How the New Overtime Rules Will Affect Businesses, Practically Speaking

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By Alice Chin
| Employment

Time Punch Clock

The Federal Overtime Rule change, taking effect on December 1, has provided very specific legal requirements for small business owners, the most relevant being the increase in the standard salary level. In Priori’s first article on this change to the Fair Labor Standards Act, we outlined the specific legal implications of the change and how they impact small businesses. But what are the more practical implications of the change?

Changes are Opportunities

The change in the overtime rule is a wonderful opportunity to review employee status without raising eyebrows at the Department of Labor and triggering an audit. Use this opportunity to review not only the salary levels of exempt and non-exempt employees to comply with the new rule, but also to review the duties test for each exempt employee. Remember that in order for an employee to be classified as exempt, they must pass both the duties test and the salary test. You can also use this rule change as an opportunity to review the status of your independent contractors to ensure that they meet the three-factor federal test to qualify for that status. If not, you may need to move them to employee status. In performing your review, check not only against federal rules but also against state rules, which can sometimes be more stringent. Reviewing all these potential liabilities and correcting them quickly and together reduces your risk of audit, and lets you move forward in your business with peace of mind.

Financial Modeling

If you have employees who you will be moving from exempt to non-exempt status, review your financial options thoroughly with the input of both your finance and Human Resources teams before changing your employees' status. Here are three options to consider that can help to control costs:

  • Limit Overtime. In many cases, if an employee has worked limited overtime in the past, simply changing them from exempt to non-exempt status may be a reasonable option, provided you also put policies in place that keep overtime to a minimum. 
  • Use the DOL’s Cost-Neutral Formula. The Department of Labor has approved the "cost-neutral solution," where you calculate a new hourly rate for the employee that includes a consideration of their overtime hours. To do so, use the following formula: Weekly Salary/(40 + (Overtime Hours x 1.5)) = New Hourly Rate.  
  • Include incentive pay. Finally, the new provision also allows for the use of nondiscretionary bonuses –  incentive payments and commissions that make up to 10% of the salary requirement for the exemption basis, provided that this is paid at least quarterly.

When considering financial models, make sure to include all applicable taxes that may apply to increased wages as well as the wage and exemption requirements at the state level.

Policy Changes

Another way to reduce cost while complying with the Overtime Rule change is to change internal policies in a way that supports the reduction of hours overall. These policies could include:

  • Requiring a manager’s prior approval on any hours worked outside of the office and/or the employee’s regular schedule, which would include checking email or taking phone calls;
  • Limiting or terminating access to work email and phones outside of the office (such as on personal devices or on company devices), so employees cannot work overtime outside of the office; and
  • If an employee is required to work overtime on a day planned in advance, you may be able to require them to take time off later in the week to off-set the cost.

In all of these cases, the policy changes should be checked against state and local municipality laws, as they are only allowed in certain instances. However, it is important to note that even if an employee breaks one of your new policies intended to limit overtime hours and works overtime hours, they are still entitled to overtime pay for the hours worked. 

Systems of Support

In addition to thinking about the ways that you can limit overtime costs for your small business, you also need to think about the systems of support needed to ensure you stay in compliance going forward. The following are the minimum systems you should have in place:

  • Wage and Hour Policies. Ensure that your Employee Handbook has policies in place that require the recording of all hours, and also spells out each employee’s rights to meal and rest breaks under the law.  Every employee should be required to sign a Handbook Acknowledgement Receipt that indicates they have read and agree to abide by these policies. This will provide excellent support if you ever face a Wage and Hour violation.
  • Time-Tracking System. In addition to providing employees their rights and requirements with regard to time, you must also keep detailed records of the time each employee works. Use a simple web-based tool such as Harvest or Toggl, or ask your payroll company if they have a product that will automatically feed into your payroll.
  • Wage Notices. Most states have a wage notice requirement, meaning you must notify an employee of changes to their pay in advance of such changes. The most common is a seven-day notice period, but for some states it is as long as 30 days. With the December 1 implementation deadline for the Overtime Rule, ensure you leave yourself enough time to give the proper notification (especially keeping in mind that the Thanksgiving holiday is one week before the deadline).
  • Labor Posters. Review your labor posters to ensure they mention the difference between exempt and non-exempt employees (and check the minimum wage and date of notice while you’re at it). This will help prove you have informed employees of their rights under the law.

Each of these systems can take time to implement, so be sure to leave yourself enough time to build and roll-out the systems in advance of the December 1 deadline.

Communication is Key

Communicate with employees early and often about changes to their classification and wages. This is the best way to ensure that these changes do not impact culture. When crafting your employee communications, consider:

  • Notify employees of changes that will affect them, but only once you are sure they will affect them. Giving only partial data, or sending out a blanket email that includes those that may not be affected, will only lead to confusion, speculation and a degradation of the trust between employees and management.
  • Be clear about why and when changes are being implemented. Most employees are more comfortable with changes when they are given plenty of notice. Similarly, understanding why they are impacted is key to continuing to build trust with the employee and your employer brand, separating legal requirements from your company culture.
  • Be sensitive. Many employees see being classified as non-exempt as being “junior” or “administrative” while they see being exempt as being “professional” or “managerial.” Be aware of this mental distinction, and make clear in all of your communications that the exempt or non-exempt status of an employee has no bearing on their opportunities for advancement or their value to the team.

Craft all communications in line with your employer brand and company culture, as well as legal requirements. Be sure to treat all effected employees equally (same amount of notices, etc.) to create an open and transparent environment, as well as to protect your company from claims of discrimination. 

Considering all the factors required to comply with the Overtime Rule change thoroughly and accurately can be time-consuming. But taking the time now will reduce your risk of future litigation and monetary loss considerably. Move forward in partnership with your legal, finance and HR teams to ensure you have peace of mind knowing your business, and employees are cared for and safe.

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