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New over time rule starting 12-1-16
On December 1, millions more U.S. workers will become eligible for overtime pay through a new federal rule. Complying with these regulations could mean changes to how you pay some of your employees and track their time.
Given the potential impact of the new rule, the time to prepare is now. Follow these steps to help your small business be ready to meet these requirements.
Understand the changes
The new overtime rule more than doubles the salary level at which certain types of employees are exempt from overtime pay protections under the Fair Labor Standards Act. Currently, salaried workers who meet the criteria for the act’s executive, administrative and professional exemptions — including many office managers, professional services employees, and retail and restaurant supervisors — may not receive time-and-a-half pay for hours worked over 40 in a workweek if they earn at least $455 per week ($23,660 for a full-year worker). The rule change raises this threshold to $913 per week ($47,476 for a full-year worker).
You may include certain types of bonuses and incentive payments, including commissions, in calculating whether a worker’s salary is high enough to exempt them from overtime pay under the new rule. However, those payments can count toward only 10 percent of the threshold, and they must be made at least quarterly.
Identify who will become eligible for overtime pay
In order to estimate the financial impact that the regulations may have on your business, identify the employees who will be affected and determine how many hours they typically work each week. If you aren’t sure, ask them to record their working hours for a month (don’t count meal breaks of 30 minutes or longer). Many payroll service providers offer time-tracking tools, or you can try a time-tracking app. Keep in mind that there may be busy times, such as inventory counts or holiday sales, when staff work longer hours than usual.
Consider your options
Once you’ve determined who will likely be entitled to overtime pay, you’ll need to decide whether or not to change the way you pay them. Your options may include:
• Transitioning them to non-exempt status, meaning that they’re eligible for overtime pay, but keeping their salary as is and paying overtime as needed.
• Retaining their overtime-exempt status by raising their salary to the new threshold, which might make sense if it is already close to that level and they generally work over 40 hours per week already.
• Reclassifying them as non-exempt employees and setting an hourly rate of pay that’s adjusted to account for anticipated overtime. For example, if an employee earns $40,000 per year and typically works 45 hours per week, converting his or her pay to an hourly wage of $16.19 (and paying five hours per week at a time-and-a-half rate) would total $40,000 annually. A downside to this approach is that maintaining the current salary level will depend on always working the additional hours, so the move might be seen as a pay cut.
Keep in mind that if the overtime laws in your state are more generous to or protective of employees, the state laws will apply.
An alternative way to mitigate overtime expenses is to reconsider the job responsibilities of employees who often work more than 40 hours per week. Ask whether some of their tasks could be streamlined, eliminated or reassigned. However, take care not to pile too much work on employees who will remain exempt from receiving overtime pay. To ensure adequate staffing during busy periods, consider whether hiring part-time or temporary workers might be a cost-effective alternative to paying overtime to existing staff.
You will need to track and keep records of the hours worked by employees who are newly eligible for overtime. Using an electronic system, such as the time-tracking tools included in payroll services, can improve accuracy and help to ensure that you’re paying employees correctly for overtime hours. Set aside time to train staff on these tools and address their questions. To better control costs, you may also need to establish guidelines for when overtime is allowed.
Be sure to talk with employees who will be affected by the new rule, and explain why you need to implement the changes. Assure your employees that the changes are driven by the new regulations and not their performance. Plan to check in after the changes take effect to be sure people have adjusted to the new processes.