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How will the overtime affect your business and employees?

New DOL Overtime Rule Announced. How Will it Affect Your Business?

Note: On November 22, 2016, a federal judge ruled to stop the U.S. Department of Labor’s overtime rule. The overtime rule will not go into effect on December 1, 2016. However, the overtime rule or a variation of the rule might go into effect at a later date. We’ll keep you updated as information changes. 

A new law is here, expanding overtime pay to 4.2 million exempt workers. The U.S. Department of Labor (DOL) passed the new overtime law on May 18, 2016, that changes the white-collar exemption and who can receive overtime.

What is the new DOL overtime rule?

The new law changes what qualifies as an exempt employee. You are not required to pay overtime wages to exempt employees.

Previously, for an employee to be exempt, you had to:

  1. Pay the employee a salary;
  2. Pay the employee at least the salary threshold of $455 per week ($23,660 per year);
  3. Give the employee executive, administrative, or professional duties.

The overtime law changes the salary threshold. The salary threshold is the minimum annual salary you must pay employees for them to qualify as exempt from overtime wages.

Now, for an employee to be exempt, you must:

  1. Pay the employee a salary;
  2. Pay the employee at least the salary threshold of $913 per week ($47,476 per year);
  3. Give the employee executive, administrative, or professional duties.

Employers can now count bonuses and commissions toward as much as 10% of the salary threshold.

Employees who do not meet these rules are nonexempt from overtime wages. This means if a nonexempt employee works overtime hours, you must pay overtime wages.

The minimum salary threshold, according to the new DOL overtime rules, will automatically increase every three years based on wage growth. The first automatic increase will occur on January 1, 2020. Employees who are currently exempt might become nonexempt in the future as the salary threshold increases.

The new law also updates the salary level for a highly compensated employee. To be a highly compensated employee, you must pay the employee at least $134,004 per year. The salary threshold for highly compensated employee exemption will be automatically updated.

Chart showing the overtime law throughout history.

What the new overtime law means for your business

You must comply with the new overtime law by December 1, 2016. That gives employers six months to prepare. Small businesses are not exempt from the overtime law.

Below are things you can do to comply with the law.

If you have nonexempt employees

If you have nonexempt employees, nothing will change. You will still pay your nonexempt employees their hourly rates along with overtime wages for any overtime hours they work.

If you have exempt employees

If you have exempt employees, you might have to change the way you pay them. The overtime law means you will probably have to pay your employees overtime, unless they earn at least $47,476.

Increase salaries

One option you have is to increase employee salaries above the salary threshold. Salaries need to be at least $47,476 for employees to remain exempt. Depending on what you currently pay your exempt employees, you might have to give large pay raises.

If you also have nonexempt employees, you might want to consider giving them pay raises, too. The raises would prevent your hourly employees from earning wages exceedingly smaller than the wages your salaried employees earn.

Pay overtime wages

If you do not increase exempt employee wages to at least $47,476, your exempt employees will become nonexempt. This reclassification means you will have to start paying them overtime wages.

You will pay your newly nonexempt employees at least one and a half times their regular rate of pay for time worked beyond 40 hours in a week. You might want to convert your employees’ salaries into an hourly rate to make overtime pay calculations easier. However, if you choose continue paying salaries to your employees, you can calculate overtime for salary employees.

If your employees work many extra hours, the cost of overtime wages will quickly add up. To reduce your payroll costs, you can limit the hours employees can work. Employees cannot work extra time for free, even if they volunteer to do so. Having your employees work any time for free is against the law.

Transitioning your business

The DOL estimates that the new overtime law will affect approximately 4.2 million exempt workers. Small businesses make up 99.7% of employers in the U.S., so many of them will be affected.

Unfortunately, you probably don’t have a magical business bank account that can provide you with more money to pay your employees. You might have to make tough decisions about employee compensation. You might have to reduce the amount of flexibility your formerly exempt workers once had.

Despite changes you might have to make, there are ways for your business to survive. You can create a business budget to keep your company on a financially healthy track.

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This is not intended as legal advice; for more information, please click here.

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