Overtime laws might change soon.
What does this mean for small business owners? In short, your salaried workers who are exempt from overtime pay now might soon become 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 In March 2014, President Obama signed a memorandum to revise the outdated overtime laws.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 non-exempt 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.
Doing the math
Current overtime laws leave about 88% of salaried employees as ineligible for overtime. Are they all highly compensated workers? Nope.
Some of those workers earn 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 is currently $455 per week ($23,660 per year). If the proposed overtime laws go into effect in July 2016, the salary level will jump to $970 per week ($50,440 per year).
There are additional stipulations about an employee’s duties when determining the exempt vs. non-exempt status (e.g., the employee must work a minimum of 40 hours per week). The DOL estimates 4.6 million workers would 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 existing salary threshold, the employee is exempt from overtime. Your supervisor could easily end up earning only $7.58/hour on a busy 60-hour workweek. This means your supervisor could end up earning less per hour than coworkers under his or her supervision.
What this means for you
When the salary threshold for overtime pay is increased, your supervisor may no longer be exempt. What will 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)
How can you prepare for the probable changes?
When you do the math according to the proposed overtime laws, 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 when 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 start paying employees overtime in the near future.
This article was originally published on 06/30/2014.