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March 9, 2016
Business Management  |  7 min read

The Small Business Owner’s Guide to Obama’s Overtime Rules

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Ellis Friedman

Editor's note: On November 21, 2016, a federal judge blocked these proposed rule changes. As NPR reports, "With Republicans controlling both houses in Congress and the Trump administration set to take office in less than two months, the new overtime rule's long-term future remains in limbo." 

If you’ve opened the internet or a newspaper in the past week, you’ve definitely heard about the Obama Administration's newly enacted changes to overtime rules. Politics aside, you probably have some concerns about these changes since there's a good chance the Department of Labor's ruling will directly impact you and your business.

Before we get into the changes you'll need to make in order to comply with the new rules, let’s first review precisely what those changes are (remember, they take effect Dec. 1, 2016).

Proposed changes to overtime rules

The current rules, which expire Nov. 30, dictate that salaried workers making more than $455 a week, or $23,660 a year, do not qualify for overtime pay. The new changes more than double that threshold to $913 a week, or $47,476 a year.

So that awesome employee you’ve been paying $40,000 who definitely pulls more than 40 hours a week? They may be entitled to overtime compensation at time-and-a-half for every hour after 40 hours a week. The overtime compensation rules provide exceptions for employees who perform duties that are mainly executive, administrative, or professional. Those employees would not be entitled to overtime and could remain exempt (i.e. salaried as opposed to hourly).

To be certain you know just how to classify any role that could be affected by the new rules, you’ll have to review their job description and subject it to the “duties test,” which describes the specific duties that qualify employees for exemption from overtime pay.

Given that this long overdo update is so monumental (the new rules bring the threshold in inflation-adjusted dollars roughly back to where it was in 1975) there is bound to be some overlap with manager pay and individual contributor pay rates. This could imply that some managers are robbed of their flexibility to pitch in with non-managerial parts of the job.

In case you were wondering, it turns out that there is no exception for small businesses, though the Department of Labor FAQ fact sheet does say that “the proposed rule [applies] to employees of enterprises that have an annual gross volume of sales made or business done of $500,000 or more, and certain other businesses.”

So if your business makes less than $500,000 of annual revenue, is it exempt? Probably not. Under the Fair Labor Standards Act (FLSA), individual employees may still be “covered in any workweek when they are individually engaged in interstate commerce, the production of goods for interstate commerce, or an activity that is closely related and directly essential to the production of such goods.”

Well, that cleared it up. Leave it to federal lawmakers to really make sure you’re crystal clear on the new regulations that affect your business.

All cynicism aside, this is a serious topic that you’re going to have to sort out with a legal labor expert. On that note, since we can’t provide legal advice, we'll just pass along what some of the experts have said.

The changes you need to make to your small businesses to adhere to the new overtime rules

What do I do about my employees’ salaries?

The first thing you’ll need to do is determine whether you can afford the new minimum salary threshold for non-exempt staff (the aforementioned $47,476), says Dana Smith, owner of Exalt Resources, an HR management service for small and medium-sized businesses. If you can’t pay them more than that, then you’ll have to pay overtime if they work more than 40 hours.

The changes also mean that small businesses might need to limit the number of managers they employ (if those managers are not exempt), says Smith, and that means that those who remain in managerial roles will also have expanded responsibilities.

What operational changes will I need to make?

Changes in exempt status

Smith says small businesses will need to conduct an FLSA analysis—a “duties test”—to accurately determine which employees are properly classified as exempt (salaried) or non-exempt (hourly) under the new law. If they can no longer afford to classify certain employees as exempt, they’ll have to change the employee’s status to non-exempt.

For employees whose status is changed from salaried to non-salaried, or exempt to non-exempt, Smith points out that this will probably feel like a demotion. The new changes could also jeopardize remote working arrangements, as accurately tracking hours for those who work from home is very tricky. According to Smith, this means that exempt (salaried) employees may lose the work-life balance they’ve come to enjoy if they’re converted to non-exempt (hourly) employees.

Remote employees and time tracking

John Waldmann, founder and CEO of Homebase, a cloud-based time clock and scheduler, says that if a business is already tracking hours for some employees, they likely have a system in place, and that they’ll just need to add previously exempt employees to that system to track their hours. However if a small business isn’t already tracking employees’ hours, they’ll need a system to do so to ensure they’re paying accurate overtime.

That means putting an hour-tracking system in place, which can be as simple as an Excel sheet or as sophisticated as tracking software. Small businesses will then need to look at the balance of work activities. If you currently have exempt (salaried) employees working more than 40 hours a week, Waldmann says the you’ll need to determine whether their extra work is worth the potential overtime costs, and it could be a good time to review work and potentially reallocate or change responsibilities.

Waldmann advises not to forget that this will be a behavior change for affected employees, as they’ll have a new process to follow every day and may not be used to tracking their hours.

Who can help me comply with the new overtime rules?

Start with your in-house HR or payroll expert. If you need, you can look to HR consultants or employment attorneys to help you make sure you get and stay compliant when the new rules go into effect.

In the end, these proposed changes are a big deal with many implications, and the confusion you may feel around them isn’t your imagination. As The L.A. Times reports:

According to the Obama administration, the new employers could cost employers between $240 million and $255 million per year in direct costs.

Business groups estimate the costs would be much higher. A recent study commissioned by the National Retail Federation estimated employers could shell out as much as $874 million to update payroll systems, convert salaried employees to hourly, and track their hours if similar regulations were imposed.

While there is a little time left until Dec. 1, you should start planning now with your HR advisors and lawyers to make sure you’re in the best possible position when the new rules take effect.

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