New overtime rules affect most small businesses

Business owners have resources, time to develop plans for new overtime rules

Overtime law

Starting in December, new guidelines governing overtime rules for salaried employees go into effect, and nearly all businesses within the state of Washington will be affected.

The changes, confirmed last month by the U.S. Department of Labor, pave the way for individuals who earn up to $47,476 annually as salaried employees to be paid overtime. Previously, the overtime threshold for salaried workers was $23,000 (annually). The new rule also sets up automatic updates to the threshold every three years.

These updates to the Fair Labor Standards Act aren’t entirely new. In 2014, President Obama signed a memo that ordered the Department of Labor to define exactly which white collar workers were covered by the Fair Labor Standards Act’s standards on overtime and minimum wage.

This rule does not affect all business employees. There are exemptions for executive and administrative employees, as well as a few other categories of salaried workers.

For an employee to qualify for the executive exemption, they must meet these standards: primary duties must include managing the business as a whole, or a department; they must regularly oversee the work of two full-time employees, or the equivalent, and must have the authority to hire, fire and promote other individuals. The administrative exemption requires that an individual’s primary duty be non-manual work directly related to general business operations, including the use of discretion and independent judgment.

Under the final rule, individuals who make more than $134,005 are exempt from these requirements, if their primary duties are considered office or “non-manual,” and if they perform certain duties of an exempt executive, administrative or professional employee, as outlined in the Department of Labor’s Small Business Guide.

“The biggest impact will be financial, either in the form of increasing salaries to the new minimum or paying overtime to workers who are currently exempt,” said Rhonda Stephens, a representative of Vancouver’s Barrett Business Services Inc. (BBSI). “A less obvious impact will be reclassified workers feeling demoted – having to punch a time clock and losing flexibility in their schedule.”

BBSI offers payroll and staffing services to businesses in a wide range of industries, and Stephens said their clients are asking several questions about the changes.

“How much is this going to cost me or, similarly, am I better off giving raises or paying overtime?” Stephens offered, when asked to share the questions being asked by clients. “The answer varies greatly, case by case. We are working to help our clients with that analysis.”

While the changes to the overtime threshold affect nearly all businesses within the state, some industries may feel the pinch more than others.

For example, “retailers, restaurants and small businesses will be hit the hardest as these industries often have managers who are paid significantly less than the new salary threshold of $47,476,” said Brandy Cody, a partner with Fisher Phillips, a Portland-based labor and employment law firm. “As these businesses transition salaried managers to being paid hourly (accompanied by the inevitable push to avoid expensive, unbudgeted overtime), other hourly employees will have to step in to get the work done left behind by stretched-thin salaried employees.”

Cody went on to say that businesses where a larger proportion of employees are currently classified as salaried employees and overtime-exempt will be affected more than those who pay all employees on an hourly basis.

“Hospitality will likely be one of the hardest hit industries, with many hotel and restaurant managers currently below the new threshold,” Stephens said.

On the accounting side of the equation, Nancy Iannarone, co-owner of Vancouver-based NW Accounting Professionals, said that most of their clients have a payroll system that they use. Tracking the time worked is where Iannarone thinks things may get tricky.

“Initially, it will add more costs to track these things. Some people track the hours that salaried employees work, some don’t,” she said. “That’s where the biggest problem will be.”

Iannarone sees the new regulation like a double-edged sword.

“It’ll mean more expenses for businesses up front, related to tracking, but it also means more money to their employees,” she said. “Many businesses though, find a way to pass their additional costs onto their customers. I’m not sure how this will play out.

Earlier this week, a group of GOP senators filed legislation to roll back the Labor Department’s new overtime rule, arguing it would harm the economy. However, even if the bill passed both chambers, it would likely be vetoed by President Obama.

Guidance available for small business owners

Small business owners still have time to figure out how they’re going to deal with these new rules. The Department of Labor says there are four options:

  • Pay time-and-a-half for overtime work
  • Raise workers’ salaries above the minimum threshold
  • Limit workers’ hours to 40 hours per week
  • Implement some combination of the above

“Businesses that cannot afford to increase salaries and are too lean to limit overtime may have to look at other ways to reduce their labor cost burden, such as cutting bonus and incentive programs or benefits,” Stephens explained. “Some employers may consider decreasing the pay rate of reclassified employees to offset projected overtime. There are some other creative possibilities with job share and flex schedule arrangements to keep individual workers under 40 hours in a week.”

To ease some of the pressure on business owners, the new rule from the Department of Labor allows employers to count bonuses and incentive payments toward up to 10 percent of the employee’s salary level, as long as those payments are delivered at least quarterly. The department also notes that there’s no rule saying employers must have specific schedules and that there is nothing to prohibit flexible work schedules, provided the employer and worker have an agreement.

“Although it’s always a good idea to have an expert take a look at how your employees are classified, the new final rule will … make employees scrutinize their pay more closely. There is no time like the present to confirm that your pay plans are in compliance and will still be in compliance when December 1 rolls around,” Cody said.

Iannarone suggested that if business owners have an accountant or bookkeeper they regularly use, they should reach out to learn more about how this rule will affect them. For those that use a payroll service, those services will be sending out notices to inform business owners about these changes.

The Department of Labor offers a variety of reference materials related to the Fair Labor Standards Act and the updated overtime regulations. To learn more, visit DOL.gov/whd/overtime/final2016.

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