What Does the New Overtime Rule Mean for Your Business

A new overtime rule announced earlier this year is forcing small businesses to adapt. And finally, it will be effective on December 1, 2016. Whether or not you are ready for the big change (hopefully, you are!), we will review the rule again and walk through the steps you can take to stay compliant.

Update: According to American Staffing Association, on November 22, a Texas federal judge issued Nationwide Temporary Injunction Blocking DOL Overtime Rule. The nationwide injunction means that employers do not have to comply with the rule on Dec. 1. 


What is the overtime rule?

The U.S. Department of Labor (DOL) overtime rule determines which employees are exempt from overtime. Employers don’t have to pay overtime to exempt employees. If an employee is non-exempt, employers need to pay overtime for overtime hours worked.


The changes affect 4.2 million exempt workers

On May 18, DOL passed a new overtime law that will make 4.2 million exempt workers non-exempt. The new DOL overtime rule changes the white-collar exemption and which employees can receive overtime.


To be exempt, an employee must;

  1. receive a salary
  2. have executive, administrative or professional duties
  3. be paid more than the salary threshold


The first two qualifications do not change with the new overtime rule. However, the third qualification is the one added in this change. The salary threshold is set by the DOL in the overtime rules. The new overtime law increases the salary threshold, making fewer employees exempt from overtime. Before the rule changed, the salary threshold was $455 per week or $23,660 per year. The new salary law raises the threshold to $913 per week or $47,476 per year. The increase is a little more than double the previous salary threshold. That’s quite the jump. But, that’s not all. The salary threshold isn’t the only thing that is complicating small business payroll budgets. The minimum salary threshold will automatically increase every three years based on wage growth. The first automatic increase will happen on Jan. 1, 2020. That means more employees will become exempt as the threshold rises.


The new rule also updates the salary level for highly compensated employees. Employees must receive at least $134,004 per year to be highly compensated. Small businesses are not exempt from the overtime law and must comply by December 1.


What does it mean for small business owners?

The size of the overtime law’s impact will depend on the number of non-exempt employees a business has after the salary threshold increases. The overtime law will not affect the businesses, which have all non-exempt employees with the new threshold. Non-exempt employees always need to be paid overtime for working more than 40 hours per week. If the increased salary threshold creates newly non-exempt employees at a business, the overtime law could have major effects on payroll costs. To stay compliant, employers with exempt employees might have to adjust their businesses. Employers will need to either pay employees higher salaries, or pay overtime wages. Small business owners have a couple of options for handling the overtime rule changes.


1.Increase employee salaries above the salary threshold.

To pay more than the threshold, employers need to pay salaries over $47,476 per year. Raising salaries might work for businesses that already pay salaries close to the new threshold. Businesses with employees that work a lot of overtime might also want to raise salaries. Employers should estimate the number of overtime hour employees work, and calculate the cost. Comparing the cost of overtime pay against the cost of increased salaries can help employers decide how to adjust employee wages.

2.Pay employees less than the salary threshold, and pay overtime wages.

If an employee is paid below the new salary threshold, they are nonexempt. Employers need to pay newly non-exempt employees at least one and a half times their regular pay for any overtime worked. To prevent overtime costs from adding up, employers can cap the number of hours that employees can work each week.


Transitioning to the New Overtime Rules

Small business owners might have to make some tough decisions when the new overtime rule comes into effect. For managing the changes, employers can take the following steps.

1. Explain the new overtime law to employees.

If you are a small business owner, you know that the new overtime law does not just affect your business; it also affects your employees’ lives. The more you keep your employees informed, the easier it will be to transition your company. Explain what will happen when the overtime rule changes and how the salary threshold works.

2. Clarify changes within the company.

Talk to your employees about how your business will adjust to the new overtime law. Let employees know about any changes to their pay, schedules or job duties. Explain that you are not randomly making changes, but that you need to comply with new overtime rule.

3. Train employees on timekeeping.

If employees become nonexempt with the new salary threshold, the hours they work need to be recorded. But, some employees, especially salaried workers, might be unfamiliar with timekeeping systems. You should show all employees how to keep track of hours worked.

If you have nonexempt employees, you will need a timekeeping system. Though you can use paper or a spreadsheet, the simplest timekeeping option is online time and attendance software. It’s also important that your supervisors and managers understand your overtime policy.




Still not sure about the new rule? Feel free to contact us. Our HR specialist will be happy to answer your questions!

Written by Weena - Human Resources Manager

Updated on May 8, 2017 11:48