. With few exceptions an employee making less than this amount will not be exempt for overtime. Moreover, the rule raises the base every three years indexed to national wage surveys.

The Duties Test

The general guidelines for white collar jobs in executive, administrative and professional positions remain unchanged. To be classified as exempt from receiving overtime payments, executives must supervise two or more employees, be in charge of a major unit of the business and be able to hire and fire. Administrators are primarily involved in developing and implementing policies more than supervising daily operations or productive activities. And professionals are those with advanced university degrees that qualify them for their positions. In all cases the employee must be able to exercise independent judgement, not be subject to close review and be responsible for duties other than those that simply follow standard procedures and rules.

Steps to Take

First, run a list of employees by salary and then start with those now making less than the new threshold. Here are the decision choices to consider:

  • If they are making less than the basis and you have determined they are not exempt, do nothing.
  • If they are exempt by the duties test, but making less than the new basis:
    • Raise them to the new level.
    • If you are content with their current level, continue to pay them a salary but monitor their hours to pay overtime when they work more than 40 hours. This category is known as “salaried non-exempt.”  
    • Calculate their real hourly rate and (carefully) change them from salary to hourly.

Second, review all those making more than the base to determine if they meet the duties test.

Manage the Change

Things to consider

  • There may be a benefits impact when an employee’s classification changes
  • There may be a morale impact when a currently salaried employee is moved to hourly. Many employees consider that their salaried classification is a status indicator and may feel that a move to hourly signals a demotion or a decrease in appreciation.
  • There is a training impact as employees learn how to track and log their hours of work, meals and breaks.
  • There is a flexibility impact. You may have to consider how to manage such afterhours work as responding to emails and travel time. You may have to figure out more precise ways of monitoring telecommuting.
  • There may be a huge budget impact if your business model depends on entry-level employees working 50-60 hours a week on an unsubstantiated salary basis.
  • And finally you need to look at the effects of compression within your grades as you change the pay rates of those within them.

Conclusion

Whatever you do and whatever you think of it, the new rule changes the way we do business.  Now is the time to prepare for it.