What Every Small Business Owner Needs to Know About DOL’s New Overtime Rule

Date: June 13, 2016

Recently, NFIB hosted a webinar on the Department of Labor’s new Overtime Rule. Tammy McCutchen, a principal attorney at Littler Mendelson, explained the major changes coming as a result of this rule. In the archive, available here, McCutchen provides a 5-step plan to help small business owners come into compliance.

An Overview of the New Rule

The biggest change, coming as a result of the DOL’s new rule, is a mandated increase in the minimum salary level that businesses must pay salaried employees. Prior to this regulation, the minimum salary level was $455 per week ($23,660 annualized). The new regulation, which goes into effect on December 1, 2016, raises the minimum salary level to $913 per week ($47,476 annualized) — over twice as much as the previous minimum. And going forward, DOL will revise the mandatory salary threshold for exempt employees every three years, with the next change coming into effect on January 1, 2020. As a result of this hike in minimum salary levels, small business owners will be forced to make major changes to their employee compensation schemes.
This new salary level can include bonuses and commissions. However, those forms of compensation can only make up 10% of the minimum salary requirement ($91.30 per week, or $4,747.60 annually). This requirement may—in itself—create complications for many employers.

Compliance with this new rate will be checked quarterly. For example, if at the end of a quarter, the total amount paid to an exempt employee is not greater than or equal to ¼ of the annual amount ($11,869) then the employer must pay the employee the difference between the amount paid and the $11,869 in the next pay period. Accordingly, in order to come into compliance with the new rule, annual bonuses or commissions should be changed into quarterly bonuses or commissions.

Step 1: Identify Employees Who Need to be Re-Classified

The first step for compliance requires a little bit of math and research. To start, the employer needs to identify currently exempt employees making less than $47,476, – or less than $42,728.40 with at least $4,746.60 in bonuses. After identifying these people, you are going to want to figure out how to reclassify these employees. This could involve either a bump in salary, a change from salaried to hourly, or a change in the incentive structure of that employee’s pay.

Step 2: Redesign Compensation

The next step, after deciding which employees need to be re-classified, is restructuring your compensation scheme. This step involves determining whether or not that employee will be hourly or salaried, and what the compensation rate will be for these employees. Additionally, this may include making cuts to employee benefits. All of these cuts need to comply with any national regulations regarding benefits, such as the Affordable Care Act.

When deciding whether to raise an exempt employee’s base salary or to simply convert them to hourly employment, it is necessary to calculate the overtime compensation that employee would likely receive if they were switched to an hourly rate. Remember, that an hourly employee must be paid his or her hourly wage for however many hours worked each week, but, for any hours worked above 40, the employer must pay time and a-half. Thus an employee making $15.00 per hour would have to be compensated at $30.00 per hour once he or she begins accruing overtime. Also, bear in mind that a minority of states, like California, require overtime pay for any time spent working in excess of 8 hours in any one day.

Step 3: Review Policies and Processes

This is one of the more important steps. After reclassifying employees, it is going to be necessary to review any current policies related to compensation. These policies include, but are not limited to: (1) off-the-clock work; (2) meal and rest breaks; (3) travel time; and (4) mobile device coverage.

Owners should also review some of their business’s processes including timekeeping, changes in payroll, and potentially limiting the number of overtime hours employees can work.

Step 4: Communicate the Changes

This is likely the most important step. Owners are going to want to communicate the changes to management and employees. This is necessary both on a personal and legal level. Legally, employees must be notified of any changes to their compensation. Most states require advance notification of at least one pay period, but there are a few that require more advanced notification. Consult your state employment laws for further guidance.

On a personal level, it is going to be necessary to speak with employees. Some employees may see this as a demotion or a change in their value to the company. Owners should be sure to inform employees that this is not the case. Re-classification is not in any way a reflection of that employee’s value, but is necessary to make sure that your business complies with government regulations. Feel free to blame the government here, specifically the Department of Labor.

Step 5: Train Re-Classified Employees

Some of these new employees will never have had to punch a timecard before and may not be happy about doing so. Make sure that employees know how to do this. Additionally, make sure they are aware of all changes to compensation policies. Lastly, make sure that all employees are aware of what may constitute a compensable work activity so that you do not violate the regulation. It is essential to remember that anytime worked—even time spent checking work emails from a smartphone—must be compensated for non-exempt employees.

Also, here are a few helpful links:

Compliance HR’s online compensation calculation tool: http://compliancehr.com/our_solution/

*Note that the Xmpt Toolkit is not free. It is $4,000, but NFIB members will be given a $500 discount with the use of NFIB’s discount code. Please contact a member of NFIB’s Small Business Legal Center for information regarding the code.

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