With less than five months to go until the new overtime threshold takes effect, it’s getting to be crunch time for employers trying to prepare for the changes. The good news is, there’s no need to panic. Really! In this article, I’m going to try to clear up some misconceptions that might have needlessly put you in a tizzy.
No, you won’t have to convert all your employees to hourly.
I’ve seen several writers complain that the new threshold will “force” employers to convert large numbers of employees from salaried to hourly. This simply isn’t true.
This misconception is probably based on the common, but mistaken, idea that all salaried employees are exempt from overtime. In reality, it’s possible for an employee to be paid a salary and still be eligible for overtime pay. The confusion likely stems from the fact that employees must be paid on a salary basis to be exempt from overtime. But that’s not the only criteria they have to meet to be exempt. More on that later.
Under federal law the base pay for non-exempt workers can be calculated any number of ways: salaried, hourly, piecework, commissions, etc. The only requirement is that when you take that base pay and divide it by the number of hours they actually work, it has to calculate out to at least $7.25 per hour. (Note, your state may have different ideas. It always pays to check with your employment law attorney.)
So if you have employees who are currently paid a salary, you can continue to pay them a salary after December 1. If they make less than the overtime threshold and work more than 40 hours in a workweek, you’ll also have to pay them overtime. This is no change from how things are now. It’s just that the overtime threshold amount will be higher after December 1.
And, of course, that means you need to track work time for any employees whose salary is less than the threshold. (Because how can you know whether you need to pay them overtime unless you know how many hours they’ve worked?) Remember, though, you can continue to pay a salary, even one below the overtime threshold. You just need to pay overtime if these employees work more than 40 hours in a workweek.
No, you won’t have to double everyone’s pay.
While the federal threshold amount is roughly doubling, this doesn’t mean your payroll costs will double.
For employees who are not paid a salary, and for salaried employees currently making less than $455 a week (about $23,660 per year), nothing will change. You are currently required to pay them overtime if they work more than 40 hours in a workweek, and will continue to be under the new regulations.
For salaried employees properly classified as “exempt” who are currently making more than $913 per week (or about $47,476 per year), nothing will change. You are not now required to pay them overtime, and you will still not be required to pay overtime under the new regulations.
For salaried employees making between $455 a week and $913 per week and for whom you currently pay overtime, nothing will change. Since you were already paying them overtime, the change should have no effect on your payroll costs.
The only employees potentially affecting your costs are those making a salary of more than $455 a week, but less than $913 a week, and who you currently consider exempt from overtime. Note there will only be an impact if they work overtime. If they’re not currently working more than 40 hours a week and they continue to work 40 or fewer hours per week after December 1, there will be no change.
So, the only employees who represent a potentially increased cost for you are those in this salary band who are regularly working more than 40 hours in a workweek.
For these employees, you have three basic options:
- Raise their salary to more than $913 per week so they can continue to be considered exempt. This is probably going to be the easiest option if you have people whose salary is close to the updated threshold and whose jobs are properly classified as exempt.
- Keep their pay unchanged and restructure their job so they don’t work overtime. This could involve hiring someone, perhaps a part-timer, to take over some of their duties, shifting duties to other less-busy employees or departments, or simply eliminating unnecessary tasks entirely.
- Keep their pay and duties unchanged and pay the overtime.
It’s important to note this change will almost certainly not result in a doubling of your total payroll costs. If you opt to keep salaries at or near their current levels and pay overtime, there are various methods of calculating overtime to minimize the cost impact. Check with your wage and hour attorney to find out which of these methods (if any) you’re eligible to use.
You don’t need to wait until December 1 to take action.
In fact, I’d argue you shouldn’t wait until December 1. To choose the best, most cost-effective option, you need data. I strongly recommend you start tracking time now for potentially affected employees if you aren’t tracking their time already.
I suggest you track time for all employees, salaried, hourly, exempt and non-exempt. The Department of Labor (DOL) has specifically said it’s OK to track time even for overtime-exempt salaried employees, as long as the time isn’t used to compute their pay.
Why would you want to do this?
- It gives you a handle on how much overtime (if any) each employee is working. You need this information to compute how much overtime pay you might incur after December 1. Without this information, you’re essentially flying blind.
- It also highlights imbalances in your current workload. You might be able to reduce overtime in general by shifting duties from overworked employees on to capable (but underutilized) workers.
- It could help acclimate to the new procedures workers who are currently exempt from overtime who you’ve decided to reclassify as non-exempt on December 1. If you start tracking time now, when the new threshold takes effect, time tracking will already be part of their daily routine. This will also make the transition from exempt to non-exempt less noticeable for employees who might be concerned about a loss of “status.”
- As a bonus, tracking employee work time can result in a reduction in “time theft.” Studies have shown that simply knowing someone is watching makes workers less likely to arrive late, leave early or take long breaks and lunches.
You need to consider more than just the threshold.
I mentioned above that the threshold of $913 a week in salary is not the only criteria employees need to meet to be considered exempt.
Companies get in trouble every day when they mistakenly believe all they have to do is pay an employee a salary and they won’t have to pay overtime.
For instance, I’ve seen a slew of reports lately about restaurants that tried to pay their kitchen staff a flat salary with no overtime. Other businesses have given low-level employees a fancy-sounding title with the word “manager” in it, paid them a salary and assumed that was all they needed to do. When the DOL investigators show up, these business owners are finding to their chagrin that these low-level workers are not exempt. Some have been hit with back wages and penalties in the hundreds of thousands of dollars (or more). For a small business, this could be crippling.
To be exempt, a job must clear three hurdles:
- The employee must be paid on a salary basis. (Unfortunately, this is where some business owners stop.)
- The salary must exceed the overtime threshold. (This will be $913 a week starting December 1.)
- Once the threshold has been met, the job duties must meet certain specific criteria. (This is the one that trips up many businesses.)
The DOL has prepared a fact sheet (Fact Sheet #17A) that outlines the criteria that must be met for Administrative, Professional, Computer, and Outside Sales jobs to be considered exempt from overtime. Note especially that it doesn’t matter what the job title is, it’s the job duties that make the difference. Generally speaking, if the job duties don’t meet these criteria, the employee will be overtime-eligible, even when the employee’s salary exceeds the overtime threshold.
A blessing in disguise?
This change to the overtime threshold actually presents a hidden opportunity for some. If it’s been a while since you evaluated your job classifications, it’s possible you have some workers who are misclassified. “Job creep,” reassignment of duties, and evolution of your business model can all contribute to significant changes in what a worker actually does day-to-day. If their duties have evolved such that their job no longer meets the exemption criteria, you could be in trouble.
All it takes is one disgruntled worker complaining to the DOL, or one zealous plaintiff’s attorney, and you could be facing a labor audit or a lawsuit, claiming you’ve misclassified one or more workers and now owe back overtime pay, penalties and liquidated damages.
The revised overtime threshold gives you a good excuse to re-evaluate all your jobs to ensure they’re properly documented and classified. Any changes can be attributed to the upcoming overtime threshold change — without raising any red flags with your employees.
Now, It’s Time For Business
To make an informed decision on how best to handle the upcoming changes, you need information. Acroprint offers a variety of time-tracking solutions to accommodate most every business environment and situation, from rugged traditional punch clocks to sophisticated cloud-based workforce management. Visit our web store to browse the entire selection or contact us for more information on how we can help you prepare.