- Federal Overtime Rules: What Small Businesses Need to Know
- Current overtime regulations
- Overtime rules are in flux
- Giddy-Up, Employers! The New Overtime Rule Is Comin’ In 2020
- What The New Overtime Rule Entails
- Ways To Prepare Your Business For The New Overtime Rule
- 1. Roundup Overtime Rule Information
- 2. Check Exempt Employees’ Salaries
- 3. Discuss Changes With Employees
- Job Changes
- Timekeeping Training
- Stay Positive
- 4. Implement Changes By January 2020
- New Overtime Rules for Your Business
- General Overview of the Fair Labor Standards Act (FLSA)
- Recent Changes to Federal Overtime Rules
- What Do The New Overtime Rules Mean for Small Businesses?
- Do The New Overtime Rules Apply To My Small Business?
- What Can Small Business Owners Do To Deal With The New Rules?
- 1. Go Paperless
- 2. Review Employee Titles And Roles
- 3. Consider Capping Hours
- 4. Raise Salaries
- 5. Reclassify Workers
- Applying The Overtime Rules To Your Business
Federal Overtime Rules: What Small Businesses Need to Know
Which employees in your organization are entitled to overtime protections? It's a critical question for employers to answer, because failure to extend overtime pay to all eligible workers could land a business in hot water quickly.
Understanding which employees in your organization are entitled to overtime protections is a key requirement under federal law. Failure to extend overtime pay to all eligible workers could result in lawsuits, fines, and possibly even criminal penalties for repeated and willful violations.
Further complicating the overtime picture, however, is a series of proposed rule changes that have been raised, scrapped and then raised again. In 2016, the rules governing overtime protections seemed they were about to change, but the rule change was scrapped at the eleventh hour. Now the Trump Administration has proposed a rule change that would change the rule again.
Here's a look at current overtime regulations, the consequences of noncompliance and what we know about the potential rule change on the horizon.
Current overtime regulations
Overtime laws are explained in the Fair Labor Standards Act (FLSA), which is administered by the U.S. Department of Labor (DOL). The DOL is responsible for interpreting the law and setting a precise set of rules that businesses are required to follow.
These rules establish when employers are required to pay overtime to employees, the rate at which workers earn overtime pay and which types of employees are exempt from overtime protections.
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As the rules stand today, any employee who is not considered exempt under the law (more on exemptions below) must be paid overtime at a rate of 1.5 times their regular pay for every hour worked beyond 40 hours in one workweek. The U.S. DOL defines a workweek as any “fixed and regularly recurring period of 168 hours,” which basically means seven full, consecutive days.
“Employers with employees earning less than the overtime threshold need to keep accurate time and attendance records. This is especially important for employers with remote employees who work from home,” said Sally Baraka, senior vice president and general counsel for Paycor.
“Other employers may choose to increase the compensation of its employees who are earning salaries close to the threshold.
While there is some time before the rule takes effect, it's important that employers get out ahead of this issue, and review their employee classifications and wages to determine impact.”
There is no limit to how many overtime hours an employee can work so long as they are compensated appropriately. Any time a nonexempt employee works beyond that 40-hour maximum, he or she must be paid at the overtime rate of 1.5 times, or the employer is in violation of the FLSA.
There are employee exemptions to this rule, however. If an employee falls into one of the below classifications, employers are not required to extend overtime pay:
- Executive: Executive employees are defined as those who make a salary of no less than $455 per week and whose primary duties include managing the company or a recognized department or subdivision of the company. Executive employees regularly direct the work of at least two full-time employees and maintain the authority to hire or fire other employees, or at least influence the process.
- Administrative: Administrative employees are defined as those compensated on a salary or fee basis of $455 per week or more. Their primary duties must be the performance of office or nonmanual work related to the management of general business operations of the employer or clients. They must also exercise discretion and independent judgment in significant matters.
- Professional: Professional employees are defined as those compensated on a salary or fee basis at a rate no less than $455 per week and primarily focused on the performance of work requiring advanced knowledge, intellectual in character, and requiring the consistent exercise of discretion and judgment.
- Computer-related: Computer employees are those compensated either on a salary or fee basis at a rate no less than $455 per week or, if compensated on an hourly basis, no less than $27.63 an hour. Their primary duties must include the application of systems analysis techniques and procedures, or the design and development of computer systems or programs.
- Outside sales: An employee meets the outside sales exemption if their primary duty is making sales, obtaining orders or contracts for services. They must regularly work outside the employer's primary workplace.
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There are two major consequences for employers that violate overtime laws. The first is being subject to employee lawsuits, which can quickly become expensive and generate negative publicity.
For FLSA violations, employers are generally required to provide back pay to affected employees as well as liquidated damages equal to back pay owed.
That immediately doubles the cost of complying upfront, without taking into consideration any legal fees employers would be required to cover.
The government could also act against noncompliant employers. The U.S. DOL's Wage and Hour Division can levy fines of up to $10,000 for willful FLSA violations the agency uncovers. If it finds employers repeatedly, willfully violated the law, penalties could involve imprisonment. In other words, it pays to comply with the overtime laws the first time.
Overtime rules are in flux
In 2016, the Obama administration's DOL appeared ready to change the rules governing employee exemptions. These changes would have tightened the definitions of each classification and raised the pay threshold to $913 per week, or a salary of $47,476.
That change was expected to extend overtime protection to 4.2 million additional workers compared with the current regulations.
Many businesses adjusted their policies in preparation for the change, including shifting salaried employees to an hourly wage, but the rule change was ultimately scrapped after the Trump administration took power.
Now, the Trump Administration is working on an overtime rule change that, if approved, would set the income cutoff at $679 per week starting in 2020.
That would extend overtime protections to about one million more workers but leave the status of workers making more than $679 per week unchanged.
The proposed rule change would not extend to first responders, nurses and construction workers, however.
“The proposed rule change is the first of its kind since 2004 and will increase the salary threshold for overtime compensation from $23,660 annually to $35,308 annually,” Baraka said.
In addition to rule changes, employers should be aware of how state laws affect their policies. The federal overtime protection rules are just a minimum, and some states go above and beyond. Becoming acquainted with state law is as critical as federal law, and failure to do so could result in penalties assessed at the state level even if you're compliant with federal law.
Giddy-Up, Employers! The New Overtime Rule Is Comin’ In 2020
Brace yourself, employers. The new overtime rule is coming for you in 2020.
As an employer, you know all too well how confusing overtime rules can be. And starting in 2020, they’re going to get just a little bit more complicated.
If you’re not sure about all this overtime commotion, here’s the scoop. In January 2020, the DOL new overtime rule will be rocking many employers’ worlds. According to the Department of Labor, this new rule will make roughly 1.3 million workers newly eligible for overtime pay.
So giddy-up for the new changes, my fellow employers. Read on to discover how the new overtime rule will impact your business and what changes your company might have to make to comply with the new rule.
What The New Overtime Rule Entails
Starting January 1, 2020, the FLSA salary threshold will be increasing to $35,568 annually, or $684 weekly.
To put things into perspective, the salary threshold for exemption was $23,660 per year, or $455 per week before the overtime rule update.
So, you might be asking, What does this mean for my business, Mike? OK, OK, I’ll get to the point already. The new threshold means big changes for some of your employees. The threshold change could make many previously exempt employees newly nonexempt.
You ly know by now that exempt employees are not eligible for overtime. The new rule and more employees becoming nonexempt means one thing: more employees will be eligible for overtime pay.
As a reminder, an employee is exempt if they meet all of the following:
- Be paid on a salary basis
- Earn at least the FLSA salary threshold ($35,568 per year starting in 2020)
- Have executive, administrative, and professional job duties
OK phew, So that’s it, right? Wrong. The DOL’s new overtime rule also changes the annual compensation requirement for highly compensated employees to $107,432 per year (originally $100,000). Under the FLSA, a worker is considered to be a highly compensated employee if they meet all of the following qualifications:
- Earns $107,432 or more per year (originally $100,000 or more per year)
- Performs office or non-manual work
- Regularly performs at least one of the duties of an exempt executive, administrative, or professional employee
In addition to the FLSA, the IRS also has its own definition of a highly compensated employee. According to the IRS, a highly compensated employee is an individual who meets one of the below requirements:
- Owned more than 5% of the interest in a business at any time during the year or preceding year
- Received compensation from the business of more than $125,000 in the preceding year (if the preceding year is 2019, $130,000 if the preceding year is 2020), and was in the top 20% of employees when ranked by compensation (if the employer chooses to rank)
Rules for highly compensated employees were put in place to prevent discrimination between high- and low-wage workers (e.g., 401(k) rules). With the highly compensated employee rules, employees who fall into this group won’t have an unfair advantage when it comes to retirement plans and other benefits.
But wait, there’s more! Employers can also now use nondiscretionary bonus compensation and incentive payments to pay up to 10% of the new exempt salary threshold.
Ways To Prepare Your Business For The New Overtime Rule
January 2020 is quickly creeping up on us. That means we are only a few short weeks away from the new overtime rule going into effect. Before we say goodbye to 2019 for good, you need to know how you can prepare for the 2020 overtime rule.
Brace yourself for the upcoming overtime rule by following the four steps below.
1. Roundup Overtime Rule Information
Before you can be roaring and ready to go for the new overtime law at your business, you need to do your homework.
You can study up for the big new overtime 2020 “test” by doing the following:
- Keep up with news about the new overtime rule
- Read articles from reliable payroll and tax professionals
- Subscribe to blogs that discuss the upcoming overtime rule
The more educated you are about the new 2020 overtime rule, the better off you’ll be. You don’t want to be scrambling at the last minute trying to find out your employer obligations and responsibilities, so make sure you start preparing before the year comes to a close!
2. Check Exempt Employees’ Salaries
Take a look at each of your exempt employees. Do they earn at least $35,568 per year? Yes? Then you’re in the clear.
But what about the exempt employees earning less than $35,568? What do you do with them? Well … you have a few options. You can increase salaries, limit overtime, or pay overtime wages.
If you opt to increase salaries, consider giving both exempt and nonexempt employees pay raises. That way, you can close the wage gap and avoid wage violations. Not to mention, it keeps everyone happy campers.
You must pay any newly nonexempt employees overtime wages if they make less than $35,568 annually. Overtime is time and a half (or 1.5 times) the employee’s regular rate of pay for any hours worked over 40 during a workweek. Before you begin paying newly nonexempt workers, brush up on how to calculate overtime if you plan on paying salaries.
If neither of the above appeals to you, you can also limit the number of overtime hours newly nonexempt employees can work. Overtime wages can quickly add up, especially if you have many employees working extra hours. If you plan on limiting or banning overtime, let your workers know ASAP. And, be prepared for some disgruntled responses.
3. Discuss Changes With Employees
If you have employees who are newly nonexempt due to the new overtime rule, you must, must, must talk to them about the upcoming changes. Again I repeat, you must talk to your affected employees!
To have a smooth transition, you need to discuss job changes, offer timekeeping training, and stay positive.
Inform your employees of any job changes coming their way. This might include telling nonexempt workers about:
- An overtime policy
- Task redistribution
- Overtime procedures
Newly nonexempt workers must also start tracking their time worked. Don’t leave nonexempt employees hanging with the time clock. Instead, provide a training session where nonexempt employees can learn how to use your timekeeping method.
If you don’t currently have a timekeeping system in place, what the heck are you doing?! Just kidding. But, you should look into purchasing a time and attendance solution so your employees can track their hours worked.
When you’re discussing the new overtime changes, it’s important to stay as positive as possible. Sure, some employees aren’t going to be too keen on the idea of becoming nonexempt. So, it’s your job to talk them through the changes and get them on board.
Let employees know that nonexempt status is not a reflection of their importance or performance. Inform your impacted employees on how the law is mandatory, how it is not a demotion, and how they can now earn extra income from overtime hours (you don’t ban overtime).
Depending on your business, it might be best to let the affected employees know in a group setting. That way, they will all learn about the changes at once and can follow up with questions. And remember, the more you positively promote the changes, the less ly your employees will come at you with pitchforks and torches.
4. Implement Changes By January 2020
New laws, especially the new overtime law, aren’t something you want to mess around with, ladies and gentlemen. Listen to me when I say this: Do not procrastinate when it comes to implementing the new 2020 overtime law.
Don’t push the new overtime rule to the side. Trust me, you’ll regret it. Instead of waiting until year-end (or even January) to get ready for the new rule, prepare your business for changes ahead of time.
We all know that year-end can be a busy time for small business owners. Heck, it’s my accounting and payroll software company’s busiest time of year. So before things start getting wild at your business at the end of the year, make sure you get your payroll ready for the new rule.
Before year-end, make sure you:
- Know which employees will be impacted by the new law
- Inform employees of any changes
- Update your payroll to reflect the changes
Employees classified as exempt must receive a salary of at least $684 per week by January 1, 2020. If an employee does not receive at least $684 per week, they are now considered nonexempt. Nonexempt employees will need to receive overtime pay for any hours worked over 40 in a workweek. So giddy-up and start preparing your payroll now!
New Overtime Rules for Your Business
Federal wage laws apply to every business, no matter how small. So as a small business owner, you’ll need to keep on top of the wage and hour rules and regulations.
Several recent changes in federal wage laws, especially overtime rules, may have an impact on your small business – let’s take a look at the current landscape of federal overtime laws and how to adapt your business for compliance.
General Overview of the Fair Labor Standards Act (FLSA)
The Fair Labor Standards Act (FLSA) is a federal law setting out the overtime rules for workers. Under the FLSA, all employees ages 16 or older must receive overtime pay for hours worked over 40 hours per week.
That overtime pay must be at least one and a half times the regular hourly rate – “time and a half.” Note that the only measure that matters is whether an employee has worked more than 40 hours in 7 days.
You are not automatically required to pay overtime for work on holidays or weekends.
The FLSA doesn’t impose a limit to the number of hours an employee may work during the work week – if they work overtime, you’ll have to pay overtime no matter what. And you must pay overtime wages from a particular week at the same time as you pay regular wages for that period.
Recent Changes to Federal Overtime Rules
President Obama announced extensive changes to the federal overtime rules on May 18, 2016. The Department of Labor’s update to the current overtime rules automatically extended overtime pay to more than four million workers. The intention of these new rules is to ensure that all workers are fairly paid for their long work hours.
The new overtime protection laws apply to workers earning less than $47,476 per year. The new overtime laws also remove certain long-standing exemptions.
Formerly employees were excluded if they were salaried, earned more than $23,660 per year, or were in executive, administrative, or professional positions.
These exemptions will be lifted, and the pay threshold for overtime protection will be raised to an annual salary of $47,476. The pay threshold will be revised and updated once every three years. The new overtime rules will go into effect on December 1, 2016.
At that time, the new rule will amend overtime regulations under the FLSA minimum wage and overtime protections.
The overtime expansion laws will have signification impacts on small business owners and workers. Under the new laws, any employee who don’t make at least the threshold salary or classify as exempt are entitled to time-and-a-half pay after they’ve worked 40 hours in one week – even if they’re salaried or in managerial or professional positions.
What Do The New Overtime Rules Mean for Small Businesses?
Since the mandated changes won’t take effect until December 1, 2016, you still have time to review your practices and ensure that your business is in compliance with the law. Experts have opined that small business owners will be the ones who are most impacted by these changes, since small businesses may be more ly to have employees with salaries under the new threshold.
Now is the time to create uniform practices when it comes to wages, billing, and time recording in your office. Consider creating a written, comprehensive overtime policy that applies to all of your employees. Review these policies with your staff to make sure they understand the new laws and your policy.
You’ll want to address these questions:
- How will working hours be calculated?
- Does travel time count as working time?
- What happens if an employee works overtime without approval?
- Are employees allowed to work overtime at all?
Because the new overtime laws apply to workers that may not have set shifts, you’ll need to make sure you have a reliable system in place for tracking working hours. Are your employees required to clock in and out? Or do you have a formal online system in place to log hours? And whatever system you put in place, you’ll need to make sure your employees are sticking to it.
Do The New Overtime Rules Apply To My Small Business?
The FLSA does not apply to every small business. In general, it only applies to businesses with more than $500,000 in revenue or businesses involved in interstate commerce – that’s a broad definition and a large proportion of businesses will be covered by that rule.
In addition, certain kinds of employees may still end up being exempt from the new overtime rules. You’ll need to work with your attorney to determine who is and isn’t covered.
What Can Small Business Owners Do To Deal With The New Rules?
There are actionable steps you can take today to make sure your company stays above the law when it comes to federal overtime.
1. Go Paperless
Technology has opened the door for new ways to automate. One of the best uses of technology in a small business is recording hours.
Hand recording hours can open the door to human error (and take a lot of time!), but technology is generally more reliable.
Automating hourly recordings is one of the best investments you can make to ensure your time records match up with your employees’ actual hours. Ask them to sign in when they start work and when they leave to keep an accurate measure.
An automatic timekeeping system can also be set up to allow your employees to review their own hours and make sure they’re accurate.
2. Review Employee Titles And Roles
You want to clarify all employees’ roles within the company at least biannually. This allows you to keep current on what each person’s job descriptions require. That allows you to review how many hours per week the job entails. You may find that you have to make a choice between paying one employee overtime or hiring a second employee to share those duties.
You can also review the expected roles and hours at any time – if you notice someone is clocking a large amount of overtime. It may be that they’re swamped or it may be that they’re not working as efficiently as they could be.
3. Consider Capping Hours
If you’re interested in capping hours, you can ensure that you keep your employees at 40 hours per week. Then you never have to deal with overtime pay.
As you create your overtime pay policy, you’ll need to decide whether you’re going to allow overtime at all. You can also decide that overtime is potentially allowed, but only with prior approval.
Or, you can decide that overtime is allowed no matter what (although you open the door to abuse of the system).
Whatever you decide, remember that you need to apply that policy across the board to all workers doing the same job.
4. Raise Salaries
Another way to circumvent any overtime issues is to raise employee salaries. By raising salaries above the new threshold, then you would avoid having to calculate any overtime hours.
You’ll need to calculate how much overtime you expect to pay and determine whether the total will cost you more than $47,000.
If it will, then it’s less expensive for you to simply raise that employee’s salary over the threshold.
5. Reclassify Workers
If you have hourly workers that earn more than the threshold, you may want to consider switching them over to salary. You’ll need to calculate the employee’s annual pay including expected overtime. If it’s more than the $47,476 threshold, then it’s cheaper for you to switch them to a salary that’s just over the threshold.
However, remember that this means your employee is going to make less money than they would if they stayed hourly, so you’ll have to consider whether it’s worth risking upsetting them.
If you have salaried workers that make less than the new threshold, it may be less expensive for you to switch them to hourly pay. You’ll have to adjust that hourly pay so that their regular hours plus expected over time work out to be the same as their old salary. They’re doing the same amount of work for the same amount of pay as before the overtime rules changed.
Again, your employees may not be happy with that change. The new overtime rules would have meant that they would be getting a raise, and reclassifying them takes that away.
Remember that if you do reclassify employees, they’re pay won’t be the only thing that’s affected. That change in classification may affect their bonuses, their benefits, and their flexibility at work.
And while changing an employee’s classification isn’t illegal, you should probably only do it once – switching multiple times can throw up a red flag that you’re trying to avoid FLSA regulations.
So talk to your attorney and accountant to decide how best to handle your policies and whether reclassification is the right choice for your business.
Applying The Overtime Rules To Your Business
These changes are coming in December and you’ll need to be ready. In some cases, the new overtime rules are going to increase your labor costs and you’ll need to make adjustments to stay in the black. Now is the time to start reviewing your overtime policies so that you’re ready when the new rules take effect.
And some states have their own additional overtime rules – make sure you talk to your attorney and accountant about making sure you’re in compliance with all of the relevant regulations.