Changes to overtime laws, which can impact a small business’s finances, HR policies and employee classifications, went into effect in 2016. Here is what you need to know about the law and possible solutions for your small business.
The Fair Labor Standards Act
As a small business owner, you’re familiar with the Fair Labor Standards Act (FLSA), but as a primer for the new law, here are the basics.
First put into effect in 1938, the FLSA established minimum wage, overtime pay and child labor laws. Today, it requires employers to pay at least a minimum wage for up to 40 hours per week and pay overtime for hours in excess of 40.
The FLSA applies to employers whose annual sales total $500,000 or more or engaged in interstate commerce. These two criteria mean almost all workplaces must abide by FLSA laws.
The Final Rule
The Final Rule are the changes to the FLSA that go into effect in December. The Rule primarily entails changes in the criteria of recognising FLSA-governed employees as exempt or nonexempt.
Employees categorized as nonexempt employees are entitled to overtime pay; exempt employees are not.
The Final Rule doesn’t change FLSA laws, it simply raises the salary threshold for those recognized as exempt. FLSA says the salary level for exemption status is $455 per week or $23,660 per year. The Final Rule raises this threshold to $913 per week or $47,476 per year. Automatic updates to those thresholds will start in January 1, 2020 and occur every three years.
Employers are also now allowed to satisfy up to 10 percent of the standard salary requirement with commissions, incentive payments and nondiscretionary bonuses, provided these are paid at least quarterly.
These new laws lead to some problems, mostly in terms of resources and expenses.
The Department of Labor estimates that the changes will increase employee compensation by $1.2 billion a year. The law impacts about 40 percent of workers.
Regardless of the route businesses take, these changes will result in an increased expense for employers.
The Final Rule changes don’t dictate which actions employers must take. The Department of Labor anticipates at least five possible responses employers may take:
- increasing an employee’s salary to maintain their exempt status
- paying the premium for overtime hours
- reducing or eliminating overtime hours
- reducing pay allocated to base salary and adding pay for overtime hours to keep total weekly pay constant
- using a combination of these responses
What does this mean for your small business?
Small businesses have options for how they’ll implement these new regulations. Here are a few ways to approach the changes.
- If budget allows, a small business can choose to increase salaries for employees so they meet the new criteria.
- Since employers are allowed to satisfy up to 10 percent of the salary requirement with commissions, etc., small businesses can introduce a variable comp plan for certain results-driven positions to make up the difference.
Move employees’ statuses
- Alternatively, employers can choose to move the employees’ statuses from exempt to nonexempt. However, this will require increased administrative work, since employers will now need to track the hours worked and pay time-and-a-half for any overtime hours.
Implement automation tools
- Small businesses may consider taking steps to reduce increased human resources and managerial costs by using automation tools to streamline.
- Employers should make sure they have the administrative bandwidth to calculate and manage hours for nonexempt employees, if they choose to go that route. Using automated timesheet processing can reduce the managerial cost of monitoring employee overtime.
- A combined small business payroll and accounting software solution can help you track all your employee-related expenses down to the penny, every time you run payroll.
- Employers who are forced to cut employee overtime hours may also consider pursuing automated or outsourced solutions to make up for lost productivity or reduced customer service capability.
Small businesses can take a strategic approach and really look at this employee by employee to determine which option makes the most sense given the employee’s role and current salary.
Because labor is often the number-one cost for small businesses, understanding how payroll impacts profitability is critical to your success. As small businesses plan out the new year, be sure to allocate sufficient funds for this increased payroll expense.