By now most employers are aware of changes in the U.S. Department of Labor’s rule changes on overtime exemptions, which go into effect December 1. If you don’t already have a plan of action for how your organization is going to adapt, it’s time to be proactive.
Many workers may still not be aware of the details of the change, which nearly doubles the threshold for exempt salaried employees to $47,476. Non-exempt workers must be paid overtime wages at time-and-a-half of their hourly rate for anything above 40 hours per week.
By substantially increasing the threshold, this means millions more employees will become eligible for overtime – and companies could be on the hook for a significant financial outlay. The impact could disproportionately affect small/medium businesses and non-profits.
Employers have several ways they can respond to the change. They can find ways to offset paying the additional overtime. They could eliminate positions. They can convert hourly workers into salaried ones, or vice versa. They can reduce hours worked to avoid paying overtime. Or they can increase the salary of anyone under the new threshold up to that level.
The most important thing to do right away is conduct a thorough audit of every single employee in your organization. Look at their pay, number of hours worked and duties. If a salaried employee under the new threshold is already working lots of overtime, it may make more financial sense to give them a pay raise.
One smart move to make is to have all employee start tracking hours worked. There are plenty of software options to help do this. You may encounter questions or resistance from your team – especially those members who are currently salaried. They may enjoy the status of not having to “punch a clock” and preserving flexibility in their schedule.
Explain to them that the federal rules affecting overtime are changing, so your operation must change, too.
But it’s about more than just hours worked. There is another test for overtime exemption that is equally important but has garnered less notice.
The Fair Labor Standards Act addresses the “white collar” exemption from overtime rules, and describes what sort of duties the employee must perform to qualify. This includes administrative, professional, managerial, executive, computer and highly compensated workers.
It’s not enough to just give someone a title with the word “manager” in it. To be exempt, a manager must be shown to exercise discretion and a degree of autonomy, supervising other employees.
If employees do not meet the duties test, they are still eligible for overtime regardless of how high their salaries may be.
It may be possible to pay at least a portion of overtime as a quarterly or end-of-year bonus, as long as it is not considered discretionary. This mostly affects highly compensated employees, which previously had been defined as $100,000 per year, but will rise to $134,000 after December 1, 2016.
The stakes are very high. Since this change was made by presidential executive order with little public discussion, it’s unclear how tightly federal officials will enforce the new rules starting Dec. 1, i.e., if there will be a grace period. The smartest move is to assume there will not be, as the penalties incurred can be quite large.
If the DOL does receive a complaint from an employee, it’s likely they will investigate not just that person’s exemption status but examine the entire workforce. They will want to look at hourly data and job duties to justify exemptions. As the employer, the onus is upon you to be able to back up an exemption claim with facts.
Under the new rules, a violation of overtime rules means the company must pay double the wages owed, plus attorney’s fees. So even a failure to pay a few hours of overtime could translate into a very large bill.
After Dec. 1, there may be changes or reform of the new overtime rules. Until then, our advice is to follow the letter of the law.
Pay every bit of overtime owed, and ensure that exempt workers truly belong in that classification. You may need to adjust the compensation policy for many of your employees to find the most cost-effective solution.
If you need guidance in formulating a plan to adapt to the new overtime rules, reach out to a trusted advisor to assist you through this time of transition.
Lisa Purichia is partner and director of entrepreneurial services for Sponsel CPA Group and Stephanie Cassman is an employment attorney with Lewis Wagner LLP.