New O.T. Rule will Cost Small Businesses

Change in overtime eligibility will have a disproportionate impact on small businesses next year.

Well, it is said that the wheels of government grind slowly. Today’s announcement from the Department of Labor is a great example of that truism.

A new overtime pay eligibility rule may impact a large number of small businesses next year. Starting in January, salaried employees who earn less than $35,568 per year will be eligible for overtime pay. This is a retooling of a rule that had previously set the threshold much higher (at $47,476) but was struck down by a U.S. District Court after being challenged by several states and industry groups.

I wrote about that rule when it was announced back in November of 2016. The government has taken almost 3 years to find an alternative they consider acceptable to the various parties with a legitimate say: congress, business, and labor. For instance, the U.S. Chamber of Commerce supports this new version and it’s assumed that Congress won’t block it because the period for review will end prior to next year’s elections [as reported in The New York Times:].

What does this mean for your business?

Here’s the simple explanation. Any employee that you are paying on a salaried basis (defined as exempt) who earns less than $35,568 per year will be eligible for overtime pay at 1.5x their prorated hourly wage. Even though they’re being paid a fixed salary, you will need to track any time they work more than 40 hours per week.

So even if you don’t currently have a timekeeping process in place, you will need to adopt a clear method for these employees to record overtime hours and adjust the pay they receive for those hours in order to be in compliance.

Why is the eligibility changing now?

This rule has always been in place, but the eligibility trigger was set very low at $23,660. In fact, it hadn’t been changed since 2004. Labor advocates and government experts were legitimately concerned with the fairness of that threshold because employers could take advantage of their lower-paid workers by designating their jobs as exempt.

Historically, exempt positions were for management or professional occupations that enjoyed a certain level of autonomy in setting their own work schedules. These employees were expected to put the time in for whatever the job required and had the power to control when and how they work.

Based on the government’s published figures, there are approximately 1.3 million workers who are designated exempt while earning less than $35,000 per year. That’s not nearly the typical salary for a professional and certainly not adequate income for someone expected to work whatever hours the job requires.

It’s assumed that most of these jobs are in healthcare, food service, and retail. But there are many small businesses with employees designated as managers who are, nevertheless, paid at much lower salaries than their peers in large companies.

If you own a business with exempt employees under the threshold, here are some smart tips to help you manage the change:

  • Change the affected employees’ status from exempt to nonexempt and start paying them hourly at the beginning of the year.
  • If you can’t make that change, put in place a simple timesheet or time tracking process and train every employee on how to accurately record their hours.
  • Speak with your employees openly. Explain why their job is exempt and why that is important to the business. Ask for their help in managing their time on the job and empower them to find solutions.
  • If you find that your lowest paid employees are working overtime, figure out why. If it’s due to business needs, then adjust the scope or pay structure of the position. If it’s just because of culture, consider changing the way expectations are communicated.

Use us as a sounding board. We’ll be happy to discuss how to best respond to this change and maintain productivity and organizational stability in your business.