After almost 30 years as an entrepreneur, I know how much employer laws can affect small businesses. The most recent Department of Labor (DOL) change to put a wrench in an employer’s payroll budget is the new overtime rule.
Small business owners will need to adapt and find solutions quickly in order to survive. Fortunately, there are steps you can take now to prepare for the new overtime rules.
These are the changes to the overtime rule.
The DOL overtime rule determines which employees are exempt from overtime. Employers don’t have to pay overtime to exempt employees. If an employee is non-exempt, employers need to pay overtime for overtime hours worked.
On May 18, the U.S. Department of Labor passed a new overtime law that will make 4.2 million exempt workers non-exempt. The new DOL overtime rule changes the white-collar exemption and which employees can receive overtime.
To be exempt, an employee must receive a salary and have executive, administrative or professional duties. Those two qualifications do not change with the new overtime rule.
There is also a third qualifying factor to be an exempt employee: The worker must be paid more than the salary threshold. The salary threshold is set by the DOL in the overtime rules.
The new overtime law increases the salary threshold, making fewer employees exempt from overtime. Before the rule changed, the salary threshold was $455 per week, or $23,660 per year.
The new salary law raises the threshold to $913 per week, or $47,476 per year. The increase is a little more than double the previous salary threshold. That’s quite the jump.
But, that’s not all. The salary threshold isn’t the only thing that is complicating small business payroll budgets. The minimum salary threshold will automatically increase every three years based on wage growth. The first automatic increase will happen on Jan. 1, 2020. That means more employees will become exempt as the threshold rises.
The new rule also updates the salary level for highly compensated employees. Employees must receive at least $134,004 per year to be highly compensated.
Small businesses are not exempt from the overtime law and must comply by December 1.
What does it mean for small business owners?
The size of the overtime law’s impact will depend on the number of non-exempt employees a business has after the salary threshold increases.
The overtime law will not affect the businesses, which have all non-exempt employees with the new threshold. Non-exempt employees always need to be paid overtime for working more than 40 hours per week.
If the increased salary threshold creates newly non-exempt employees at a business, the overtime law could have major effects on payroll costs. To stay compliant, employers with exempt employees might have to adjust their businesses.
Employers will need to either pay employees higher salaries, or pay overtime wages. Small business owners have a couple of options for handling the overtime rule changes.
Option 1: Increase employee salaries above the salary threshold.
To pay more than the threshold, employers need to pay salaries over $47,476 per year. Raising salaries might work for businesses that already pay salaries close to the new threshold.
Businesses with employees that work a lot of overtime might also want to raise salaries. Employers should estimate the number of overtime hours employees work, and calculate the cost.
Comparing the cost of overtime pay against the cost of increased salaries can help employers decide how to adjust employee wages.
Option 2: Pay employees less than the salary threshold, and pay overtime wages.
If an employee is paid below the new salary threshold, they are nonexempt. Employers need to pay newly nonexempt employees at least one and a half times their regular pay for any overtime worked.
To prevent overtime costs from adding up, employers can cap the number of hours employees can work each week.
Transitioning to the new overtime rules.
Small business owners might have to make some tough decisions when the new overtime rule comes into effect. For managing changes to the law, employers can take the following steps.
1. Explain the new overtime law to employees.
As a seasoned business owner, I’ve spent a lot of time talking to employees. I’ve learned that building relationships with employees makes dealing with change easier for the entire company.
If you are a small business owner, you know that the new overtime law does not just affect your business; it also affects your employees’ lives.
The more you keep your employees informed, the easier it will be to transition your company. Explain what will happen when the overtime rule changes and how the salary threshold works.
2. Clarify changes within the company.
Talk to your employees about how your business will adjust to the new overtime law. Let employees know about any changes to their pay, schedules or job duties. Clarify that you are not randomly making changes, but that you need to comply with the law.
Your employees might be concerned about how the new rule will influence their pay and hours, or what happens when salaried employees become hourly. But, the change could be positive for your workers. If employees work overtime often, they will earn extra pay. Or, you might choose to give employees raises to push salaries over the threshold.
On the other hand, if you decide to reduce wages or hours to cut payroll costs, your employees could be upset. To save employees from working the same job duties for less pay, you could adjust their responsibilities to match the new pay and schedule.
3. Train employees on timekeeping.
If employees become non-exempt with the new salary threshold, the hours they work need to be recorded. But, some employees, especially salaried workers, might be unfamiliar with timekeeping systems. You should show all employees how to keep track of hours worked.
If you have nonexempt employees, you will need a timekeeping system. Though you can use paper or a spreadsheet, the simplest timekeeping option is online time and attendance software.
It’s also important that your supervisors and managers understand your overtime policy. Supervisors can help enforce the overtime policy; answer your employees’ questions; and make sure your business stays compliant with overtime rules.
Note: this article is not intended to provide legal advice. You should seek specific legal advice from your attorney.