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Lead Your Team Managing

What You Need to Know About the New Federal Overtime Rules

What You Need to Know About the New Federal Overtime Rules
Credit: chaipanya/Shutterstock

A rule change announced May 18 by the U.S. Department of Labor (U.S. DOL) would expand overtime protections to an estimated 4.2 million workers, extending the rule to cover those making less than $47,476 per year and removing long-standing exemptions in the law. Business News Daily dug into the specifics of the new regulation and spoke with labor policy experts and human resources professionals about the anticipated effects of the change, for both employers and workers.

Scheduled to go into effect Dec. 1, 2016, the new rule changes overtime regulations under the Fair Labor Standards Act's minimum wage and overtime protections. Previously, employees were excluded if they were salaried, earned at least $455 per week ($23,660 per year) or were in positions considered executive, administrative or professional. Now, those exemptions will be lifted and the pay threshold for overtime protections will be raised to $913 per week, or an annual salary of $47,476. That pay threshold will be updated once every three years, indexed to wage growth over time.

So what does the overtime expansion mean for entrepreneurs and employees of small businesses? Basically, any employees who do not make at least the threshold salary and classify as exempt — now a narrower classification than before — are entitled to time-and-a-half pay after they've worked 40 hours in a week.  

From a management perspective, business owners have a few options. The obvious answer is to keep your employees at 40 hours per week or less, even if they were previously working longer hours. Similarly, the other option is to simply pay time-and-a-half for overtime, although those costs are bound to add up quickly. And, of course, employers also have the option to raise employees' salaries beyond the new threshold, in which case those workers would no longer qualify for the overtime protections.

David Reid, CEO of human resources and benefits company EaseCentral, told Business News Daily he expects many entrepreneurs to convert salaried employees to hourly wages in the wake of the change. By doing so, Reid said, small business owners could aim to keep an employee's annual overtime wages below the difference between the new threshold of $47,476 and the worker's previous salary.

"If you'll have them work additional hours, pay raises are going to come more in the form of overtime in these small businesses," Reid said, referring particularly to small businesses with around 15 employees. "I don't think the mentality of the small business owner is to give somebody a raise over the cap. I think they're going to sit back and realize that what used to not be additional pay for additional time at work will now be overtime pay, and that will be used in lieu of giving a pay raise."

Reid said it's important for small business owners to ask themselves, "At what point am I better off evaluating the option of going to an hourly employee?"

Valerie Samuels, a partner in the law firm Posternak, Blankstein & Lund LLP, said the rule change will also lift the exemptions on employees who were categorized as executive, professional or administrative, but who weren't truly working in any of those capacities.

"Employers very often play fast and loose with the 'duties test,' which is whatever [employees duties are] that make them exempt," Samuels said. "Let's say you have someone who is an administrative assistant. They probably have some administrative duties … but aren't really exercising any significant discretion on anything of importance."

That "significant discretion" is supposed to be the legal justification for classifying an employee as exempt, Samuels said, but very often positions that shouldn't be exempt are classified as such, based on the way their job descriptions have been written. Samuels advised employers to prepare for the Dec. 1 deadline accordingly.

"I think employers need to sit down with their employment counsel and take a hard look at all their employees to make sure they are properly classified. If not, they have to address that, because they'll have a liability," Samuels said, adding that in some states, failure to pay required overtime will incur "triple damages."

The federal rule change has been in the making since July 2015, when the U.S. DOL first published a notice of proposed rulemaking in the Federal Register for public comment. By September 2015, the department received more than 270,000 comments and used the feedback to tailor the final rule change.

Adam C. Uzialko

Adam received his Bachelor's degree in Political Science and Journalism & Media Studies at Rutgers University. He worked for a local newspaper and freelanced for several publications after graduating college. He can be reached by email, or follow him on Twitter.