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The New Overtime Rule -- Increase Pay or Cut Hours?

October 26, 2016

It’s likely you’ve heard the news. A Department of Labor rule that takes effect Dec. 1, 2016, mandates overtime pay for millions of workers who haven’t been receiving it.

The ruling will apply to nearly all organizations, including the very smallest businesses. With no time to waste, employers will want to prepare with these initial steps:

- Collect and analyze data on employee hours

- Consider your workforce management options

- Implement required changes with care

Read on for more detail on this new ruling.

Take note of the new overtime threshold. The new overtime rule, promulgated under the Fair Labor Standards Act, will raise the salary threshold to $47,476 per year from $23,660, the level set in 2004.

This means that employers will be required to pay time-and-a-half for overtime for all employees earning less than $913 per week, regardless of whether they are called managers. In addition, the new rule will automatically update the salary threshold every three years, based on U.S. wage growth. The duties test for overtime eligibility will not change.

Some see pros -- others see the cons. Many employers and their advocates are unhappy with the ruling’s timeline that will potentially increase labor costs.

“Though the salary threshold is due for an increase, 100 percent is too much too fast, especially for certain industries and regions,” says Lisa Horn, director of Congressional affairs at the Society for Human Resource Management.

Others see economic benefits in a pay increase for many lower-paid employees who work long hours. “For the U.S. economy, this is a tremendous boon,” says Judy Conti, Federal advocacy coordinator for National Employment Law Project. “There will be 4.5 million workers newly entitled to overtime. That’s going to put money in the hands of workers who are going to spend it in their communities.”

Bills have been introduced in Congress to delay the threshold increase or phase it in over three years. But this legislation is unlikely to pass, let alone be signed by President Obama. In late September, the attorneys general of 21 states sued to block the rule; the suit’s chances of succeeding before the new overtime rules take effect are unclear.

Employers will need to audit exempt employees’ current working hours. To begin with, employers will need to measure how their lower-paid exempt workers are spending their time.

“Determining the number of hours employees work sounds simple, but exempt employees are not required to track their hours,” so their employers may not have the numbers at hand, says Dena Sokolow, a shareholder with the law firm Baker Donelson in Tallahassee, Fla.

FLSA requires that employers count all compensable time. Employers are required to include all “compensable time” in calculating overtime hours for non-exempt employees, says Sokolow. So employees who email nights and weekend or work through lunch must be compensated for that time -- unless, for example, the company institutes an email curfew, she says.

“Employers will have to make sure they’re recording hours and enforcing policy.”

Employers do have a number of options to remain in compliance with the overtime rules as they change. Here are four possible approaches that many wage-and-hour experts have suggested.

Raise pay. Employers can choose to raise the annual salary of workers who are currently overtime-exempt to the threshold of $47,476. This approach may make the most sense for workers who are already earning close to the threshold.

Reclassify workers as non-exempt and pay overtime hours. For employees who work little more than 8 hours a day and 40 hours a week, employers may choose to simply pay them time-and-a-half for those few overtime hours. Still, “reclassifying an employee is a significant undertaking, and complying with the Fair Labor Standards Act has never been easy, especially for small businesses,” says Horn.

Eliminate overtime hours. Management may choose to invest in technology, eliminate inefficiencies, or otherwise reduce the workload of employees in order to trim their days to 8 hours and their weeks to 40 hours.

Hire more workers to avoid paying overtime. Many companies will probably look into hiring more employees to avoid paying them time-and-a-half for overtime hours, reducing earning opportunities for experienced employees, says Lior Rachmany, CEO of Dumbo Moving in New York City. “We’ll have to employ more people, so each will get paid less. On busy days, we’ll have to charge customers extra to pay our workers overtime.”

Take care in communicating changes to employees. Some employees may find it demoralizing if they are reclassified as non-exempt and lose their management status – even if this means they work fewer hours for the same net pay.

Says Conti: “A good employer would go to employees and say, ‘We have to do a technical reclassification. A technical classification doesn’t affect the way we value you.’ ”

Expect that the new overtime rule will be enforced. Many small businesses will assume they’re not subject to the overtime rule because they have so few employees, but the Fair Labor Standards Act applies regardless of headcount, says Sokolow.

“The DOL has requested tens of millions of dollars for additional enforcement. So they will audit more, both at random and when a worker complains.”


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