Under the direction of President Obama, the U.S. Department of Labor has announced big changes in rules about overtime pay. The White House says the changes provide badly needed updates to labor laws and that they will strengthen the middle class. Critics, meanwhile, say the new rules reduce flexibility for companies and employees, and won’t ultimately help workers.
We won’t know for a while how the changes will play out. But what we do know is that they’ll require some major adjustments by small business owners and employees — and that you should start preparing now. Here are the key things you need to know about the coming changes to overtime pay.
Mark Your Calendar
The new rules take effect Dec. 1, 2016. Not sure whether you’re affected? According to the Economic Policy Institute, businesses that have at least $500,000 in annual sales or that have customers in multiple states are likely covered under the new law. Some entities, such as nonprofits, are exempt.
Look at Your Employees’ Status
So will you need to change how you pay all your team members because of the new changes? Probably not.
The big shift happening Dec. 1 is that any salaried employee who makes up to $913 per week ($47,476 per year) is now eligible for overtime if s/he works more than 40 hours per week. The old threshold was $23,660 per year.
The new rules don’t affect your hourly workers or your salaried workers who are already eligible for overtime. According to Fast Company and other sources, the employees you need to focus on are those who 1) make less than $47,476 per year, and 2) have up until now been exempt from overtime because of an executive, administrative or professional job title. Under the upcoming changes, employees who earn under the threshold salary are eligible for overtime regardless of their job description.
Consider the Impact
Learning and adapting to the new rules will take time. But beyond that, there’s a lot of debate over their potential impact. The restaurant news website Eater writes that businesses, including restaurants, might raise prices to cover extra labor costs. But the New Yorker, citing a study by the progressive Economic Policy Institute, counters “that most employers will experience little to no increase in personnel costs come December 1st.”
Get Ready for Closer Tracking
One option for employers is changing affected salary workers to hourly employees, but that move is not required, the Labor Department says. Instead, workers can continue to be salaried, but they’ll likely need to track the time they work more closely. Employers can cap them at 40 hours per week or choose to pay overtime after that point.
If you find you’re devoting more time and attention to tracking hours, a scheduling tool like Planday can make the task easier. For example, you can set up a rule in Planday that warns you if you’re scheduling an employee to work over 40 hours in a week.
Some experts, such as the blog Ask a Manager, predict that closer tracking of hours will put new limits on employees who have had flexible working arrangements. It could also make employers think twice about situations like sending an employee to a convention, where it’s hard to track actual hours worked, CNN Money says.
Many analyses of the new rules, including information from the Labor Department itself, point out that employers might opt to raise pay for some salaried employees who are now eligible for overtime under the new rules. For example, say you have a salaried employee who now makes $44,000 but who frequently works more than 40 hours per week. When the new rules take effect, you’ll save money by raising her salary to $47,500 so that she won’t be eligible for overtime.
Weigh Cuts, Too
Some critics of the new law have pointed out that employers might also simply cut base pay to make up for the extra income that affected workers will soon start receiving through overtime.
Writing for Forbes.com, economist Bill Conerly recommends a modified pay-cut strategy to preserve pay and flexibility for employees while keeping expenses fixed and predictable for employers:
Take your formerly salaried employees and pay them a lower wage, but guarantee pay for more than 40 hours, even if they actually work less. Paying workers for hours not worked is perfectly fine; it’s the other way around that gets an employer in trouble.
(Read the full article to see how Conerly argues that the math will still work out in employers’ favor.)
Prepare for the Future
What’s next after the changes that take effect Dec. 1? The threshold for who’s eligible for overtime will update again on Jan. 1, 2020, and then every three years after that, according to the Department of Labor. Each updated threshold will set the salary level at the “40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region,” the DOL says.
Check out the Labor Department’s series of webinars on the new overtime rules.