Will New Overtime Laws Impact Your Payroll Costs?

Will Impending Overtime Laws Raise Your Payroll Costs?

Note: A federal judge ruled to stop the U.S. Department of Labor’s overtime rule on November 22, 2016. On December 1, 2016, the overtime rule will NOT go into effect. But, the overtime rule or a variation of the rule might go into effect at a later date. We will update information as it changes.

The U.S. Department of Labor (DOL) passed the new overtime law on May 18, 2016. The new overtime laws go into affect December 1, 2016.

What does this mean for small business owners? In short, your salaried workers who were exempt from overtime pay now might be eligible for overtime.

Let’s say you own a frame shop. Business is good, and you can afford to promote a worker to a supervisor position. However, that supervisor might cost you more than you thought.

Overtime laws: Payroll changes are coming

The Fair Labor Standards Act (FLSA) covers the complex laws for overtime hours. In March 2014, President Obama signed a memorandum to revise the outdated overtime laws. He stated, “If you have to work more, you should get paid more.”

Overtime laws include a minimum salary threshold. Employees who earn more than the threshold might be exempt from overtime earnings if they also have qualifying job duties. Employees who earn less than the threshold are nonexempt from overtime earnings.

Also known as a “white-collar” exemption, the intention of the FLSA overtime rules were to limit the amount of overtime pay that highly paid workers could receive. The limits include a salary threshold as well as confusing rules. When the threshold was set in 1975, 65% of salaried workers were eligible for overtime compensation. The other 35% potentially made too much money to earn overtime wages.

Since 1975, there has been only one increase in the salary threshold. The increase does not allow for the impact of inflation. So, we have gone from 65% of salaried workers eligible for overtime pay in 1975 to just 12% of salaried workers eligible in 2014.

overtime laws

Doing the math

Before the new overtime law passed, overtime laws left about 88% of salaried employees ineligible for overtime. Were they all highly compensated workers? Nope.

Some of those workers earned as little as $23,660 per year. If you do the math, a salaried employee who works a 60-hour week with an annual salary of $23,660 (without any overtime compensation) earns only $7.58 per hour. That is only $0.33 more than the national minimum wage ($7.25 per hour).

The minimum salary level for employees exempt from overtime was $455 per week ($23,660 per year). 

With the new overtime law, the salary level has jumped to $913 per week ($47,476 per year). Employers will have to follow the new law starting December 1, 2016.

There are additional stipulations about an employee’s duties when determining the exempt vs. nonexempt status (e.g., the employee must work a minimum of 40 hours per week). The DOL estimates 4.6 million workers will no longer be exempt from overtime pay!

What this means for your exempt employee

Let’s look at the frame shop example again…

Suppose that your frame shop supervisor earns a salary of $455 per week. That would be $11.38 per hour for a 40-hour workweek. The new supervisor makes staff schedules and covers shifts if an employee doesn’t show up. For a large order, the new supervisor sometimes works late to get the work caught up.

With the old salary threshold, the employee was exempt from overtime. Your supervisor could have easily ended up earning only $7.58/hour on a busy 60-hour workweek. This means your supervisor might have ended up earning less per hour than coworkers under his or her supervision.

What this means for you

Since the salary threshold for overtime pay increased, your supervisor is no longer exempt. What does that do to your payroll costs? Here are example calculations for a salaried employee earning overtime.

Non-Exempt: 40 hours/week
(no overtime hours)
Non-Exempt: 50 hours/week
(10 overtime hours)
Non-Exempt: 60 hours/week
(20 overtime hours)
$455.00/week $625.70/week $796.40/week
$23,660.00/year $32,536.40/year $41,412.80/year

How can you manage the new overtime law?

When you do the math according to the overtime law, do you end up with an impossible monthly payroll? Does your employee end up with a fair hourly wage?

First, you need a plan. Look at what you currently pay your employees and start crunching some numbers.

  • You might need to lower employee salaries in order to cover the cost of overtime if they are no longer exempt.
  • You might increase employee salaries to the new minimum threshold to maintain their exempt statuses.
  • You can shift duties from one employee to another so the employee no longer works overtime hours. Perhaps you will need to hire additional workers.
  • If you don’t have a good timekeeping system, you should consider getting one now. This will make the transition easier if you need to track employee hours and  start paying employees overtime in the near future.

With Patriot’s online time and attendance software add-on to our online payroll software, you can easily track hours employees worked. Get a free trial today!

This article was updated on 5/18/2016 to reflect the overtime law.
This is not intended as legal advice; for more information, please click here.

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