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You are here: Law & Politics Government What the new federal overtime law means
The U.S. Department of Labor’s (DOL) new overtime rule is simple: Beginning Dec. 1, 2016, every salaried employee making less than $47,500 will receive time-and-a-half pay for every hour they work in a week beyond 40. By raising the minimum salary qualification from $455 to $913 per week, the DOL is securing overtime pay for an additional 4.2 million employees. The implications of the new rule are huge—especially for small business owners, many of whom depend on employees whose pay is under the new salary threshold. But with those employees soon entitled to time-and-a-half, that dependence may come with a big price tag.

Despite the consequences, many small business owners aren’t actively preparing for the new rule—and a significant number don’t even know it exists. With only weeks remaining before the rule takes effect, it’s imperative that all company leaders know what the rule entails and how it will impact their business. From there, small business owners should follow strategic steps to develop a compliance plan that’s specifically tailored to preserving their organizations’ operations and financial stability.

Unpacking the new overtime rule: History, scope, compliance and implications

For small business owners, a significant part of preparing for Dec. 1 is understanding the fundamentals of the new DOL rule: why it was updated, who’s impacted and what compliance looks like. Although the rule’s scope of application is broad and leaves little wiggle room for exemptions, small business owners have a number of compliance options at their disposal. By taking advantage of a strategic compliance option, businesses can avoid negative consequences that might otherwise result from noncompliance.

The push for updated overtime regulations grew out of an acknowledgment that existing rules are outdated for today’s workforce. Originally established in 1938, the Fair Labor and Standards Act is the primary governing document for employee wages and hours. In its initial form, the FLSA established the federal minimum wage and the 40-hour workweek. Later protections were added mandating overtime pay of time-and-a-half to employees below a certain salary threshold who worked beyond the fixed workweek.

The FLSA’s overtime rules were established to fortify the middle class by ensuring appropriate compensation for hours worked. But because its salary threshold was only adjusted for inflation once since the 1970s, the FLSA’s overtime rights extended to a rapidly diminishing class of workers. By 2014, the FLSA’s threshold for overtime pay—$23,300—covered a mere 8% of the salaried workforce.

As President Barack Obama argued in a March 2014 memorandum to the Secretary of Labor, it was time for the threshold to rise in order to accommodate white collar workers—an employee sector the original FLSA was designed to protect. The new overtime rule represents the DOL’s answer to President Obama’s memorandum. In addition to boosting the overtime threshold from $23,300 to $47,476 to account for inflation, the new rule will also automatically increase the threshold every three years to reflect collective wage growth. When it takes effect on Dec. 1, 2016, it will directly impact 4.2 million workers.

For small business owners, the new rule’s scope of application is broad and concrete, and there are limited exemption opportunities. The summary of the final rule makes it clear that the update extends to full-time salaried workers making less than $47,476 a year. Based on the new rule, all workers who fall below this threshold are entitled to overtime pay unless an exemption is claimed. But small business owners can’t rely on exemptions dictating their new rule preparedness plan. As the DOL’s Wage and Hour Division points out, small businesses cannot claim special exemption from the new overtime rule. Apart from certain specific industry exemptions (outlined here) it will be challenging for small business employers to justify exempting full-time salaried employee below the $47,476 threshold from the new overtime rule.

Because most small business owners won’t be able to circumvent the new rule, they must prepare to comply with it. Fortunately, there’s more than one avenue to compliance.

Employers can decide among these approaches—or a combination thereof:

Pay overtime per the new rule: The most direct way for small businesses to comply is to pay overtime to qualifying salaried employees beginning on Dec. 1. But despite its simplicity, this method can quickly become costly, especially for businesses that rely on employees under the threshold regularly working past 40 hours a week.

Raise employee salaries above the threshold: As an alternative to having to pay overtime, employers can raise their employees’ annual salaries above $47,476. For many employers—particularly those whose employees are already close to earning that figure—this may be the most practical and economical approach. It will ensure payroll consistency and create overtime surprises, particularly during high-demand times of the year.

Institute 40-hour maximums for employees under threshold: Another way to remain compliant is to cap the workweek at 40 hours for employees who make under $47,476. This can be carried out via comprehensive time tracking and the implementation of a company-wide standard. However, businesses that go this route are still legally bound to pay qualifying employees overtime, and can’t cite a company policy as a reason not to pay. Furthermore, limiting qualifying employee hours to 40 may have a substantial impact on productivity, particularly for businesses that depend on employees to regularly work more than 40 hours. Businesses that find themselves in this situation may need to hire more salaried employees or part-time workers to account for losses in productivity. Alternately, they could consider taking on independent contractors and freelancers, particularly during busy periods of the year.

Small businesses and overtime:  An awareness and preparedness gap Regardless of what approach to compliance they choose, small business owners must be prepared to roll it out by the beginning of December. Despite the importance of being ready by Dec. 1, many small business owners aren’t actively devising a compliance strategy—and a significant number don’t even know the new FLSA rule exists. According to a Manta poll of more than 2,200 small business owners carried out in August, roughly 37% of respondents reported not being aware of the new overtime rule. And of the small business owners who said they had employees who fell below the $47,476 threshold, nearly one-third said they are not actively strategizing to comply with the new rule.  Among small business employees, there’s even less of a sense of clarity about the new rule. As an August Manta survey of over 600 small business employees revealed, 57% of respondents making below the salary threshold said they weren’t aware of the impending change to the FLSA. Additionally, 52% of this group reported that they don’t currently receive overtime for work beyond 40 hours a week. The fact that the awareness gap surrounding the FLSA rule is more marked for employees than employers suggests that some small business owners who are aware of the new rule might not be communicating its implications to their staff.

The steps small businesses must take to prepare With the implementation date for the new rule looming, small businesses need to be prepared for its impact.

Here are some of the key steps business owners can take within the next two months to ensure a smooth transition to operating compliantly under the new rule:

Decide on a specific compliance method: However you’re going to comply with the new rule—whether by raising salaries, paying the new overtime rates, implementing 40-hour workweek caps, or some combination thereof—it’s important to solidify your approach now and plan accordingly. Determining the best compliance method for your business will depend on your organization’s particular functions. If, for instance, you run a business that only demands long hours during a particular season, it might make sense to either keep salaries as they are and pay overtime or implement a 40-hour cap and bring on temporary or contract-based workers during the busy season. If, on the other hand, you run a business that relies on employees regularly going beyond 40 hours, raising salaries above $47,476 may end up saving the most. One easy way to determine the best approach for your business’ savings is to use an FLSA cost estimate calculator.

Implement efficient time tracking: Manta’s August survey found that of the small business owners who will be impacted by the new DOL rule, roughly one-fifth don’t track time. And of the small business employees Manta surveyed who fall below the $47,476 threshold, 30% said they don’t track and report time to their employer. For small businesses whose personnel will be impacted by the new rule, time tracking is an essential part of compliance. The most important consideration for small business owners is to implement time tracking that’s easy to oversee and not onerous for employees. That means avoiding methods like papers and spreadsheets in favor of time reporting software that’s designed for ease of entry and administrative oversight.

Promote awareness across the business: As Manta’s August survey revealed, small business employees are less aware of the impending rule change than employers. Without an aware and prepared workforce, small business owners will face greater difficulty planning for the change. By keeping your employees informed about the new overtime rule and how it will impact their workload, you can prevent confusion that may hinder compliance.

Bring in a labor and employment lawyer or other expert: The DOL’s FLSA regulations are dense and voluminous, and small business leaders may find them difficult to navigate—particularly if they’re looking to claim very specific exemptions. In this case, it can be beneficial to consult a labor and employment lawyer or other expert to avoid any legal repercussions.

With weeks remaining before the new rules take effect, all small business owners must prepare. While this requires time, resources and possibly internal restructuring, owners who start planning now will position themselves for successful compliance come Dec. 1.
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