The Department of Labor has proposed changes to overtime pay regulations, and they will have serious implications on the way employers compensate their workers. Although the rules haven’t gone into effect yet, you need to be prepared and plan ahead to stay compliant and keep your payroll running smoothly.
What exactly will change when the proposed rules are put into effect? Here’s a brief overview:
The New Rules
The new regulations proposed by the Department of Labor are a little complicated, but here are the biggest changes you need to know. First, the minimum weekly salary to be considered exempt for overtime pay under the Fair Labor Standards Act will increase in 2016 to $970 a week, or $50,440 a year. These salary levels will adjust every year to the 40th percentile of weekly earnings for full-time salaried workers.
But salary isn’t the only factor in determining overtime pay—job responsibilities also play a role. The employee’s primary duty, or the most important responsibility of the job, needs to be considered exempt as well. For example, administrative tasks and duties that require less decision-making are typically nonexempt.
So, what do these new rules mean in practice, and how do you prepare for them? Here are a few things you need to do:
The first step to prepare for overtime pay changes is to review current classifications, salaries, and job descriptions. Identify employees who are currently exempt from overtime whose salaries fall below the new threshold of $970 a week—they may become nonexempt under the new rules.
Review your job descriptions and the actual responsibilities of each position. Do the primary job duties fall on the exempt list? If not, you may need to make some classification changes. In addition, do your job descriptions accurately reflect the responsibilities of the job? Talk with managers and employees to make sure you’re representing jobs appropriately and to determine if the work fits exempt qualifications.
Now that you have a clear understanding of who’s doing what and which employees are above and below the new threshold, it’s time to think about reclassifying employees in preparation for the new overtime pay regulations.
There are a few ways you can choose to reclassify employees, and you should base your decision on costs and the structure of the business. Here are a few options to consider:
Increase pay: For employees with salaries just under the new threshold, consider their contribution to your company in line with your company's merit increase strategy. If an increase in their pay is around the corner anyway, they may naturally be bumped up to exempt status.
Reclassify: For employees who earn a salary below the new threshold, you can reclassify them as nonexempt and adjust their base salary to account for the extra pay they will now earn from overtime.
Limit overtime: If you decide to reclassify employees under the threshold as nonexempt, you can setup a strategy around overtime hours to control costs. However, you may need to hire more employees to make up for the lost time.
However you decide to classify employees, make sure the classifications are compliant with regulations and they meet the needs of the business and employees.
No matter how you classify employees under the new overtime pay rules, you need to accurately track how many hours everyone works in a week—especially for employees who may be reclassified.
Understanding how many hours, and how much overtime nonexempt employees may be entitled to, can help you make the best decisions on classifying employees and how to plan payroll going forward. In addition, you need to monitor work hours to make sure nonexempt employees are paid correctly for overtime. Scheduling tools, payroll platforms, and other HR software can help to automatically track hours and pay employees accordingly.
Overtime pay regulations can be confusing, but taking simple steps to prepare will ensure your payroll is compliant and runs smoothly.
For more information on overtime rules and payroll in general, take a look at our Payroll Guide.