Update: A federal judge has temporarily blocked the so-called “Final Rule” by the U.S. Department of Labor which now faces an uncertain future with the administration of President-elect Donald Trump.
The Department of Labor’s new overtime rule, which raises the annual salary threshold for exempt employees from $23,660 to $47,476, goes into effect Thursday, December 1, 2016.
Unprepared businesses are scrambling to make changes to avoid detrimental overtime and noncompliance expenses and fines.
According to the DOL, approximately 4.2 million American workers are currently classified as exempt from overtime pay yet earn salaries that fall below the new minimum threshold.
Employers have until December 1 to either give exempt employees who make below the new threshold a raise or reclassify them as nonexempt.
This may or may not mean an increase in total wages; that depends on the decision the business owner makes. Some companies may choose to make some positions hourly, rather than salaried, to stay in compliance with the new law without increasing labor costs.
Steps Small Business Can Take to Prepare and Stay Compliant with the New Overtime Rule
Small Business Trends spoke via telephone with John Waldmann, founder and CEO of Homebase, an employee scheduling and time-tracking software application for the restaurant and retail industries, to get his insights on what small businesses can do to prepare and stay compliant when the new rule goes into effect.
He provided the following advice:
Start Tracking Time
Companies need to begin tracking time for salaried workers, to determine whether it is feasible to raise their salary, reduce the workload or transition them to a nonexempt status.
“Most small businesses don’t have the margin to absorb a big increase in labor costs, so increasing salaries to the new threshold is likely not a viable option,” Waldmann said. “As such, employers will either have to put them in a position where they earn overtime or reduce the workload to under 40 hours per week.”
He indicated that the local retail businesses and the restaurant industry would be hit hard by these overtime rule changes, particularly team leaders, shift managers and general managers being affected.
“The Fair Standards Labor Act requires all employers to maintain time cards and other non-exempt employee records to ensure that these employees receive the pay for hours worked,” he said.
Waldmann encouraged business owners to use automated tracking software like that provided by Homebase, to improve efficiency and reduce errors.
“Ninety percent of retail and restaurant scheduling is still handled on paper or in Excel, leading to increased errors and noncompliance with labor laws,” he said. “Paperwork and administration cost local business owners more than a billion hours of wasted time every year.”
Evaluate Employee Workload
Waldmann said that the change in employee classification means companies will need to evaluate the current workload of affected employees and determine if redistribution to other employees is necessary. Other changes may include altering vacation and sick time policies or modifying the way these employees accrue this time.
Bonuses may also be affected, although the new rule allows employers to count nondiscretionary bonuses, commissions and incentive payments for up to ten percent of the salary minimum.
Prepare From a Budget Standpoint
“Businesses need to consider the approximate number of straight time hours and overtime hours worked, to determine the correct hourly rate,” Waldmann said.
He outlined a simple two-step formula:
- Calculate the approximate number of hours that an employee works every week. Break this down between regular and overtime hours. For example, if someone works 50 hours a week, this could be 40 hours of regular time and 10 hours of overtime.
- Divide the average weekly salary by these hours. Exclude weeks that the employee does not work, to get a more accurate figure. For example, if you give two weeks of unpaid vacation, base your weekly salary upon 50 weeks instead of 52.
Homebase provides an online wage calculator to automate the process.
Communicate With Affected Employees
The effect on businesses goes beyond the financial impact. According to Waldmann, the change may not sit well with affected employees. He stressed the need for communication, to offset any ill will that may result.
“Moving employees who are salaried to hourly will likely have a negative impact, as they may see it as a demotion,” he said. “Therefore, it’s vital that you communicate clearly, to reassure them that is not the case. It’s important that you get ahead of the change not only from an operations standpoint but also a communications perspective.”
In addition to Waldmann’s direct advice, a Homebase blog post addressing the topic cited two other factors that small businesses should keep in mind:
Keep New Rate Higher Than Minimum Wage
The new rate must be higher than minimum wage for a business’s given jurisdiction. If the effective hourly rate ends up lower, the business will need to either adjust employee hours or increase the total labor budget.
Comply with State Meal and Rest Break Requirements
Businesses will also need to comply with state meal break and rest break requirements.
“Business owners face a lot of complicated regulations today,” Waldmann said. “Not only are they affected by the change in overtime rule but also minimum wage increases. A tremendous amount of work goes into core activities, such as calculating hours and tracking overtime. That’s where Homebase can help.”
Go to the Homebase website to learn more about its scheduling and time-tracking software. It’s free to use.Also, visit OvertimeChange.com, a site that Homebase created that contains resources to help small businesses prepare for and manage the rule changes.
Working Late Photo via Shutterstock